As filed with the Securities and Exchange Commission on September 8, 2000
Registration No. 333-[ ]
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ACE SECURITIES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 56-2088493
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
6525 MORRISON BOULEVARD
SUITE 318
CHARLOTTE, NORTH CAROLINA 28211
(704) 365-0569
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ELIZABETH S. ELDRIDGE
ACE SECURITIES CORP.
6525 MORRISON BOULEVARD
SUITE 318
CHARLOTTE, NORTH CAROLINA 28211
(704) 365-0569
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
REED D. AUERBACH
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 806-6648
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================== ====================== ====================== ======================= ===============
Title of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount of
Registered Registered Offering Price Per Aggregate Offering Registration
Unit(1) Price(1) Fee
----------------------------------- ---------------------- ---------------------- ----------------------- ---------------
<S> <C> <C> <C> <C>
Asset-Backed Notes and $1,000,000 100% $1,000,000 $264
Asset-Backed Certificates
=================================== ====================== ====================== ======================= ===============
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains seven base Prospectuses (each, a
"Prospectus") relating to the offering of one or more series of securities each
of which will include one or more classes of certificates and/or one or more
classes of notes.
The first Prospectus (the "Automobile Prospectus") contemplates the
securitization of assets which may include (1) certain new and used automobile,
recreational vehicle, including motor homes, campers, boats, boat motors,
motorcycles, jet skis, wave runners, all terrain vehicles, and snow mobiles,
van, truck, bus and trailer receivables or (2) asset backed certificates or
notes, each representing an interest in a trust fund consisting of a pool of
such receivables.
The second Prospectus (the "Mortgage Prospectus") contemplates the
securitization of assets which may include (1) one or more mortgage pools,
containing (A) mortgage loans secured by residential, cooperative and
multifamily properties and (B) certain conventional mortgage pass-through
certificates issued by one or more trusts established by one or more private
entities or (2) one or more contract pools containing manufactured housing
conditional sales contracts and installment loan agreements or participation
certificates representing participation interests in such contracts.
The third Prospectus (the "Mortgage Note Prospectus") contemplates the
securitization of assets which may include (1) one or more mortgage pools,
containing (A) mortgage loans secured by residential, cooperative and
multifamily properties and (B) certain conventional mortgage pass-through notes
issued by one or more trusts established by one or more private entities or (2)
one or more contract pools containing manufactured housing conditional sales
contracts and installment loan agreements or participation certificates
representing participation interests in such contracts.
The fourth Prospectus (the "Credit Card Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of credit card, charge card or certain other types of accounts and
asset-backed securities consisting of notes secured by, receivables arising in
certain designated portfolios of credit card, charge card or certain other types
of accounts.
The fifth Prospectus (the "Floorplan Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of wholesale consumer receivables and asset-backed securities
consisting of notes secured by, receivables arising in certain designated
portfolios of wholesale consumer receivables.
The sixth Prospectus (the "Equipment Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of equipment receivables.
The seventh Prospectus (the "Student Loan Prospectus") contemplates
the securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of student loans.
This Registration Statement also contains one form of prospectus
supplement with respect to each base Prospectus.
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] AUTO RECEIVABLES OWNER TRUST [ ]-[ ]
$[ ] [ ]% ASSET BACKED NOTES, CLASS A-1
$[ ] [ ]% ASSET BACKED NOTES, CLASS A-2
[ ]
-----------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
-----------------------------------------------------------------------------
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
-----------------------------------------------------------------------------
The notes will represent interests in the trust fund only and will not
represent interests in or obligations of any other entity.
-----------------------------------------------------------------------------
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
SELLER AND SERVICER
The notes will be issued by a trust. The sources for payment of the notes
are a pool of non-prime auto loans held by the issuing trust, cash held by the
issuing trust and, in the case of the class A-1 notes and class A-2 notes, a
financial guaranty insurance policy issued by [ ].
We are only offering to you the class A-1 notes and class A-2 notes. The
class B notes are subordinated to the class A notes to the extent described in
this prospectus supplement. Interest and principal on the notes are scheduled to
be paid monthly, on the [ ]th day of the month. The first scheduled payment date
is [ ].
Deutsche Banc Alex. Brown is purchasing the class A-1 notes from the
issuing trust at approximately [ ]% of the principal amount of the class A-1
notes plus accrued interest from [ ], [ ] and the class A-2 notes at
approximately [ ]% of the principal amount of the class A-2 notes plus accrued
interest from [ ]. Deutsche Banc Alex. Brown is offering the class A-1 notes and
class A-2 notes from time to time in negotiated transactions or at varying
prices which will be determined at the time of sale. The aggregate proceeds to
the issuing trust, before deducting expenses payable by or on behalf of the
issuing trust estimated at $[ ], will be $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this prospectus
supplement in two separate documents that progressively provide more detail: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your notes, and (2) this prospectus supplement, which describes
the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
-----------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
-----------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Prospectus Supplement Prospectus
The Insurer................................33 Prospectus Supplement............................
ERISA Considerations.......................68 Reports to Securityholders.......................
Ratings....................................69 Available Information............................
Underwriting...............................69 Incorporation of Certain Documents by Reference..
Experts....................................70 Summary of Terms.................................
Legal Matters..............................70 Risk Factors.....................................
Glossary...................................71 The Trusts.......................................
Index of Terms.............................75 The Trustee......................................
The Receivables Pools............................
The Collateral Certificates......................
The Government Securities........................
Weighed Average Life of the Securities...........
Pool Factors and Trading Information.............
The Seller and the Servicer......................
Use of Proceeds..................................
Description of the Notes.........................
Description of the Certificate...................
Certain Information Regarding the
Securities.....................................
Description of the Transfer and Servicer
Agreement......................................
Certain Matters Regarding the Servicer...........
Certain Legal Aspects of the
Receivables......................................
Material Federal Income Tax
Consequences...................................
State and local Tax Consequences.................
ERISA Considerations.............................
Plan of Distribution.............................
Legal Matters....................................
Index of Terms...................................
Global Clearance, Settlement and.................
Documentation Procedures.......................
</TABLE>
<PAGE>
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED
TO CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU
SHOULD READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH
FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
PARTIES
THE TRUST
[ ] Auto Receivables Owner Trust [ ]-[ ] is a Delaware business trust. The trust
will issue the notes and be liable for their payment. The issuing trust's
principal asset will be a pool of auto loans.
SELLER AND SERVICER
[ ] is a [ ] corporation. It will sell the auto loans to ACE Securities Corp. [
] will also service the auto loans held by the issuing trust.
COMPANY
ACE Securities Corp. is a special purpose Delaware corporation. Neither Deutsche
Banc Alex. Brown nor any of its affiliates has guaranteed, will guarantee or is
or will be otherwise obligated with respect to any notes.
THE INSURER
[ ] is a [ ] financial guaranty insurance company. [ ] will issue a policy,
which will guarantee the payment of timely interest and principal due on the
class A-1 notes and class A-2 notes but only as set forth in the section of this
prospectus supplement titled "The Policy."
THE OWNER TRUSTEE
[ ] is a [ ]. [ ] will be the owner trustee.
THE INDENTURE TRUSTEE
[ ] is a [ ]. [ ] will be the indenture trustee and the backup servicer.
DATES
INITIAL CUTOFF DATE
o [ ]. The issuing trust will receive payments due on, or received with
respect to, the auto loans after this date.
CLOSING DATE
o On or about [ ].
DESCRIPTION OF THE SECURITIES
The issuing trust will issue three classes of asset backed notes. The class A-1
notes will be designated as the "Class A-1 Notes" and the class A-2 notes will
be designated as the "Class A-2 Notes". The Class A-1 Notes together with the
Class A-2 Notes will be designated as the "Class A Notes". The class B notes
will be designated as the "Class B Notes." Only the Class A Notes are offered to
you pursuant to this prospectus supplement. Any information in this prospectus
supplement relating to the Class B Notes is presented solely to provide you with
a better understanding of the Class A Notes.
Each of the Class A-1 Notes and Class A-2 Notes will have the initial principal
amount and the interest rate set forth in the following table. The dates on
which the final payment of principal and interest on each of the Class A-1 Notes
and Class A-2 Notes is scheduled to be made are also set forth in the following
table.
INITIAL
NOTE FINAL
PRINCIPAL INTEREST SCHEDULE
CLASS BALANCE RATE PAYMENT DATE
----- --------- --------- ------------
A-1 $[ ] [ ]% [ ]
A-2 $[ ] [ ]% [ ]
The Class A Notes will initially be issued in book-entry form only. The Class A
Notes will be issued in minimum denominations of $1,000 and multiples of $1,000
in excess of $1,000.
You may hold your Class A Notes through The Depository Trust Company in the
United States.
The notes will be secured solely by the pool of non-prime auto loans and the
other assets of the issuing trust which are described under the section entitled
"The Trust Property."
A collection period means, with respect to a payment date, the calendar month
prior to the month in which the payment date occurs.
The Class A-2 Notes will not receive any payment of principal on a payment date
until the full amount of the Class A-1 Notes principal has been paid in full. On
each payment date, the Class B Notes will not receive any payment of interest or
principal until all amounts due the Class A Notes on the payment date have been
paid in full.
PAYMENT DATES
o The payment date will be the [ ]th day of each month, or, if that day
is not a business day, on the next succeeding business day. The first
payment date will be [ ].
o The record date for all payment dates is the [ ]th day of each month,
or, if that day is not a business day, on the prior business day.
INTEREST
o In the case of the first payment date, interest will accrue from [ ]
through and excluding the first payment date of [ ]. For any
subsequent payment interest will accrue on the Class A Notes during
the month preceding each payment date. Interest on the notes will be
calculated on a "30/360" basis.
PRINCIPAL
o Prior to achieving a required level of overcollateralization, the
amount of principal available to be distributed to the Class A Notes
is generally equal to (1) the amount of collections on the auto loan
pool allocable to principal during the prior calendar month plus any
losses recognized on the auto loan pool during the prior calendar
month and (2) a specified amount of excess interest received on the
auto loan pool during the prior calendar month, after paying specific
expenses of the trust, interest on the Class A Notes and funding the
reserve account to the required level, necessary to achieve the
required level of overcollateralization.
o Once the required level of overcollateralization has been reached, the
amount of principal available to be distributed to the Class A Notes
will be equal to (1) the amount of collections on the auto loan pool
allocable to principal during the prior calendar month plus any losses
recognized on the auto loan pool during the prior calendar month less
(2) the excess of (a) the amount of overcollateralization on the
payment date less (b) the required level of overcollateralization on
the payment date. Additionally, once the required level of
overcollateralization has been reached, excess interest will no longer
be used to create any further overcollateralization.
o Principal distributable to the Class A Notes will be distributed first
to the Class A-1 Notes until its principal balance is reduced to zero
and then will be distributed to the Class A-2 Notes until its
principal balance has been reduced to zero.
o In addition, the outstanding principal amount of the Class A-1 Notes
and the Class A-2 Notes, to the extent not previously paid, will be
payable on the final scheduled payment date of the related class of
notes.
THE TRUST ASSETS
The issuing trust's assets will include:
o non-prime motor vehicle retail installment sale contracts secured by
new and used automobiles and light-duty trucks;
o monies due on, or received under the receivables, after [ ];
o an assignment of the security interests in the vehicles securing the
auto loan pool;
o the related files;
o all rights to proceeds from claims on physical damage, credit life and
disability insurance policies covering the vehicles or the obligors;
o all rights to liquidation proceeds with respect to the auto loan pool;
o an assignment of the rights of ACE Securities Corp. under a
receivables purchase agreement with [ ];
o an assignment of the rights of [ ] against dealers under agreements
between [ ] and these dealers;
o specific bank accounts;
o all proceeds of the foregoing; and
o particular rights under the principal transaction documents for this
offering.
THE AUTO LOAN POOL
The auto loans consist of non-prime motor vehicle retail installment sale
contracts originated by dealers and then acquired by [ ] pursuant to its
contract acquisition program. [The motor vehicle retail installment sale
contracts consist primarily of contracts with individuals with less than perfect
credit due to various factors. These factors include the manner in which the
individuals have handled previous credit, the limited extent of their prior
credit history and/or their limited financial resources.]
STATISTICAL INFORMATION
The statistical information in this prospectus supplement is based on the auto
loans in the pool as of [ ]. It is expected that the composition and
characteristics of the pool of auto loans on the closing date will be similar to
the information set forth in this prospectus supplement. However, some auto
loans in the pool may be excluded on the closing date as a result of
administrative considerations. [ ] does not believe that the characteristics of
the auto loans included in the trust on the closing date in the aggregate will
differ materially from the information set forth in this prospectus supplement.
o As of [ ] the auto loans in the pool have:
- an aggregate principal balance of $[ ];
- a weighted average annual percentage rate of approximately [
]%;
- a weighted average original term to scheduled maturity of
approximately 60 months;
- a weighted average remaining term to scheduled maturity of
approximately [ ] months; and
- a remaining term to scheduled maturity of not more than 72
months and not less than [ ] months.
PRE-FUNDING FEATURE
Approximately $[ ] of the proceeds of the notes will be held by [ ]in an account
which is formed solely to hold this money, and used to purchase additional auto
loans with the prior written consent of [ ] in each case. The issuing trust will
purchase from ACE Securities Corp. additional non-prime auto loans from time to
time on or before [ ], [ ], from funds on deposit in this account. The
obligation of ACE Securities Corp. to sell additional auto loans to the trust is
conditioned on these loans having been sold to ACE Securities Corp. from [ ].
The auto loans acquired by the issuing trust during the period between the day
of the closing and [ ], will also be originated or acquired by [ ]. The
characteristics of the subsequently-acquired auto loans are not expected to
differ to any great extent from the auto loans acquired by the issuing trust on
the day of the closing.
THE INSURANCE POLICY
On the day of the closing, [ ] will issue a financial guaranty insurance policy
for the benefit of the Class A noteholders. Pursuant to this policy, [ ] will
unconditionally and irrevocably guarantee the payments of interest and principal
for each payment date with respect to the Class A Notes required to be made
during the term of the policy, subject to the further provisions of the policy
as described in this prospectus supplement. The Class B Notes do not have the
benefit of the policy.
OPTIONAL REDEMPTION
The notes, if still outstanding, may be redeemed in whole, but not in part, on
any payment date on which [ ] exercises its "clean-up call" option to purchase
the auto loan pool. This can only occur after the pool balance declines to 10%
or less of the original pool balance. [ ]'s exercise of the "clean-up call" is
also subject to the satisfaction of particular conditions, including obtaining
the prior written consent, in some circumstances, of [ ] The redemption price is
equal to the unpaid principal amount of the notes plus accrued and unpaid
interest on the notes.
MANDATORY REDEMPTION
IF PRE-FUNDING ACCOUNT IS NOT DEPLETED
Each of the Class A-1 Notes and Class A-2 Notes will be redeemed in part on a
pro rata basis if any portion of the $[ ] deposited in a segregated pre-funding
account with [ ]remains on deposit in that account on [ ], or prior to this date
if the amount remaining in the account is less than $100,000, provided, however
if the amount remaining in the pre-funding account is less than $100,000, only
the Class A-1 Notes will be redeemed.
UPON EVENT OF DEFAULT
The notes may be accelerated and subject to immediate payment at par upon the
occurrence of an event of default under the indenture. So long as [ ] is not in
default, the power to declare an event of default will be held by [ ]. In the
case of an event of default, the notes will automatically be accelerated and
subject to immediate payment at par. The policy issued by [ ] does not guarantee
payment of any amounts that become due on an accelerated basis, unless [ ]
elects, in its sole discretion, to pay the amounts in whole or in part.
RATING OF THE NOTES
The Class A Notes must receive at least the following ratings from [ ] and [ ]
in order to be issued.
RATING
CLASS --------------
-----
A-1..........................
A-2..........................
-------------------------------------------------------------------------------
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal tax counsel, will deliver an
opinion of counsel that, for federal income tax purposes, the Class A Notes will
be treated as indebtedness. Each noteholder, by accepting a Class A Note, will
agree to treat the notes as indebtedness.
ERISA CONSIDERATION
Subject to particular considerations discussed in this prospectus supplement
under "ERISA Considerations," the Class A Notes are eligible for purchase by
employee benefit plans.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES.
THE INFORMATION RELATING TO THE
AUTO LOANS MAY NOT REFLECT ACTUAL
EXPERIENCE. There can be no assurance that
the net loss experience calculated and
presented in this prospectus supplement
by [ ] with respect to its portfolio of
serviced contracts will reflect actual
experience with respect to the auto
loans included in the issuing trust. In
addition, there can be no assurance that
the future delinquency or loan loss
experience of the servicer with respect
to the auto loans will be better or
worse than that set forth in this
prospectus supplement with respect to [
]'s servicing portfolio.
THE [ ] FINANCE PROGRAM AND
THE NATURE OF OBLIGORS
MAY INCREASE THE RISK OF
DELINQUENCIES AND LOSSES. [ ]generally originated by
automobile dealers for sale and
assignment to [ ]. [ ] purchases retail
automobile installment sale contracts
which may not meet the credit standards
of traditional primary lenders. As a
result, the underwriting standards
applied by [ ] are not as stringent as
those of the finance companies of motor
vehicle manufacturers or other financial
institutions. The [ ] finance program
focuses on the non-prime market,
including borrowers with sub-standard
credit profiles who may not be able to
receive financing from more traditional
sources. The borrowers may have had
credit problems in the past, including
prior delinquencies, repossessions,
bankruptcy filings or charge-offs by
other credit companies. Accordingly,
borrowers may have greater difficulty or
be less likely to make their scheduled
payments. The number of delinquencies
and losses on the auto loans is expected
to be higher than would be the case with
lower risk borrowers. Due to the credit
quality of these borrowers, the auto
loans have been originated with higher
annual percentage interest rates than
more traditional lenders charge lower
risk borrowers. Any increase in losses
on the auto loans will result in
accelerated prepayments on the Class A
Notes. Any reinvestment risks associated
with prepayment will be borne by the
noteholders. Additionally, if [ ], as
the security insurer, defaults under the
policy, you will bear the risk of loss
on the auto loans. You are urged to
consider the credit quality of the auto
loans when analyzing an investment in
the notes.
A CHANGE IN SERVICER MAY
ADVERSELY AFFECT COLLECTIONS ON
THE AUTO LOANS. [ ] believes that its credit
loss and delinquency experience reflect
in part its trained staff and collection
procedures. If a servicer termination
event occurs under the sale and
servicing agreement and [ ] is removed
as servicer, or if [ ] resigns or is
terminated as servicer, the backup
servicer has agreed to assume the
obligations of successor servicer.
Typically, a change in servicers results
in a temporary disruption of servicing.
There can be no assurance, however, that
collections with respect to the auto
loans will not be adversely affected by
any change in servicer.
THE ISSUING
TRUST HAS ONLY LIMITED ASSETS. The sole sources for repayment
of the notes are payments on the auto
loans, amounts on deposit in the
pre-funding account, other cash accounts
held by [ ], proceeds from the
repossession and sale of related
financed vehicles that secure defaulted
auto loans and payments made under the
insurance policy. The receivables are
NOT insured or guaranteed by any person.
The notes represent obligations of the
trust and will not be insured or
guaranteed by any entity. The money in
the pre-funding account will be used
solely to purchase additional auto loans
or, in limited circumstances, redeem a
portion of the Class A Notes and is not
available to cover losses on the auto
loan pool. The capitalized interest
account is designed to cover obligations
of the issuing trust relating to the
portion of its assets not invested in
auto loans and is not designed to
provide protection against losses on the
auto loan pool. Although the insurance
policy will be available to cover
shortfalls in distributions of the
payments due on the Class A Notes,
pursuant to, and in accordance with, the
insurance policy, the issuing trust will
depend on current distributions on the
auto loan pool, including amounts
otherwise payable to the Class B Notes,
and amounts, if any, available in
specific collateral accounts maintained
for the benefit of [ ] to make payments
on the Class A Notes. The Class A Notes
represent limited obligations of the
issuing trust, and the Class A Notes
will not be insured or guaranteed by [
], ACE Securities Corp., [ ]or any other
person or entity. If [ ] has not
perfected security interests in the
related financed vehicles, its ability
to realize on the collateral securing
the auto loans may be affected and the
proceeds to be distributed to the
noteholders on a current basis may be
reduced.
GEOGRAPHIC CONCENTRATION OF
AUTO LOANS MAY INCREASE
CONCENTRATION RISKS. Obligors with respect to
approximately [ ]% of the auto loans
were located in [ ] as of [ ], [ ],
based on current principal balance as of
the Initial Cutoff Date and the address
of the Obligor. Adverse economic
conditions or other factors affecting [
] could increase the delinquency, loan
loss or repossession experience of the
issuing trust with respect to the auto
loans.
LIMITED ABILITY TO RESELL CLASS A
NOTES. The underwriter may assist in
resales of the Class A Notes, but they
are not required to do so. A secondary
market for the Class A Notes may not
develop. If a secondary market does
develop, it might not continue or it
might not be sufficiently liquid to
allow you to resell any of your Class A
Notes.
THE RATE AT WHICH THE CLASS A NOTES
WILL AMORTIZE CANNOT
BE PREDICTED. Interest on the auto loans
will be payable to the holders of the
Class A-1 Notes and Class A-2 Notes on
each payment date. This amount will
equal one-twelfth of the interest rate
on the note balance of the class as of
the close of business on the last day of
the month immediately preceding the
payment date. The auto loans have
different APRs.
All of the auto loans are
prepayable at any time. The rate of
prepayments on the auto loans may be
influenced by a variety of economic,
social and other factors. These factors
include the fact that a consumer obligor
generally may not sell or transfer the
related financed vehicle securing an
auto loan without the consent of [ ]
unless the loan is repaid by the Obligor
at the time of the sale or transfer. The
rate of prepayment on the auto loans may
also may be influenced by the structure
of the loan, the nature of the consumer
obligors and the related financed
vehicles and servicing decisions. In
addition, under some circumstances, [ ]
is obligated to purchase auto loans as a
result of breaches of particular
representations and warranties, pursuant
to the sale and servicing agreement and
the receivables purchase agreement.
Under some circumstances, the servicer
is obligated to purchase auto loans
pursuant to the sale and servicing
agreement as a result of specified
uncured breaches of covenants by it. The
servicer may also purchase all the auto
loans if the pool balance has declined
to less than 10% of the original pool
balance, subject to specified
limitations in the sale and servicing
agreement.
[ ] is not aware of publicly
available industry statistics that set
forth principal prepayment experience
for motor vehicle retail installment
contracts similar to the auto loans.
None of the issuing trust, ACE
Securities Corp. or [ ] make any
representation as to the actual
prepayment rates on the auto loans. [ ],
however, believes that the actual rate
of prepayments will result in the Class
A Notes being repaid prior to their
respective final scheduled payment date.
The amounts paid to noteholders will
include prepayments on the auto loans.
The noteholders will bear all
reinvestment risk resulting from the
timing of payments on the notes.
EFFECT OF LITIGATION
ON [ ]'S FINANCIAL CONDITION. Due to the consumer-oriented
nature of [ ]'s industry and the
application of particular laws and
regulations, industry participants are
regularly named as defendants in
litigation alleging violations of
federal and state laws and regulations
and consumer law torts, including fraud.
Many of these actions involve alleged
violations of consumer protection laws.
A significant judgment against [ ] or
others within the industry could have a
material adverse effect on [ ]. It could
affect [ ]'s financial condition,
results of operations and/or its ability
to perform its obligations under the
receivables purchase agreement, the sale
and servicing agreement and the trust
agreement.
RATINGS OF THE CLASS A NOTES
ARE NOT GUARANTEED TO REMAIN
IN PLACE. A rating is not a
recommendation to purchase, hold or sell
notes. The ratings of the Class A Notes
address the likelihood of the payment of
principal and interest on the Class A
Notes pursuant to their terms. There is
no assurance that a rating will remain
in effect for any given period of time
or that a rating will not be lowered or
withdrawn entirely by a rating agency if
in its judgment circumstances in the
future so warrant. In the event that any
ratings initially assigned to the Class
A Notes are subsequently lowered or
withdrawn for any reason, including by
reason of a downgrading of the
claims-paying ability of [ ], no person
or entity will be obligated to provide
any additional credit enhancement with
respect to the Class A Notes. Any
reduction or withdrawal of a rating may
have an adverse effect on the liquidity
and market price of the Class A Notes.
EVENTS OF DEFAULT UNDER
THE INDENTURE MAY RESULT IN AN
ACCELERATION. Upon the occurrence of an
event of default under the indenture, so
long as _[ ] shall not have defaulted
and the default is not continuing, [ ]
as indenture trustee, will continue to
submit claims under the insurance policy
as necessary in accordance with the
terms of the insurance policy to enable
the issuing trust to continue to make
payments due with respect to the Class A
Notes on each payment date. However,
following the occurrence of an event of
default, [ ] may, at its option, elect
to cause the liquidation of the assets
of the issuing trust, in whole or in
part, and pay all or any portion of the
outstanding amount of the Class A Notes,
plus accrued interest on the Class A
Notes.
IF THE ISSUING TRUST DOES NOT USE
ALL OF THE MONEY IN THE
PRE-FUNDING ACCOUNT A MANDATORY
REDEMPTION OF A PORTION OF
THE CLASS A NOTES COULD RESULT. If the issuing trust has not
used all of the money deposited in the
pre-funding account to purchase
additional auto loans by [ ], [ ], then
the holders of each of the Class A-1
Notes and the Class A-2 Notes will
receive a pro rata prepayment of
principal in an amount equal to the
unused amount or if the amount remaining
in the pre-funding account is less than
$100,000, only the Class A-1 Notes will
be redeemed. Any reinvestment risk from
the mandatory redemption of a portion of
the Class A Notes from the unused amount
will be borne by the holders of the
Class A Notes.
[ ] MAY NOT BE ABLE TO
ORIGINATE SUFFICIENT AUTO
LOANS TO USE ALL MONEYS IN
THE PRE-FUNDING ACCOUNT. The ability of [ ] to acquire
or originate sufficient additional auto
loans may be affected by a variety of
social and economic factors including:
interest rates; unemployment levels; the
rate of inflation and consumer
perception of economic conditions
generally. If [ ] does not originate
sufficient additional auto loans then
the money deposited in the pre-funding
account will not be completely used and
a mandatory redemption of a portion of
the Class A Notes will result.
<PAGE>
THE SELLER AND THE SERVICER
[To be inserted]
THE TRUST
The issuing trust, [ ]Auto Receivables Owner Trust [ ]- [ ] (the "Trust" or
the "Issuer"), is a business trust formed under the laws of the State of
Delaware pursuant to the trust agreement for the transactions described in this
prospectus supplement. On or about [ ] (the "Closing Date"), the Trust will
issue Class A-1 [ ]% Asset Backed Notes (the "Class A-1 Notes"), Class A-2 [ ]%
Asset Backed Notes (the "Class A-2 Notes", and together with the Class A-1
Notes, the "Class A Notes") and Class B [ ]% Asset Backed Notes (the "Class B
Notes" and, together with the Class A Notes, the "Notes.") The Class A-1 Notes
will have an aggregate original principal amount of $[ ], the Class A-2 Notes
will have an aggregate original principal amount of $[ ] and the Class B Notes
will have an aggregate original principal amount of $[ ]. Only the Class A Notes
are offered to you pursuant to this prospectus supplement. Any information in
this prospectus supplement relating to the Class B Notes is presented solely to
provide you with a better understanding of the Class A Notes. On the Closing
Date, the Trust will also issue an Asset Backed Certificate (the "Certificate")
which represents the equity ownership in the trust and is subordinate in right
of payment to the Notes. The Certificate is not being offered by this prospectus
supplement.
After its formation, the Trust will not engage in any activity other than
o acquiring, holding and managing motor vehicle retail installment sales
contracts secured by new and used automobiles and light-duty trucks
financed by these motor vehicle retail installment sales contracts (the
"Receivables") and the other assets of the Trust and proceeds from the
Trust,
o issuing the Notes and the Certificate,
o making payments on the Notes, and
o engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental to the foregoing or connected
with the foregoing.
The proceeds from the initial sale of the Notes will be used by the Trust
to purchase the Initial Receivables from the Company pursuant to the Sale and
Servicing Agreement and to fund deposits in the Pre-Funding Account and the
Capitalized Interest Account. The Servicer will service the Receivables pursuant
to the Sale and Servicing Agreement and will be compensated for acting as
Servicer. See "Description of the Transaction Documents--Servicing Compensation"
in this prospectus supplement.
The Trust's principal offices are located in Wilmington, Delaware, in care
of [ ], as Owner Trustee, at the address listed below under "--The Owner
Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Initial Cutoff Date, as if the issuance and sale of the Notes had taken place on
this date:
Class A-1 Notes........................ $[ ]
Class A-2 Notes........................ $[ ]
Class B Notes.......................... $[ ]
Total............................. $[ ]
THE OWNER TRUSTEE
[ ], the Owner Trustee (the "Owner Trustee") under the Trust Agreement
dated as of [ ], as amended as of [ ] among the Seller, the Company and the
Owner Trustee (the "Trust Agreement") is a [ ] and its principal offices are
located at [ ]. The Owner Trustee will perform limited administrative functions
under the Trust Agreement. The Owner Trustee's liability in connection with the
issuance and sale of the Notes is limited solely to the express obligations of
the Owner Trustee set forth in the Trust Agreement and the Sale and Servicing
Agreement.
THE INDENTURE TRUSTEE
[ ] will be the Indenture Trustee under the Indenture dated as of [ ]among
the Trust and the Indenture Trustee (the "Indenture"). [ ] is a [ ], the
corporate trust office of which is located at [ ].
TRUST PROPERTY
Each Note represents a limited obligation of the Trust secured by the
property of the Trust (the "Trust Property"). The Trust Property will include,
among other things, the following:
o non-prime motor vehicle retail installment sale contracts (the "Initial
Receivables") secured by new and used automobiles and light-duty trucks
(the "Initial Financed Vehicles");
o monies due or received under the Initial Receivables (a) with respect to
the Initial Receivables, after [ ] (the "Initial Cutoff Date"), or (b) with
respect to the Subsequent Receivables after the related cutoff date (each a
"Subsequent Cutoff Date");
o amounts as from time to time may be held in one or more separate trust
accounts established and maintained by the Indenture Trustee, including the
Collection Account, the Pre-Funding Account and the Capitalized Interest
Account, and the proceeds of these accounts, as described below (see
"Description of the Transaction Documents--Accounts");
o security interests in the Financed Vehicles granted by the obligors (the
"Obligors") pursuant to the Receivables and any accessions;
o the interest of the Seller in any proceeds from claims on any credit life,
credit disability, and physical damage insurance policies or other
insurance policies covering the Financed Vehicles or Obligors;
o specific rights under the Sale and Servicing Agreement and the Receivables
Purchase Agreement;
o amounts payable to the Seller under all Dealer Recourse obligations;
o all items contained in the related receivable files and any and all other
documents that the Seller keeps on file in accordance with its customary
procedures relating to the Receivables;
o property, including the right to receive future Liquidation Proceeds, that
secures any of the Receivables and that has been acquired pursuant to the
liquidation of any Receivable; and
o any and all payments on and proceeds of the foregoing.
Additional non-prime motor vehicle retail installment sale contracts (the
"Subsequent Receivables") secured by new and used automobiles and light-duty
trucks (the "Subsequent Financed Vehicles") and related property are intended to
be purchased by the Trust from the Seller from time to time on or before [ ],
from funds on deposit in the Pre-Funding Account. The Subsequent Receivables
will be purchased by the Company from the Seller pursuant to one or more
subsequent purchase agreements (each, a "Subsequent Purchase Agreement") between
the Company and the Seller, and from the Company by the Trust pursuant to one or
more subsequent transfer agreements. The purchase by the Trust of the Initial
Receivables and the Subsequent Receivables are in this prospectus supplement
referred to as the "Receivables," and the Initial Financed Vehicles and the
Subsequent Financed Vehicles are in this prospectus supplement referred to as
the "Financed Vehicles."
Pursuant to the dealer agreement between the Dealer and the Seller, a
Dealer generally is obligated to pay the Seller for the unpaid balance of those
Receivables which do not meet limited representations made by the Dealers (these
obligations referred to in this prospectus supplement as "Dealer Recourse").
These representations and warranties relate primarily to the origination of the
contracts and the perfection of the security interests in the related Financed
Vehicles, and do not typically relate to the creditworthiness of the related
Obligors or the collectability of the relevant contracts. Although the Dealer
Agreements with respect to the Receivables will not be assigned to the Trust or
Indenture Trustee, the Receivables Purchase Agreement and the Sale and Servicing
Agreement will require the Seller to cause the amount of any recovery in respect
to any Receivable pursuant to any Dealer Recourse to be deposited in the
Collection Account in satisfaction of the Seller's obligations under the Sale
and Servicing Agreement. The sales by the Dealers of installment sale contracts
to the Seller do not generally provide for recourse against the Dealers for
unpaid amounts in the event of a default by an Obligor under the installment
sales contract, other than in connection with the breach of the foregoing
representations and warranties. There can be no assurance that the Seller will
pursue all claims under the Dealer Agreements nor that the Seller will prevail
if any claim is made.
The Receivables were generally originated by Dealers in accordance with the
Seller's requirements under agreements with Dealers for assignment to the Seller
and were so assigned. All the Initial Receivables will be sold and assigned by
the Seller to the Company pursuant to the Receivables Purchase Agreement and by
the Company to the Trust pursuant to the Sale and Servicing Agreement on or
prior to the Closing Date. The Subsequent Receivables will be sold and assigned
on one or more future dates occurring no later than [ ] (each, a "Subsequent
Transfer Date"). The Indenture Trustee, as custodian, will hold the original
installment sales contract or promissory note as well as copies of documents and
instruments relating to each Receivable (the "Receivables File").
Pursuant to the Indenture, the Trust will grant a security interest in the
Trust Property in favor of the Indenture Trustee on behalf of the Noteholders
and for the benefit of the [ ] (the "Insurer") in support of the obligations
owing to it under the Insurance and Indemnity Agreement, dated as of [ ],
between the Seller, the Trust, the Certificateholder and the Insurer. Any
proceeds of the security interest in the Trust Property would be distributed
according to the Indenture as described under "The Notes--Priority of
Distribution Amounts." The Insurer would be entitled to the distributions only
after payment of amounts owing to, among others, Noteholders.
THE SELLER'S AUTOMOBILE FINANCING PROGRAM
[To Be Inserted]
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth information relating to the delinquency and
loss experience of the Seller for the periods indicated. The data presented in
the delinquency and loss tables below are for illustrative purposes only. There
is no assurance that the delinquency and credit loss experience with respect to
the Seller's automobile, light-duty truck and sports utility vehicle installment
contracts in the future, or that the experience of the Trust Property with
respect to the Receivables pledged to the Indenture Trustee for the benefit of
the Noteholders, will be similar to that set forth below. Losses and
delinquencies are affected by, among other things, general and regional economic
conditions and the supply of and demand for automobiles, light-duty trucks and
sports utility vehicles. The delinquency and loss percentages may be affected by
the increase in size of, and the relative lack of seasoning of, a substantial
portion of the portfolio. THE INFORMATION IN THE TABLE BELOW IS NOT INTENDED TO
INDICATE OR PREDICT THE EXPECTED DELINQUENCY EXPERIENCE ON PAST, CURRENT OR
FUTURE POOLS OF AUTOMOBILE LOANS FOR WHICH THE SERVICER IS THE PRIMARY SERVICER.
See "Risk Factors--The information relating to the auto loans may not reflect
actual experience."
<PAGE>
HISTORICAL DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF ______________ AS OF ____________
------------------------------------------- ---------------------------------------
% OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE
----------- ---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Principal Balance at Period
End(1), (2).......................
Delinquencies
31-60 Days........................
61-90 Days........................
91+ Days..........................
Total Delinquencies.................
Amount in Repossession(3)...........
Total Delinquencies and Amount in
Repossession......................
AS OF ______________
-------------------------------------------
% OF
NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE
----------- ---------- ----------
<S> <C> <C> <C>
Aggregate Principal Balance at Period
End(1), (2).......................
Delinquencies
31-60 Days........................
61-90 Days........................
91+ Days..........................
Total Delinquencies.................
Amount in Repossession(3)...........
Total Delinquencies and Amount in
Repossession......................
AS OF ______________ AS OF ____________
------------------------------------------- ---------------------------------------
% OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE
----------- ---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Principal Balance at
Period End(1), (2).....................
Delinquencies
31-60 Days...........................
61-90 Days...........................
91+ Days.............................
Total Delinquencies....................
Amount in Repossession(3)..............
Total Delinquencies and
Amount in Repossession................ ============ ============ ============= ============== ========== =============
---------------
(1) The aggregate principal balance is equal to the gross receivable less
unearned finance charges on Precomputed Receivables plus the principal
balance on Simple Interest Receivables.
(2) Represents the aggregate principal balance of all contracts purchased and
serviced by the Seller.
(3) Represents the aggregate principal balance as of the repossession date.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL NET LOSS EXPERIENCE
DURING THE PERIOD ENDED
----------------------------------------------- ----------
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Average Aggregate Principal
Balance(1)....................................................
Gross Charge-Offs(2)............................................
Recoveries(3)...................................................
Net Losses......................................................
Net Losses as a Percentage of Average Aggregate
Principal Balance.............................................
---------------
(1) The aggregate principal balance is equal to the gross receivable less
unearned finance charges on Precomputed Receivables plus the principal
balance on Simple Interest Receivables.
(2) Gross Charge-Offs are defined as the remaining principal balance of the
charged-off contract less the net proceeds of the liquidation of the
related vehicle.
(3) Recoveries include post-liquidation amounts received on previously
charged-off contracts, including deficiency payments, rebates on related
extended service contracts and insurance policies.
</TABLE>
<PAGE>
THE BACKUP SERVICER
If a Servicer Termination Event occurs and remains unremedied and the
Seller is terminated as Servicer or resigns as Servicer, in each case in
accordance with the Sale and Servicing Agreement, [ ], a [ ], will serve as
Backup Servicer.
The Backup Servicer will receive a fee on each Payment Date equal to
one-twelfth the product of [ ] basis points and the then outstanding Note
Balance as compensation for, among other things, (1) standing by to act as
successor Servicer and (2) confirming particular calculations made by the
Servicer on the monthly statement to Noteholders, including but not limited to
(a) interest and principal payments due to the Noteholders and (b) some of the
Receivables performance ratios.
THE RECEIVABLES
Pursuant to the Receivables Purchase Agreement, the Seller will sell and
assign to the Company all of its right, title and interest in and to the
Receivables and the other Trust Property, and the Company, pursuant to the Sale
and Servicing Agreement, will sell and assign to the Trust all of its right,
title and interest in and to the Receivables and any other Trust Property. The
Trust will then pledge all of its right, title and interest in and to the
Receivables to the Indenture Trustee for the benefit of the Noteholders and the
Insurer pursuant to the Indenture. The Receivables consist of non-prime motor
vehicle retail installment sales contracts. The Receivables were purchased by
the Seller in the ordinary course of its business pursuant to its finance
programs and underwriting standards. As detailed in this prospectus supplement,
credit guidelines may be less stringent than those applied in the origination of
other automobile loans by other lenders. See "The Seller's Automobile Financing
Program."
No selection procedures adverse to the Noteholders or the Insurer were
utilized in selecting the Initial Receivables sold and assigned to the Company
and then sold and assigned to the Trust. The Receivables existing as of the
Initial Cutoff Date were selected from the Seller's portfolio according to
several criteria. Among the criteria, each Receivable:
(1) arises from the delivery and acceptance of a Financed Vehicle and
which delivery and acceptance has been fully performed by the
Obligor and the Dealer party to the transaction,
(2) arises from the normal course of the Dealer's business,
(3) is not in default,
(4) the Obligor of which is a natural person residing in any state or
the District of Columbia,
(5) the Obligor of which is not a government or a governmental
subdivision or agency,
(6) met the Seller's underwriting criteria at the time of purchase,
(7) is denominated and payable in Dollars in the United States,
(8) is in full force and effect and constitutes the legal, valid and
binding obligation of the Obligor in accordance with its terms,
(9) is not subject to any dispute, litigation, counterclaim or
defense, or any offset or right of offset at the time of purchase
by the Seller, any exercisable right of rescission,
(10) is not more than [ ] days past due,
(11) has an original term to scheduled maturity of not less than [ ]
or more than 72 months,
(12) has a remaining term to scheduled maturity of not less than [ ]
months or greater than 72 months,
(13) provides for equal monthly payments which will cause the
Receivable to fully amortize [ ] during its term,
(14) has a remaining principal balance of not less than $[ ] or more
than $[ ],
(15) has an APR of not less than [ ]% and
(16) the model year of the related Financed Vehicle is not earlier
than [ ].
PAYMENTS ON THE RECEIVABLES
All of the Receivables provide for the payment by the related Obligor of a
specific total amount of payments, payable in substantially equal monthly
installments on each scheduled payment date, which total represents the amount
financed plus interest charges on the amount financed for the term of the
Receivable. Each Receivable provides for repayment of the Amount Financed by an
Obligor according to:
o the Rule of 78's (a "Rule of 78's Receivables"),
o the actuarial method (an "Actuarial Receivable" and together with Rule
of 78's Receivables, the "Precomputed Receivables") or
o the simple interest method (a "Simple Interest Receivable").
Under a Rule of 78's Receivable, the rate at which the amount of finance
charges is earned and, correspondingly, the amount of each scheduled monthly
payment allocated to reduction of the outstanding principal balance of the
related Receivable are calculated in accordance with the "Rule of 78's". Under
the Rule of 78's, the portion of a payment allocable to interest earned during
that month is determined by multiplying the total amount of interest payable
over the term of the Receivable by a fraction, the denominator of which is equal
to the sum of a series of numbers beginning with one and ending with the number
of scheduled monthly payments due under the related Receivable, and the
numerator of which is the number of payments remaining under the Receivable
before giving effect to the payment to which the fraction is being applied. The
difference between the amount of the scheduled monthly payment made by the
Obligor and the amount of earned interest calculated for the month is applied to
principal reduction.
An Actuarial Receivable provides for amortization of the loan over a series
of fixed level monthly installments. Each scheduled monthly payment is deemed to
consist of an amount of interest equal to one-twelfth of the stated APR of the
Receivable multiplied by the outstanding principal balance of the Receivable and
an amount of principal equal to the remainder of the scheduled monthly payment.
All payments received by the Servicer on or in respect of Precomputed
Receivables, including the final scheduled payment, will be allocated pursuant
to the Sale and Servicing Agreement on an actuarial basis. No adjustment will be
made in the event of early or late payments, although in the latter case, the
Obligor may be subject to a late charge.
"Simple Interest Receivables" provide for the amortization of the amount
financed under the Receivable over a series of fixed level monthly payments.
However, unlike the monthly payment under Rule of 78s Receivables, each monthly
payment consists of an installment of interest which is calculated on the basis
of the outstanding principal balance of the receivable multiplied by the stated
APR and further multiplied by the period elapsed, as a fraction of a calendar
year, since the preceding payment of interest was made. As payments are received
under a Simple Interest Receivable, the amount received is applied first to
interest accrued to the date immediately preceding the date of payment and the
balance is applied to reduce the unpaid principal balance. Accordingly, if an
Obligor pays a fixed monthly installment before its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be less than it would have been had the payment been made
as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. Conversely, if an Obligor
pays a fixed monthly installment after its scheduled due date, the portion of
the payment allocable to interest for the period since the preceding payment was
made will be greater than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly less. In either case, the Obligor pays a fixed
monthly installment until the final scheduled payment date, at which time the
amount of the final installment is increased or decreased as necessary to repay
the then outstanding principal balance.
In the event of a prepayment in full, voluntarily or by acceleration, of a
Precomputed Receivable, a "rebate" in the loan accounting records of the
Servicer may be made to the Obligor of that portion of the total amount of
payments under the relevant Receivable allocable to "unearned" finance charges.
In the event of the prepayment in full, voluntarily or by acceleration, of a
Simple Interest Receivable, a "rebate" will not be made to the Obligor, but the
Obligor will be required to pay interest only to the date immediately preceding
the date of prepayment. The amount of a rebate under a Precomputed Receivable
generally will be less than or equal to the remaining scheduled payments of
interest that would have been due under a Simple Interest Receivable for which
all remaining payments were made on schedule.
The amount of a rebate under a Rule of 78's Receivable calculated in
accordance with the Rule of 78's generally will be less than the amount of a
rebate on an Actuarial Receivable calculated in accordance with the actuarial
method. Distributions to Noteholders will not be affected by Rule of 78's
rebates under the Rule of 78's Receivables because pursuant to the Sale and
Servicing Agreements distributions will be determined using the actuarial
method. Amounts received upon prepayment in full of a Rule of 78's Receivable in
excess of the then outstanding principal balance of the Receivable and accrued
interest on the then outstanding principal balance of the Receivable, calculated
pursuant to the actuarial method, will not be passed through to Noteholders.
PURCHASE OR REPLACEMENT OBLIGATIONS
Pursuant to the Receivables Purchase Agreement and the Sale and Servicing
Agreement, the Seller will be obligated to repurchase or replace, subject to
limits on replacement set forth in the Sale and Servicing Agreement, any
Receivable sold and assigned to the Trust as to which a breach has occurred as
to particular representations or warranties made by the Seller with respect to
the Receivable, if the breach has not been cured by the last day of the first
full calendar month following the discovery by or notice to the Seller of the
breach, if the breach will materially and adversely affect the interests of the
Noteholders, the Insurer or the Trust in the relevant Receivable. The Indenture
Trustee will also have rights to enforce the obligations of the Seller under the
Receivables Purchase Agreement. See "Description of the Transaction
Documents--Sale and Assignment of Receivables" and "Trust Property" in this
prospectus supplement.
The Sale and Servicing Agreement also provides that if the Servicer
breaches certain of its servicing obligations under the Sale and Servicing
Agreement, including but not limited to its obligation to maintain perfection of
the first priority security interest of the Seller created by each Receivable in
the related Financed Vehicle, or other covenants with regard to the Servicer, in
each case only in a manner that materially and adversely affects the interests
of the Noteholders, the Insurer or the Trust in any Receivable, the Servicer
will purchase or replace the relevant Receivable from the Trust, unless the
breach has been cured by the last day of the first full calendar month following
the discovery by or notice to the Servicer of the breach.
COMPOSITION OF THE POOL OF INITIAL RECEIVABLES
The tables below set forth information regarding the composition and
characteristics of the pool of Receivables as of the Initial Cutoff Date. It is
expected that the composition and characteristics of the Receivables on the
Closing Date will be similar to the information set forth below. However, some
Receivables may be excluded on the Closing Date as of a result of particular
administrative considerations. The Seller does not believe that the
characteristics of the Receivables included in the Trust on the Closing Date in
the aggregate will differ materially from the information set forth in this
prospectus supplement.
<TABLE>
<CAPTION>
COMPOSITION OF THE INITIAL RECEIVABLES
<S> <C> <C>
Aggregate Principal Balance.................................. $[ ]
Number of Receivables........................................ [ ]
Average Amount Financed...................................... $[ ]
Range of Amounts Financed.................................... $[ ] to $[ ]
Average Current Principal Balance............................ $[ ]
Range of Current Principal Balances.......................... $[ ] to $[ ]
Weighted Average APR......................................... [ ]%
Range of APRs................................................ [ ]% to [ ]%
Weighted Average Original Term to Scheduled
Maturity(1)................................................ [ ] months
Range of Original Terms to Scheduled Maturity................ [ ] to [ ] months
Weighted Average Remaining Term to Scheduled
Maturity(1)................................................ [ ] months
Range of Remaining Terms to Scheduled Maturity............... [ ] to 72 months
------------------
(1) Rounded to the nearest month.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY CURRENT PRINCIPAL BALANCE
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
PERCENTAGE OF TOTAL AGGREGATE
CURRENT PRINCIPAL NUMBER OF NUMBER OF CURRENT PRINCIPAL PRINCIPAL
BALANCE RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
------------------ ------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
$ 5,000.00 to 9,999.99........
10,000.00 to 14,999.99........
15,000.00 to 19,999.99........
20,000.00 to 24,999.99........
25,000.00 to 29,999.99........
30,000.00 to 34,999.99........
------------------ -------------------- --------------
TOTAL............................ 100.00% $___________________ 100%
-------------- ------------------ ==================== ==============
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY AMOUNT FINANCED
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
PERCENTAGE OF TOTAL AGGREGATE
AMOUNT NUMBER OF NUMBER OF CURRENT PRINCIPAL PRINCIPAL
FINANCED RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
------------------ ------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
$ 5,000.00 to 9,999.99........
10,000.00 to 14,999.99........
15,000.00 to 19,999.99........
20,000.00 to 24,999.99........
25,000.00 to 29,999.99........
30,000.00 to 34,999.99........
35,000.00 to 39,999.99........
------------------ -------------------- --------------
TOTAL............................ 100.00% $___________________ 100%
-------------- ------------------ ==================== ==============
-------------
(1) Percentages may not add to 100.00% due to rounding.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY APR
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
PERCENTAGE OF TOTAL AGGREGATE
RANGE OF NUMBER OF NUMBER OF CURRENT PRINCIPAL PRINCIPAL
APRS (%) RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
------------------ ------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
10.00 to 10.99...................
11.00 to 11.99...................
12.00 to 12.99...................
13.00 to 13.99...................
14.00 to 14.99...................
15.00 to 15.99...................
16.00 to 16.99...................
17.00 to 17.99...................
18.00 to 18.99...................
19.00 to 19.99...................
20.99 to 20.99...................
21.00 to 21.99...................
22.00 to 22.99...................
23.00 to 23.99...................
24.00 to 24.99...................
25.00 to 25.99...................
------------------ -------------------- --------------
TOTAL............................ 100.00% $___________________ 100%
-------------- ------------------ ==================== ==============
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY MODEL YEAR OF FINANCED VEHICLE
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
PERCENTAGE OF TOTAL AGGREGATE
NUMBER OF NUMBER OF CURRENT PRINCIPAL PRINCIPAL
MODEL YEAR RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
------------------ ------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
1999.............................
1998.............................
1997.............................
1996.............................
1995.............................
1994.............................
1993.............................
1992.............................
1991.............................
------------------ -------------------- --------------
TOTAL............................ 100.00% $___________________ 100%
-------------- ------------------ ==================== ==============
(1) Percentages may not add up to 100.00% due to rounding.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY REMAINING TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
PERCENTAGE OF TOTAL AGGREGATE
RANGE OF REMAINING NUMBER OF NUMBER OF CURRENT PRINCIPAL PRINCIPAL
TERMS RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
------------------ ------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
24 to 29 months..................
30 to 35 months..................
36 to 41 months..................
42 to 47 months..................
48 to 53 months..................
54 to 59 months..................
60 to 65 months..................
66 to 71 months..................
72 months........................
------------------ -------------------- --------------
TOTAL............................ 100.00% $___________________ 100%
-------------- ------------------ ==================== ==============
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY ORIGINAL TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
RANGE OF ORIGINAL NUMBER OF NUMBER OF CURRENT PRINCIPAL PRINCIPAL
TERMS RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
------------------ ------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
30 to 35 months..................
36 to 41 months..................
42 to 47 months..................
48 to 53 months..................
54 to 59 months..................
60 to 65 months..................
66 to 71 months..................
72 months........................
------------------ -------------------- --------------
TOTAL............................ 100.00% $___________________ 100%
-------------- ------------------ ==================== ==============
--------------
(1) Percentages may not add up to 100.00% due to rounding.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY ADDRESS OF OBLIGOR
(AS OF THE INITIAL CUTOFF DATE)
NUMBER OF NUMBER OF CURRENT PRINCIPAL PRINCIPAL
STATE RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
----- ------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
--------.........................
---------........................
---------........................
------------.....................
----------.......................
-----------......................
------------.....................
---------........................
-----------......................
-----------......................
---------........................
----------.......................
----------.......................
---------........................
----------.......................
---------........................
-----------......................
-----------......................
---------........................
-----------......................
----------.......................
----------.......................
--------.........................
----------.......................
-----------......................
-----------......................
---------........................
-------..........................
----------.......................
------------------ -------------------- --------------
TOTAL............................ 100.00% $___________________ 100%
-------------- ------------------ ==================== ==============
------------------
(1) Percentages may not add up to 100.00% due to rounding.
</TABLE>
MATURITY AND PREPAYMENT CONSIDERATIONS
All the Receivables are prepayable at any time. The rate of prepayments on
the Receivables may be influenced by a variety of economic, social and other
factors, including the fact that an Obligor generally may not sell or transfer
the Financed Vehicle securing a Receivable without the consent of the Seller
unless the loan is repaid by the Obligor at the time of the sale or transfer.
For this purpose the term "prepayments" includes prepayments in full, or in
part, including, without limitation, some partial prepayments related to refunds
of extended service contract costs and unearned insurance premiums, liquidations
due to default, as well as receipts of proceeds from physical damage, credit
life and credit accident and health insurance policies and other Receivables
repurchased for administrative reasons. The rate of prepayment on the
Receivables may also be influenced by the structure of the loan, the nature of
the Obligors and the Financed Vehicles and servicing decisions as discussed
above. In addition, under some circumstances, the Seller is obligated to
repurchase or replace Receivables as a result of breaches of representations and
warranties pursuant to the Sale and Servicing Agreement and the Receivables
Purchase Agreement, and under some circumstances, the Servicer is obligated to
purchase Receivables pursuant to the Sale and Servicing Agreement as a result of
breaches of specific covenants. Subject to particular conditions, the Servicer
has the option to purchase the Receivables when the aggregate principal balance
of the Receivables is 10% or less of the Original Pool Balance.
If prepayments are received on the Receivables, the actual weighted average
life of the Receivables may be shorter than the scheduled weighted average life,
i.e., the weighted average life assuming that payments will be made as scheduled
and that no prepayments will be made. "Weighted Average Life" means the average
amount of time during which each dollar of principal on a Receivable is
outstanding.
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of Receivables will be borne by the Noteholders. See also "The
Notes--Optional Purchase of Receivables" regarding the Servicer's right to
purchase the Receivables and the other Trust Property on any Determination Date
as of which the Aggregate Principal Balance has declined to less than 10% of the
Original Pool Balance.
Prepayments on automobile receivables can be measured relative to a
prepayment standard or model. The model used in this prospectus supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the Receivables are the same size and amortize at
the same rate and that each Receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
The tables captioned "Percent of Initial Note Principal Balance at Various
ABS Percentages" ("ABS Tables") have been prepared on the basis of the following
assumptions:
o the Trust includes two pools of Receivables with the characteristics
set forth in the following table;
o the Receivables prepay in full at the specified constant percentage of
ABS monthly, with no defaults, losses or repurchases,
o each scheduled monthly payment on the Receivables is made on the last
day of each month and each month has 30 days;
o the initial principal amount of each of the Class A-1 Notes and Class
A-2 Notes are as set forth on the cover page of this prospectus
supplement;
o interest accrues during each Interest Period at the following assuming
coupon rates; Class A-1 Notes, [ ]% and Class A-2 Notes, [ ]%;
o payments on the notes are made on the [ ](th) of each month whether or
not a Business Day;
o the Class A Notes are purchased on [ ];
o the scheduled monthly payment for each Receivable has been calculated
on the basis of the assumed characteristics in the following table so
that each Receivable will amortize in amounts sufficient to repay the
Principal Balance of the Receivable by its indicated remaining term to
maturity;
o the first due date for each Receivable is the last day of the month of
the assumed cutoff date for each Receivable as set forth in the
following table;
o the entire Pre-Funded Amount is used to purchase Subsequent
Receivables;
o the Servicer does exercise its option to purchase the Receivables; and
o the difference between the gross APR and the net APR is equal to the
Servicer Fee, and the net APR is further reduced by the fees due to
the Indenture Trustee, the Backup Servicer and the Insurer.
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM TO
AGGREGATE TERM TO SCHEDULED
PRINCIPAL GROSS ASSUMED MATURITY (IN MATURITY (IN
POOL BALANCE APR(%) CUTOFF DATE MONTHS MONTHS
----------- ------------------------- ------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
1 $ [ ] [ ] [ ] [ ] [ ]
2 [ ] [ ] [ ] [ ] [ ]
Total $ [ ]
</TABLE>
The ABS Tables indicate, based on the assumptions set forth above, the
percentages of the initial principal amount of the Class A-1 Notes and Class A-2
Notes that would be outstanding after each of the Payment Dates shown at various
percentages of ABS and the corresponding weighted average lives of the Notes.
The actual characteristics and performance of the Receivables will differ from
the assumptions used in constructing the ABS Tables. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under the varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity, that all of the Receivables will prepay at the same
level of ABS or that the coupon rates on the Notes will remain constant.
Moreover, the diverse terms of Receivables could produce slower or faster
principal distributions than indicated in the ABS Tables at the various constant
percentage of ABS specified, even if the original and remaining terms of
maturity of the Receivables are as assumed. Any difference between the
assumptions and the actual characteristics and performance of the Receivables,
including actual prepayment experience or losses, will affect the percentages of
initial balances outstanding over time and the weighted average lives of the
Class A-1 Notes and Class A-2 Notes.
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE BALANCE
AT VARIOUS ABS PERCENTAGES(1)
PAYMENT CLASS A-1 NOTES CLASS A-2 NOTES
DATE ---------------------------------------------------------------- -----------------------------------
--------- ___% ___% ___% ___% ___% ___% ___% ___%
INITIAL ------------ ---------- ---------- ----------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
========= ------------ ---------- ---------- ----------- ----------- ----------- -------- ----------
Weighted
Average Life
in Years(2)
(1) The percentages in this table have been rounded to nearest whole number.
(2) The weighted average life of a note is determined by (1) multiplying the
amount of each principal payment on a note by the number of years from the
date of the Issuance of the note to the related Payment Date, (b) adding
the results and (c) dividing the sum by the related initial principal
amount of the note.
</TABLE>
<PAGE>
YIELD CONSIDERATIONS
Other than on the first Payment Date, on each Payment Date, interest on the
Receivables will be passed through to the Class A-1 and Class A-2 Noteholders in
an amount equal to one-twelfth of the Interest Rate multiplied by the Note
Balance of the applicable Class on the last day of the immediately preceding
Collection Period. In the event of prepayments on Receivables, Noteholders will
nonetheless be entitled to receive interest for the full month on the Notes. See
also "The Receivables--Payments on the Receivables" in this prospectus
supplement.
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of the Notes to purchase
Receivables from the Company and to make the initial deposit into the
Capitalized Interest Account and the Pre-Funding Account. The Company will use
the net proceeds paid to the Company by the Trust to purchase Receivables from
the Seller, which in turn will use the proceeds to pay related expenses and
repay specific warehouse loans and any additional proceeds will be added to the
Seller's general funds and used for its general corporate purposes.
THE INSURER
The following information has been obtained from the Insurer and has not
been verified by the Seller, the Company or the Underwriter. No representations
or warranty is made by the Seller, the Company or the Underwriter with respect
to this information.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the prospectus under
"Incorporation of Certain Documents by Reference," the consolidated financial
statements of the Insurer and its subsidiaries included in, or as exhibits to,
the following documents which have been filed with the Commission by Holdings,
are incorporated by reference in this prospectus supplement:
o Annual Report on Form 10-K for the year ended [ ],
o Quarterly Report on Form 10-Q for the period ended [ ],
o Quarterly Report on Form 10-Q for the period ended [ ], and
o Quarterly Report on Form 10-Q for the period ended [ ].
All financial statements of the Insurer included in documents filed by the
Insurer pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act") subsequent to the date of
this prospectus supplement and prior to the termination of the offering of the
Class A Notes shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part of this prospectus supplement from the
respective dates of filing of these documents.
The Seller will provide without charge to any person to whom this
prospectus supplement is delivered, upon their oral or written request, a copy
of any or all of the foregoing financial statements incorporated in this
prospectus supplement by reference. Requests for copies should be directed to: [
]
The Seller on behalf of the Trust undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Trust's annual report pursuant to section 13(a) or section 15(d) of the Exchange
Act and each filing of the financial statements of the Insurer included in or as
an exhibit to the annual report the Insurer of filed pursuant to section 13(a)
or section 15(d) of the Exchange Act that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the Class A Notes offered by this prospectus supplement, and the
offering of the Class A Notes at that time shall be deemed to be the initial
bona fide offering of the Class A Notes.
All documents filed by the Company with respect to the Registration
Statement, either on its own behalf or on behalf of the Trust, relating to the
Class A Notes, with the Securities and Exchange pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
supplement and prior to the termination of any offering of the Class A Notes
offered by this prospectus supplement, shall be deemed to be incorporated by
reference in this prospectus supplement and to be a part of this prospectus
supplement from the date of the filing of these documents. Any statement
contained in this prospectus supplement or in a document incorporated or deemed
to be incorporated by reference in this prospectus supplement shall be deemed to
be modified or superseded for purposes of this prospectus supplement to the
extent that a statement contained in this prospectus supplement or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this prospectus supplement, modifies or replaces the statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus supplement.
THE NOTES
The Notes will be issued pursuant to the Indenture, a form of which has
been filed as an exhibit to the Registration Statement. The following summary
describes some of the terms of the Class A Notes and the Indenture. The summary
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Notes and the Indenture. The
following summary supplements the description of the general terms and
provisions of the Notes of any given series and the related Indenture set forth
in the accompanying prospectus, to which description reference is made by this
prospectus supplement.
The Class A Notes initially will be represented by notes registered in the
name of Cede & Co., as the nominee of The Depository Trust Company ("DTC"), and
will only be available in the form of book-entries on the records of DTC and
participating members of DTC in denominations of $1,000. All references to
"Holders" or "Noteholders" and to authorized denominations, when used with
respect to the Notes, shall reflect the rights of Note Owners, and limitations
of Note Owners, as they may be indirectly exercised through DTC and its
participating members, except as otherwise specified in this prospectus
supplement. See "Certain Information Regarding the Securities--Book-Entry
Regulation" in the prospectus supplement and Annex I to the prospectus.
In general, the Class A-1 Noteholders will be entitled to receive, on each
Payment Date, the Class A-1 Principal Payment Amount and the Class A-1 Interest
Payment Amount and the Class A-2 Noteholders will be entitled to receive, on
each Payment Date, the Class A-2 Principal Payment Amount and the Class A-2
Interest Payment Amount, subject to the priority of payments as described in
"--Priority of Distribution Amounts." Payments on the Notes will be made from
the Note Distribution Account.
MANDATORY REDEMPTION
The Class A Notes will be redeemed in part on the Mandatory Redemption Date
in the event that any portion of the Pre-Funded Amount remains on deposit in the
Pre-Funding Account at the end of the Funding Period. The aggregate principal
amount of the Class A Notes to be redeemed will be an amount equal to the
remaining Pre-Funded Amount on that date (the "Class A Mandatory Redemption
Amount"). The Class A Mandatory Redemption Amount will be distributed pro rata
to each of the Class A-1 Notes and the Class A-2 Notes, based on the current
principal balance of each Class, provided, however, that if the amount remaining
in the Pre-Funding Account is less than $100,000, only the Class A-1 Notes will
be redeemed.
OPTIONAL PURCHASE OF RECEIVABLES
As an administrative convenience, the Servicer may purchase all the
Receivables and other Trust Property on any Payment Date if, as of the last day
of the related Collection Period, the Aggregate Principal Balance has declined
to less than 10% of the sum of (1) the Aggregate Principal Balance as of the
Initial Cutoff Date plus (2) the aggregate principal balances of the Subsequent
Receivables added to the Trust as of their respective Cutoff Dates (the
"Original Pool Balance"). To exercise this option, the Servicer must pay the
aggregate Purchase Amounts for the Receivables and obtain the prior written
consent of the Insurer, or if the redemption would result in a claim under the
Policy or if the redemption would result in any amount owing to the Insurer
remaining unpaid. Upon exercising the option, the Servicer will succeed to all
interests in and to the Trust Property. The purchase price paid by the Servicer
will be deposited into the Collection Account and distributed pursuant to
"--Priority of Distribution Amounts" below. See "Certain Matters Regarding the
Servicer--Termination" in the accompanying prospectus.
This purchase will cause a redemption of the Notes; provided, however, that
the Servicer will provide the Indenture Trustee, the Backup Servicer, the
Insurer and the Rating Agencies at least 10 days' prior written notice of any
redemption. The Indenture Trustee will give notice to each Noteholder at least
five days prior to any redemption. The redemption price for each Note will be no
less than the outstanding principal balance of the relevant Note on the date of
redemption plus accrued and unpaid interest on the outstanding principal balance
(the "Redemption Price"). The Servicer will deposit the Redemption Price into
the Collection Account, and the Indenture Trustee will distribute the amounts so
deposited in accordance with the "Priority of Distribution Amounts" below.
DISTRIBUTIONS FROM THE TRUST
No later than 12:00 p.m. New York City time on each Determination Date, the
Servicer will inform the Indenture Trustee of the amount of aggregate
collections on the Receivables and the aggregate Purchase Amount of Receivables
to be purchased by the Servicer with respect to the related Collection Period.
The Servicer will determine prior to the Determination Date, the Class A-1
Interest Payment Amount, the Class A-1 Principal Payment Amount, the Class A-2
Interest Payment Amount, the Class A-2 Principal Payment Amount, the Payment
Amount, the amounts, if any, required to be deposited in the Class A Reserve
Account, the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount.
For purposes of this prospectus supplement, the following terms shall have
the following meanings:
"Additional Funds Available" means, with respect to any Payment Date the
sum of (1) the Deficiency Claim Amount, if any, received by the Indenture
Trustee with respect to the Payment Date plus (2) the Insurer Optional Deposit,
if any, received by the Indenture Trustee with respect to the Payment Date.
"Class A Interest Carryover Shortfall" means, as of the close of business
on any Payment Date, the sum of (1) the Class A-1 Interest Carryover Shortfall
and (2) the Class A-2 Interest Carryover Shortfall.
"Class A Interest Payment Amount" means, with respect to any Payment Date,
the sum of (1) the Class A-1 Interest Payment Amount and (2) the Class A-2
Interest Payment Amount.
"Class A Mandatory Redemption Amount" means the amount, if any, remaining
of the Pre-Funded Amount on the Mandatory Redemption Date.
"Class A Overcollateralization Amount" means, with respect to any Payment
Date, an amount equal to the excess, if any, of:
(1) the sum of,
(a) the remaining Aggregate Principal Balance as of the last
day of the related Collection Period and
(b) all amounts, if any, in the Pre-Funding Account, over
(2) the remaining Class A Note Balance, after giving effect to
the amounts payable on the Payment Date pursuant to clauses (1)
through (5) under "--Priority of Distribution Amounts" on the Payment
Date.
"Class A Principal Payment Amount" means, with respect to any Payment Date,
the sum of the Class A-1 Principal Payment Amount and the Class A-2 Principal
Payment Amount.
"Class A Target Overcollateralization Amount" means, with respect to any
Payment Date, an amount equal to the product of (1) [ ]%, or any lesser
percentage as the Insurer may decide in its sole discretion, and (2) the sum of
(a) the remaining Aggregate Principal Balance, and (b) amounts, if any, in the
Pre-Funded Account, each determined as of the last day of the related Collection
Period.
"Class A-1 Interest Carryover Shortfall" means, as of the close of business
on any Payment Date, the excess of (a) the Class A-1 Interest Payment Amount for
the Payment Date and any outstanding Class A-1 Interest Carryover Shortfall from
the immediately preceding Payment Date plus interest on this outstanding Class
A-1 Interest Carryover Shortfall, to the extent permitted by law, at the Class
A-1 Interest Rate from the preceding Payment Date through the current Payment
Date, calculated on the basis of a 360-day year consisting of twelve 30-day
months, over (b) the amount of interest that the Holders of the Class A-1 Notes
actually received on the current Payment Date.
"Class A-1 Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including [ ], to but excluding [ ], at the
Class A-1 Interest Rate on the Class A-1 Note Balance as of the close of
business on the last day of the related Collection Period.
"Class A-1 Mandatory Redemption Amount" means, (1) with respect to the
Mandatory Redemption Date on which the Class A Mandatory Redemption Amount is
less than $100,000, the Class A Mandatory Redemption Amount, and (2) with
respect to any Payment Date on which the Class A Mandatory Redemption Amount is
greater than $100,000, the product of (A) the Class A Mandatory Redemption
Amount and (B) a fraction, the numerator of which is the Class A-1 Note Balance
as of the class of business on the date prior to the related Payment Date and
the denominator of which is the Class A Note Balance as of the class of business
on the date prior to the related Payment Date.
"Class A-1 Principal Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-1 Principal Payment
Amount and any outstanding Class A-1 Principal Carryover Shortfall from the
immediately preceding Payment Date, over (b) the amount of principal that the
Holders of the Class A-1 Notes actually received on the current Payment Date.
"Class A-2 Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including [ ], to but excluding [ ], at the
Class A-2 Interest Rate on the Class A-2 Note Balance as of the close of
business on the last day of the related Collection Period.
"Class A-1 Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class A-1 Final
Scheduled Payment Date: the lesser of,
(1) the Class A-1 Note Balance immediately prior to the Payment Date
and
(2) the sum of
(A) the Principal Payment Amount and
(B) the Class A-1 Mandatory Redemption Amount and
(b) with respect to the Class A-1 Final Scheduled Payment Date, the then
outstanding Class A-1 Note Balance.
"Class A-2 Interest Carryover Shortfall" means, as of the close of business
on any Payment Date, the excess of (a) the Class A-2 Interest Payment Amount for
the Payment Date and any outstanding Class A-2 Interest Carryover Shortfall from
the immediately preceding Payment Date plus interest on the outstanding Class
A-2 Interest Carryover Shortfall, to the extent permitted by law, at the Class
A-2 Interest Rate from the preceding Payment Date through the current Payment
Date, calculated on the basis of a 360-day year consisting of twelve 30-day
months, over (b) the amount of interest that the Holders of the Class A-2 Notes
actually received on the current Payment Date.
"Class A-2 Mandatory Redemption Amount" means, with respect to the
Mandatory Redemption Payment Date, the positive difference, if any, between the
Class A Mandatory Redemption Amount and the Class A-1 Mandatory Redemption
Amount.
"Class A-2 Principal Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-2 Principal Payment
Amount and any outstanding Class A-2 Principal Carryover Shortfall from the
immediately preceding Payment Date, over (b) the amount of principal that the
Holders of the Class A-2 Notes actually received on the current Payment Date.
"Class A-2 Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class A-2 Final
Scheduled Payment Date: the lesser of,
(1) the Class A-2 Note Balance immediately prior to the Payment Date,
and
(2) the difference between
(A) the sum of the Principal Payment Amount and the Class A-2
Mandatory Redemption Amount and
(B) the Class A-1 Principal Payment Amount and
(b) with respect to the Class A-2 Final Scheduled Payment Date, the then
outstanding Class A-2 Note Balance.
"Class B Interest Carryover Shortfall" means, as of the close of business
on any Payment Date, the excess of (a) the Class B Interest Payment Amount for
the Payment Date and any outstanding Class B Interest Carryover Shortfall from
the immediately preceding Payment Date plus interest on the outstanding Class B
Interest Carryover Shortfall, to the extent permitted by law, at the Class B
Interest Rate from the preceding Payment Date through the current Payment Date,
calculated on the basis of a 360-day year consisting of twelve 30-day months,
over (b) the amount of interest that the Holders of the Class B Notes actually
received on the current Payment Date.
"Class B Interest Payment Amount" means, with respect to any Payment Date,
30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including [ ] to but excluding [ ], at the
Class B Interest Rate on the Class B Note Balance as of the close of business on
the last day of the related Collection Period.
"Class B Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class B Final
Scheduled Payment Date: the lesser of,
(x) the Class B Note Balance immediately prior to the Payment Date,
and
(y) amounts remaining from the sum of,
(A) Available Funds and
(B) amounts available from the Class A Reserve Account
in accordance with the terms of the Sale and Servicing Agreement, after
application of priorities First through Ninth under "--Priority of
Distribution Amounts," and
(b) with respect to the Class B Final Scheduled Payment Date, the then
outstanding Class B Note Balance.
"Contract Scheduled Payment" means, for any Collection Period for any
Receivable, the amount indicated in the Receivable as required to be paid by the
Obligor in the relevant Collection Period, without giving effect to deferments
of payments granted to Obligors by the Servicer pursuant to the Sale and
Servicing Agreement or any rescheduling of payments in an insolvency or similar
proceeding.
"Defaulted Receivable" means any Receivable with respect to which any of
the following shall have occurred:
o for which the related Financed Vehicle has been repossessed by the
Servicer;
o for which all or more than 10% of any payment is 120 days or more past
due; or
o a Contract with respect to which the Servicer has determined in good
faith that all amounts expected to be recovered have been received.
"Draw Date" means, with respect to any Payment Date the third business Day
(as defined in the Policy) immediately preceeding the Payment Date.
"Excess Overcollateralization Amount" means, with respect to any Payment
Date, the excess, if any, of
(1) the Class A Overcollateralization Amount calculated for this purpose
only without deduction for any Excess Overcollateralization Amount (I.E.,
assuming that the entire amount described in clause (x) of the definition of
"Principal Payment Amount" is distributed as principal on the Class A Notes)
over
(2) the Class A Target Overcollateralization Amount on the Payment Date.
"Insurer Optional Deposit" means, with respect to any Payment Date, an
amount delivered by the Insurer, at its sole option, other than amounts in
respect of a Policy Claim Amount, for deposit into the Collection Account for
any of the following purposes:
(1) to provide funds in respect of the payment of fees or expenses of any
provider of services to the Trust with respect to the Payment Date; or
(2) to include this amount as part of the Additional Funds Available for
the Payment Date to the extent that without this amount a draw would be required
to be made on the Policy.
"Liquidated Receivable" means any Receivable with respect to which any of
the following shall have occurred with respect to any Collection Period:
o the sale of the Financed Vehicle;
o for which all or more than 10% of any Contract Scheduled Payment is
120 days or more past due, except in the case of repossessed Financed
Vehicles,
o the Servicer has determined in good faith that all amounts it expects
to be recovered have been received, or
o 90 days have elapsed since the Servicer repossessed the Financed
Vehicle.
"OC Stabilization Date" means the first Payment Date on which the Class A
Overcollateralization Amount equals the Class A Target Overcollateralization
Amount.
"Policy Claim Amount" means, for any Payment Date, the excess, if any, of
(1) the sum of the Class A Interest Payment Amount and the Class A
Principal Payment Amount for the Payment Date over
(2) the sum of
(a) the amounts actually deposited into the Class A Note Distribution
Account on the related Payment Date and
(b) the Additional Funds Available to pay the Class A Interest Payment
Amount or the Class A Principal Payment Amount if any, for the Payment
Date.
"Principal Balance" of a Receivable:
o as of the Cutoff Date, means the Amount Financed minus
(1) in the case of a Precomputed Receivable, that portion of all
payments, including all Contract Scheduled Payments and any
prepayments in full or partial prepayments, actually
received on or prior to that date and allocable to principal
in accordance with the actuarial method and
(2) in the case of a Simple Interest Receivable, that portion of
all payments, including all Contract Scheduled Payments and
any prepayments in full or partial prepayments, actually
received on or prior to that date and allocable to principal
in accordance with the simple interest method, and
o as of any date after the Cutoff Date, means the Principal Balance as
of the Cutoff Date minus
(1) in the case of a Precomputed Receivable, that portion of all
payments, including all Contract Scheduled Payments and any
prepayments in full or partial prepayments, actually
received on or prior to that date, but after the Cutoff
Date, and allocable to principal in accordance with the
actuarial method,
(2) in the case of a Simple Interest Receivable, that portion of
all payments, including all Contract Scheduled Payments and
any prepayments in full or partial prepayments, actually
received on or prior to that date, but after the Cutoff
Date, and allocable to principal in accordance with the
simple interest method and
(3) any Cram Down Loss in respect of the Receivable. The
Principal Balance of a Liquidated Receivable for purposes
other than the definition of Principal Payment Amount shall
be equal to $0.
"Principal Payment Amount" means the amount equal to the excess, if any, of
(x) the sum of the following amounts, without duplication:
o the principal portion of all Contract Scheduled Payments
received during the Collection Period on Precomputed
Receivables, calculated in accordance with the actuarial
method, and all payments of principal received on Simple
Interest Receivables, calculated in accordance with the
simple interest method, during the Collection Period;
o the principal portion of all prepayments received during the
related Collection Period;
o the portion of the Purchase Amount allocable to principal of
each Receivable that became a Purchased Receivable as of the
last day of the related Collection Period and, at the option
of the Insurer, the Principal Balance of each Receivable
that was required to be but was not so purchased or
repurchased;
o the Principal Balance of each Receivable that first became a
Liquidated Receivable during the related Collection Period;
and
o the aggregate amount of Cram Down Losses with respect to the
Receivables that have occurred during the related Collection
Period, over
(y) the Excess Overcollateralization Amount, if any, for the Payment Date.
"Purchase Amount" means, with respect to a Receivable, the Principal
Balance plus interest on the Principal Balance at the respective APR from the
last day through which interest has been paid to the last day of the immediately
preceding Collection Period if purchased prior to the Determination Date
immediately following the end of the Collection Period, and otherwise through
the last day of the month of repurchase.
CALCULATION OF PAYMENT AMOUNTS. The Class A-1 Noteholders will be entitled
to receive, to the extent funds are available, the Class A-1 Principal Payment
Amount and the Class A-1 Interest Payment Amount with respect to each Payment
Date. The Class A-2 Noteholders will be entitled to receive to the extent funds
are available, the Class A-2 Principal Payment Amount and the Class A-2 Interest
Payment Amount with respect to each Payment Date, subject to the priority of
payments as described in "--Priority of Distribution Amounts". The "Class A-1
Note Balance" will initially represent $[ ], and afterward, an amount equal to
the initial Class A-1 Note Balance reduced by all amounts distributed to the
Noteholders that are allocable to principal. The "Class A-2 Note Balance" will
initially represent $[ ], and afterward, an amount equal to the initial Class
A-2 Note Balance reduced by all amounts distributed to the Class A-2 Noteholders
that are allocable to principal.
PRIORITY OF DISTRIBUTION AMOUNTS
On each Payment Date, the Indenture Trustee will, based on the information
contained in the Servicer's Certificate delivered on the related Determination
Date, distribute the following amounts in the following order of priority:
(1) first, from the Available Funds, to the Servicer, the Servicer Fee (as
defined in this prospectus supplement) for the related Collection
Period, and any Servicer Expenses for the related or any prior
Collection Period and other amounts mistakenly deposited in the
Collection Account belonging to the Servicer, if any, or otherwise
required to be distributed to the Servicer in accordance with the Sale
and Servicing Agreement;
(2) second, from the remaining Available Funds, to the Lockbox Bank, the
Indenture Trustee, the Owner Trustee and the Backup Servicer, any
accrued and unpaid fees and in the case of the Backup Servicer,
Servicer Transition Expenses, if any, up to an amount specified in the
Sale and Servicing Agreement, in each case, to the extent the Person
(as defined in this prospectus supplement) has not previously received
this amount from the Servicer;
(3) third, from the remaining Available Funds, pro rata in respect of the
amounts due, (a) to the Class A-1 Noteholders, the Class A-1 Interest
Payment Amount for the Payment Date and the Class A-1 Interest
Carryover Shortfall, if any, and (b) to the Class A-2 Noteholders, the
Class A-2 Interest Payment Amount for the Payment Date and the Class
A-2 Interest Carryover Shortfall, if any;
(4) fourth, from the remaining Available Funds, to the Class A-1
Noteholders, the Class A-1 Principal Payment Amount for the Payment
Date, and the Class A-1 Principal Carryover Shortfall, if any;
(5) fifth, from the remaining Available Funds, to the Class A-2
Noteholders, the Class A-2 Principal Payment Amount for the Payment
Date, and the Class A-2 Principal Carryover Shortfall, if any;
(6) sixth, from the remaining Available Funds, to the Insurer to the
extent of any amounts owing the Insurer under the Insurance Agreement;
(7) seventh, from the remaining Available Funds, to the Class A Reserve
Account to the extent necessary to increase the amount on deposit tin
this prospectus supplement to its then required level;
(8) eighth, on or prior to the OC Stabilization Date, from the remaining
Available Funds, and together with amounts, if any, available in
accordance with the terms of the Class A Reserve Account Agreement,
sequentially, to the Class A-1 Noteholders and to the Class A-2
Noteholders, as principal, until the Class A Target
Overcollateralization Amount is achieved;
(9) ninth, from the remaining Available Funds, to the Class B Noteholders,
the Class B Interest Payment Amount for the Payment Date and the Class
B Interest Carryover Shortfall, if any;
(10) tenth, from the remaining Available Funds, and together with amounts,
if any, available from the Class A Reserve Account in accordance with
the terms of the Sale and Servicing Agreement, to the Class B
Noteholders, the Class B Principal Payment Amount; and
(11) eleventh, from the remaining Available Funds, to the Class A Reserve
Account, or as otherwise specified in the Trust Documents, any
remaining funds.
PAYMENT DATE CALCULATIONS AND PAYMENTS
In the event that any Servicer's Certificate delivered by the Servicer
indicates that the Available Funds with respect to a Payment Date are
insufficient to fund in full the related Scheduled Payments plus the amounts
described in clauses (1), (2) and (6) above in "--Priority of Distribution
Amounts", the Indenture Trustee shall request the Deficiency Claim Amount from
the Class A Reserve Account, at the time required by and pursuant to, the Class
A Reserve Account Agreement. Any funds received by the Indenture Trustee
pursuant to this request will be deposited in the Collection Account and paid on
the related Payment Date to the persons entitled to the funds, in the amounts
described in clauses (1) through (6) of "--Priority of Distributions" in
accordance with the priority of payment. Further, in the event that any
Servicer's Certificate delivered by the Servicer indicates that the sum of (1)
the Available Funds with respect to a Payment Date, plus (2) any related
Deficiency Claim Amount funds deposited in the Collection Account or otherwise
received by the Indenture Trustee is insufficient to fund in full the related
Scheduled Payments, the Indenture Trustee shall furnish to the Insurer no later
than 12:00 noon New York City time on the related Draw Date a completed notice
of claim in the amount of the Policy Claim Amount. Amounts paid by the Insurer
pursuant to any notice of claim shall be deposited by the Insurer into the Note
Distribution Account for payment to Noteholders on the Payment Date.
STATEMENTS TO NOTEHOLDERS
On each Payment Date, the Indenture Trustee must provide to each Class A
Noteholder, the Insurer and the Rating Agencies a statement prepared by the
Servicer based on the information in the related Servicer's Certificate, which
statement sets forth the information required under the Sale and Servicing
Agreement. Each statement will include the following information with respect to
the Payment Date or the immediately preceding Collection Period, as applicable:
(1) the amount of the payment allocable to interest with respect to the
Class A-1 Notes, the Class A-2 Notes and the Class B Notes, as
applicable;
(2) the amount of the payment allocable to principal on or with respect to
the Class A-1 Notes, the Class A-2 Notes and the Class B Notes;
(3) the amount of the payment pursuant to a claim on the Policy;
(4) the amount of fees paid by the Trust with respect to the related
Collection Period, including any Servicer Fee and Servicer Expenses;
(5) the Class A-1 Note Balance, the Class A-2 Note Balance and the Class B
Note Balance;
(6) the Class A-1 Interest Carryover Shortfall, the Class A-2 Interest
Carryover Shortfall and the Class B Interest Carryover Shortfall, if
any, and the Class A-1 Principal Carryover Shortfall, the Class A-2
Principal Carryover Shortfall and the Class B Principal Carryover
Shortfall, if any;
(7) the Class A-1 Note Factor, the Class A-2 Note Factor and the Class B
Note Factor;
(8) for each date during the Pre-Funding Period, the remaining Pre-Funded
Amount, the amount in the Pre-Funding Account and the amount remaining
the Capitalized Interest Account;
(9) the number of Receivables and the aggregate Principal Balance due of
the Receivables, for which the related Obligors are delinquent in
making Contract Scheduled Payments (A) between 31 and 60 days, (B)
between 61 and 90 Days, (C) between 91 and 120 days and (D) more than
120 days;
(10) the number of Receivables which became Liquidated Receivables, and the
aggregate principal amount of the Receivables which became Liquidated
Receivables net of Recoveries;
(11) the number of Receivables which became Defaulted Receivables, and the
aggregate principal amount of these Receivables;
(12) the number and the aggregate Purchase Amount of Receivables that
became Purchased Receivables during the related Collection Period and
the number and aggregate Purchase Amount of Receivables that were
required to be repurchased during the related Collection Period but
were not so repurchased;
(13) the Principal Balance, APR and model year of each Receivable that was
replaced and the Principal Balance, APR and model year of the
corresponding Replacement Receivable;
(14) the number and the aggregate Principal Balance of Receivables with
respect to which, to the knowledge of the Servicer, Obligors became
the subject of bankruptcy proceedings during the Collection Period, or
during a prior Collection Period, if the Servicer first became aware
of the proceeding during the current Collection Period;
(15) the amount of any Deficiency Claim Amounts deposited in the Collection
Account from the Class A Reserve Account;
(16) the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount; and
(17) the beginning balance, amount of claims paid, amount of deposits made,
and ending balance of the applicable collateral self-insurance fund,
if any.
Each amount set forth pursuant to subclauses (1), (2) and (5) will be
expressed as a dollar amount per $1,000 of the initial principal amount of a
Note.
Unless and until Definitive Notes are issued, the reports will be sent on
behalf of the Trust to Cede & Co., as registered holder of the Class A Notes and
the nominee of DTC. See "Reports to Securityholders" and "Description of the
Notes" in the prospectus. Within the required period of time after the end of
each calendar year, the Indenture Trustee will furnish to each person who at any
time during the calendar year was a Noteholder, a statement as to the aggregate
amounts of interest and principal paid to that Noteholder and any other
information as the Servicer deems necessary to enable the Noteholder to prepare
its tax returns. See "Certain Federal Income Tax Consequences."
CREDIT SUPPORT
The Class A Overcollaterization Amount and the Class A Reserve Account (a
funded cash reserve account (the "Class A Reserve Account")), result in credit
support for the Class A Notes. This credit support is required to be increased
to, and subsequently maintained at, a level established by the Insurer. This
level changes over time. The Insurer may permit the required level of credit
support provided by the Class A Reserve Account and the Class A
Overcollateralization Amount to be reduced, or "step down", over time without
the consent of Noteholders.
OVERCOLLATERIZATION. Overcollaterization for the Class A Notes is created
as a result of the application of "excess interest" and "excess principal" to
the payment of principal on the Class A Notes. The "excess interest" is interest
which is collected on the Receivables in excess of the amount of interest that
is paid on the Class A Notes, used to pay specific fees, or, under some
circumstances, deposited to the Class A Reserve Account. This application of
excess interest results in the outstanding principal balance of the Class A
Notes amortizing more quickly than the Pool Balance. The "excess principal" is
the principal allocated to the Class A Notes which is in excess of the principal
the Class A Notes would receive if the principal collected on the Receivables
were distributed pro rata to the Class A Notes and Class B Notes based on their
relative outstanding principal balances. This application of the "excess
principal" results in the outstanding principal balance on the Class A Notes
amortizing more quickly than the Aggregate Principal Balance on a percentage
basis.
If the Insurer permits the required level of overcollaterization to step
down, principal collections which would otherwise be paid through to the Class A
Noteholders as part of the Class A Principal Payment Amount may be instead
released to the Class B Noteholders or the Certificateholder.
SUBORDINATION. As of the Closing Date, the principal balance of the Class B
Notes equals ____% of the Note Balance. The transaction is structured so that
until the OC Stabilization Date, the Class B Note Balance will grow as a
percentage of the Note Balance. The Class B Notes are subordinated in right of
payment to the payment of the Class A Notes. No payments of principal will be
made to the Class B Notes until the OC Stabilization Date. Payment of interest
on the Class B Notes is subordinated to payment of interest and principal on the
Class A Notes, the funding of the Class A Reserve Account and, until the OC
Stabilization Date, the payment of excess interest as additional principal to
the Class A Notes. If there are losses on the Receivables, those losses will be
borne entirely by the Certificateholder and by the Class B Notes before there
are any losses on the Class A Notes.
CLASS A RESERVE ACCOUNT. The Class A Reserve Account will be funded with an
initial cash deposit on the Closing Date. On each subsequent Payment Date, the
Indenture Trustee will be required to deposit additional amounts into the Class
A Reserve Account from payments on the Receivables as described under "The
Notes--Priority of Distribution Amounts" above to the extent that the balance on
deposit tin this prospectus supplement is below the then required level.
Amounts, if any, on deposit in the Class A Reserve Account on a Payment Date
will be available to the extent provided in the Class A Reserve Account
Agreement to fund any Deficiency Claim Amount with respect to the Payment Date.
Amounts on deposit in the Class A Reserve Account on any Payment Date on or
prior to the OC Stabilization Date, after giving effect to all distributions
made on the Payment Date, in excess of the specified Class A Reserve Account
Requirements for the Payment Date shall be distributed to Class A Noteholders as
a prepayment of principal on the Class A Notes. On any Payment Date after the OC
Stabilization Date, the excess funds may be released to the Class B Noteholders
or the Certificateholder without the consent of the Class A Noteholders.
In addition, the Certificateholder, the Insurer and the Collateral Agent
under the Class A Reserve Account Agreement may amend the Class A Reserve
Account Agreement, and any provisions in the Insurance Agreement relating to the
Class A Reserve Account, in any respect, including, without limitation, reducing
or eliminating the funding requirements of the Class A Reserve Account or
permitting these funds to be used for the benefit of persons other than Class A
Noteholders, without the consent of, or notice to, the Trustee, the Owner
Trustee or the Noteholders. The Collateral Agent shall not withhold or delay its
consent with respect to any amendment that does not adversely affect the
Collateral Agent in its individual capacity. Notwithstanding any reduction in or
elimination of the funding requirements of the Class A Reserve Account or the
depletion of the Class A Reserve Account, the Insurer will be obligated on each
Payment Date to fund the full amount of each Scheduled Payment required to be
paid by the Payment Date, and which would not be in the absence of a payment
under the Policy. If the Insurer breaches its obligations, any losses on the
Receivables will be borne first by the Class B Noteholders and then by the
Noteholders.
THE INDENTURE
THE INDENTURE TRUSTEE. [ ] is the Indenture Trustee under the Indenture.
For the purpose of meeting the legal requirements of some jurisdictions, the
Indenture Trustee may appoint co-trustees or separate trustees of all or any
part of the trust estate and confer upon this party any powers, duties,
obligations, rights and trusts as the Indenture Trustee deems necessary, or
desirable. In the event of an appointment, all rights, powers, duties and
obligations conferred or imposed upon the Indenture Trustee by the Indenture
will be conferred or imposed upon the Indenture Trustee and the separate trustee
or co-trustee jointly, or, in any jurisdiction in which the Indenture Trustee
shall be incompetent or unqualified to perform particular acts, singly upon the
separate trustee or co-trustee who will exercise and perform these rights,
powers, duties, and obligations solely at the direction of the Indenture
Trustee.
The Indenture Trustee may resign at any time after 60 days' written notice
to the Issuer, the Insurer and Noteholders in which event the Controlling Party
will be obligated to appoint a successor trustee. The Controlling Party may
remove the Indenture Trustee if, among other reasons, the Indenture Trustee
ceases to be eligible to continue as the Indenture Trustee under the Indenture,
becomes legally unable to act or becomes insolvent. In these circumstances, the
Controlling Party will be obligated to appoint a successor trustee. Any
resignation or removal of the Indenture Trustee and appointment of a successor
trustee will not become effective until acceptance of the appointment of a
successor trustee.
The Sale and Servicing Agreement will provide that the Indenture Trustee
will be entitled to indemnification by the Servicer for, and will be held
harmless against, any loss, liability, fee, disbursement or expense incurred by
the Indenture Trustee not resulting from the Indenture Trustee's own willful
misfeasance, bad faith or negligence and other than by reason of a breach of any
of the Indenture Trustee's representations or warranties set forth in the Sale
and Servicing Agreement. The Sale and Servicing Agreement will further provide
that the Servicer will indemnify the Indenture Trustee for some of the taxes
that may be asserted in connection with the transaction.
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Sale and Servicing Agreement, the Notes, other than the
authentication of the Notes, or any Receivables or the Related Documents and is
not accountable for the use or application by the Seller or the Servicer of any
funds paid to the Seller or the Servicer in respect of the Notes or the
Receivables, or the investment of any monies received by the Servicer before the
monies are deposited in the Collection Account. The Indenture Trustee has not
independently verified the Receivables. The Indenture Trustee is required to
perform only those duties specifically required of it under the Sale and
Servicing Agreement and the Indenture. The Indenture Trustee shall determine
whether the certificates, reports or other instruments required to be furnished
to the Indenture Trustee under the Sale and Servicing Agreement and the
Indenture conform to the requirements of the Sale and Servicing Agreement and
the Indenture, respectively.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT. The Trust and
Indenture Trustee may, with the prior written consent of the Insurer, prior to
the occurrence and continuance of an Insurer Default, but without consent of the
Noteholders, enter into one or more supplemental indentures for any of the
following purposes:
o to correct or amplify the description of the property subject to the
lien of the Indenture or add additional property to it;
o to evidence the succession of another Person to the Trust and the
assumption by the successor of the covenants of the Trust;
o to add additional covenants for the benefit of the Noteholders or to
surrender any right or power conferred on the Trust;
o to convey, transfer, assign, mortgage or pledge any additional
property to or with the Indenture Trustee;
o to cure any ambiguity, or to correct or supplement any provision in
the Indenture or in any supplemental indenture that may be
inconsistent with any other provision of the Indenture or any
supplemental indenture;
o to add to or change any of the provisions of the Indenture as shall be
necessary and permitted to facilitate the administration by more than
one trustee; and
o to add any provisions to, change in any manner or eliminate any of the
provisions of the Indenture or modify in any manner the rights of
Noteholders under the Indenture; provided that any action must not, as
evidenced by an opinion of counsel, adversely affect in any material
respect the interests of any Noteholder.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT. With the prior written
consent of the Insurer, prior to the occurrence and continuance of an Insurer
Default, and the Note Majority, the Trust and the Indenture Trustee may execute
one or more supplemental indentures to add, change or eliminate any other
provisions of the Indenture, modify in any manner the rights of the Noteholders
or provide for the acceptance of the appointment of a successor Indenture
Trustee. Without the prior written consent of the Insurer, prior to the
occurrence and continuance of an Insurer Default, and the Holder of each
outstanding related Note affected, however, no supplemental indenture will:
o change the due date of any installment of principal of or interest on
any Note or reduce the principal amount of any Note, the interest rate
on the Note or the redemption price with respect to the Note, change
the provisions of the Indenture relating to the application of
collections on, or the proceeds of the sale of, the collateral to the
payment of principal of or interest on the Notes, change any place of
payment where or the coin or currency in which any Note or any
interest on the Note is payable;
o impair the right to institute suit for the enforcement of particular
provisions of the Indenture regarding payment;
o reduce the percentage of the aggregate amount of the outstanding Notes
the consent of the Holders of which is required for any supplemental
indenture or the consent of the Holders of which is required for any
waiver of compliance with particular provisions of the Indenture or of
some of the defaults under the Indenture and their consequences as
provided for in the Indenture;
o modify or alter the provisions of the Indenture regarding particular
aspects of what constitutes an "Outstanding" Note;
o reduce the percentage of the aggregate outstanding amount of the Notes
the consent of the Holders of which is required to direct the
Indenture Trustee to sell or liquidate the Receivables if the proceeds
of the sale would be insufficient to pay the principal amount and
accrued but unpaid interest on the outstanding Notes;
o modify the provision of the Indenture requiring consent of Noteholders
except to increase the percentage of the aggregate principal amount of
the Notes required to amend the sections of the Indenture or to
provide additional provisions requiring the consent of each Noteholder
prior to modification or waiver;
o modify any of the provisions of the Indenture affecting the
calculation of the amount of any payment of interest or principal due
on any Note on any Payment Date;
o permit the creation of any lien ranking prior to or on a parity with
the lien of the Indenture with respect to any of the collateral for
the Notes or, except as otherwise permitted or contemplated in the
Indenture, terminate the lien of the Indenture on any collateral or
deprive the Holder of any Note of the security afforded by the lien of
the Indenture; or
o become effective if the Rating Agency Condition has not been satisfied
with respect to it.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. Unless an Insurer Default
shall have occurred and be continuing, "Events of Default" under the Indenture
will consist of those events defined in the Insurance Agreement as Insurance
Agreement Indenture Cross Defaults, and will constitute an Event of Default
under the Indenture only if the Insurer shall have delivered to the Indenture
Trustee, and not rescinded, a written notice specifying that any Insurance
Agreement Indenture Cross Default constitutes an Event of Default under the
Indenture. "Insurance Agreement Indenture Cross Defaults" consist of:
(1) any payment being made under the Policy;
(2) some events of bankruptcy, insolvency, receivership or liquidation of
the Trust, the Seller or the Certificateholder;
(3) the Trust becoming taxable as an association, or publicly traded
partnership, taxable as a corporation for federal or state income tax
purposes;
(4) the Class A Notes not being treated as indebtedness for federal or
applicable state income tax purposes and the characterization's having
a material adverse effect on the Trust and the Noteholders or the
Insurer;
(5) the sum of the Available Funds with respect to any Payment Date plus
the amount, if any, available from particular collateral accounts
maintained for the benefit of the Insurer is less than the sum of the
amounts described in clauses (1)-(6) under "The Notes--Priority of
Distribution Amounts" in this prospectus supplement; and
(6) any failure to perform in any material respect any other covenants or
agreements in the Indenture, or any representation or warranty of the
Trust made in the Indenture or in any certificate or other writing
delivered pursuant to the Indenture or in connection with the
Indenture proving to have been incorrect in any material respect when
made, and the failure continuing or not being cured, or the
circumstances or condition in respect of which the misrepresentation
or warranty was incorrect not having been eliminated or otherwise
cured, for 30 days after the giving of written notice of the failure
or incorrect representation or warranty to the Trust and the Indenture
Trustee by the Insurer.
Upon the occurrence of an Event of Default, so long as an Insurer Default
shall not have occurred and be continuing, the Insurer will have the right, but
not the obligation, to cause the Indenture Trustee to liquidate the Trust
Property in whole or in part, on any date or dates following the acceleration of
the Class A Notes due to the Event of Default as the Insurer, in its sole
discretion, shall elect, and to deliver the proceeds of the liquidation to the
Indenture Trustee for distribution to the Class A-1 Noteholders and Class A-2
Noteholders on a pro rata basis based on the Class A-1 Note Balance and the
Class A-2 Note Balance then outstanding, in accordance with the terms of the
Indenture. The Insurer may not, however, cause the Indenture Trustee to
liquidate the Trust Property in whole or in part if the proceeds of the
liquidation would not be sufficient to pay all outstanding principal of and
accrued interest on the Notes, unless the Event of Default arose from an event
specified in (1), (2), (3), or (4) in the immediately preceding paragraph.
Following the occurrence of any Event of Default, the Indenture Trustee will
continue to submit claims under the Policy for any shortfalls in the Scheduled
Payments on the Class A Notes in accordance with the terms of the Policy.
Following any Event of Default under the Indenture, the Insurer, in its sole
discretion, may elect to pay all or any portion of the outstanding amount of the
Class A Notes, plus accrued interest on the Class A Notes. See "The Policy" in
this prospectus supplement.
If an Insurer Default has occurred and is continuing, "Events of Default"
under the Indenture will consist of the Events of Default described in the
accompanying prospectus under "Description of the Notes--Provisions of the
Indenture" and "--Events of Default; Rights Upon Events of Default"; and the
Indenture Trustee and the Noteholders have the rights under the Indenture
described tin this prospectus supplement.
NOTE FACTORS; STATEMENT TO NOTEHOLDERS; SERVICER REPORTS TO THE INDENTURE
TRUSTEE
The "Class A-1 Note Factor" will be a seven-digit decimal number that the
Servicer will compute each month indicating the Class A-1 Note Balance as of the
close of business on the last day of the related Collection Period in that month
as a fraction of the respective original outstanding principal balance of the
Class A-1 Notes. The Class A-1 Note Factor will be 1.0000000 as of the Cutoff
Date; and afterward, the Class A-1 Note Factor will decline to reflect
reductions in the Class A-1 Note Balance as a result of scheduled payments
collected, partial prepayments, prepayments and liquidations of the Receivables.
The amount of a Class A-1 Noteholder's pro rata share of the Class A-1 Note
Balance can be determined on any date by multiplying the original denomination
of the Holder's Note by the Class A-1 Note Factor as of the close of business on
the most recent Payment Date.
The "Class A-2 Note Factor" will be a seven-digit decimal number that the
Servicer will compute each month indicating the Class A-2 Note Balance as of the
close of business on the last day of the related Collection Period in that month
as a fraction of the respective original outstanding principal balance of the
Class A-2 Notes. The Class A-2 Note Factor will be 1.0000000 as of the Cutoff
Date; and afterward, the Class A-2 Note Factor will decline to reflect
reductions in the Class A-2 Note Balance as a result of scheduled payments
collected, partial prepayments, prepayments and liquidations of the Receivables.
The amount of a Class A-2 Noteholder's pro rata share of the Class A-2 Note
Balance can be determined on any date by multiplying the original denomination
of the Holder's Note by the Class A-2 Note Factor as of the close of business on
the most recent Payment Date.
Under the Sale and Servicing Agreement, the Servicer will perform some
monitoring and reporting functions for the Trust, including the preparation and
delivery of the Servicer's Certificate on each Determination Date to the
Indenture Trustee, the Backup Servicer, the Insurer, and the Rating Agencies
setting forth specified information with respect to the preceding Collection
Period.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Sale and Servicing Agreement,
the Indenture Trustee will be required to mail to each person who at any time
during the relevant calendar year will have been a Noteholder, a statement
containing information related to the Noteholder's preparation of federal income
tax returns.
DESCRIPTION OF THE TRANSACTION DOCUMENTS
The following summary describes some of the terms of the Transaction
Documents. Forms of the Transaction Documents have been filed as exhibits to the
Registration Statement. This summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions in
the Transaction Documents. The following summary supplements the description of
the general terms and provisions of the Transfer and Servicing Agreements (as
this term is used in the prospectus) set forth in the prospectus, to which
description reference is made by this prospectus supplement.
SALE AND ASSIGNMENT OF RECEIVABLES
Some information with respect to the sale of the Receivables by the Seller
and the Company is set forth under "Description of the Transfer and Servicing
Agreements--Sale and Assignment of Primary Assets" in the prospectus. See also
"The Receivables" in this prospectus supplement and "The Receivables Pools" in
the prospectus for additional information regarding the Receivables and some of
the obligations of the Seller and the Servicer with respect to the Receivables.
At the time of issuance of the Notes, the Seller will sell and assign to
the Company, the Seller's entire interest in the Receivables, including its
security interests in the Financed Vehicles, and the Company will sell and
assign to the Trust the Company's entire interest in the Receivables, including
the security interests in the Financed Vehicles. On or before the Closing Date,
the Trust will pledge the Receivables to the Indenture Trustee for the benefit
of the Noteholders and the Insurer pursuant to the Indenture. Each Receivable
will be identified in a schedule to the Sale and Servicing Agreement. The
Indenture Trustee will, concurrently with the pledge, authenticate and deliver
the Notes, which have been executed on behalf of the Trust.
Any conveyance of Subsequent Receivables is subject to the satisfaction, on
or before the related Subsequent Transfer Date, of the following conditions,
among others:
(1) each Subsequent Receivable satisfies the eligibility criteria
specified in the Sale and Servicing Agreement;
(2) the Insurer, so long as no Insurer Default shall have occurred and be
continuing, shall in its absolute and sole discretion have approved
the transfer of the Subsequent Receivables to the Trust;
(3) the Seller will not have selected the Subsequent Receivable in a
manner that it believes is adverse to the interests of the Noteholders
or the Insurer;
(4) as of each applicable Subsequent Cutoff Date, the Receivables in the
Trust together with the Subsequent Receivables to be conveyed by the
Seller as of the Subsequent Cutoff Date, meet the following criteria,
computed based on the characteristics of the Initial Receivables on
the Initial Cutoff Date and any Subsequent Receivables on the related
Subsequent Cutoff Date:
(a) the weighted average APR of the Receivables will not be less than
one percent less than the weighted average APR of the Initial
Receivables on the Initial Cutoff Date;
(b) the remaining term of the Receivables will not be greater than 72
months nor less than [ ] months;
(c) not more than [ ]% of the Principal Balances of the Receivables
will be attributable to Loans for the purchase of used Financed
Vehicles;
(d) the APR is not less than [ ]% nor more than [ ]%; and
(e) no vehicle is older than a [ ] model year, and the Trust, the
Indenture Trustee, the Owner Trustee
(f) and the Insurer shall have received written confirmation from a
firm of certified independent public accountants as to the
satisfaction of the criteria in clauses (a) through (e) above;
(5) the Seller shall have executed and delivered to the Trust, with a copy
to the Indenture Trustee, a Subsequent Transfer Agreement conveying
the Subsequent Receivable to the Trust, including a schedule
identifying the Subsequent Receivables;
(6) the Seller shall have delivered certain opinions of counsel to the
Indenture Trustee, the Insurer, the Owner Trustee and the Rating
Agencies with respect to the validity of the conveyance of the
Subsequent Receivables; and
(7) the Rating Agencies shall have each notified the Seller, the Owner
Trustee, the Indenture Trustee and the Insurer in writing that,
following the addition of all of the Subsequent Receivables, each of
the Class A-1 Notes and the Class A-2 Notes will be rated [ ] by [ ]
and [ ] by [ ].
Pursuant to the Receivables Purchase Agreement and the Sale and Servicing
Agreement, the Seller will represent and warrant that, among other things:
o as of each Cutoff Date, the information provided in the schedule to
the Sale and Servicing Agreement with respect to the Receivables is
correct in all material respects;
o at the date of issuance of the Notes and any Subsequent Transfer Date,
the Receivables are free and clear of all liens or claims and no right
of setoff, counterclaim or rescission has been asserted or, to the
best of its knowledge, threatened with respect to the Receivables;
o at the date of issuance of the Notes and any Subsequent Transfer Date,
each of the Receivables is secured by, or will be when all necessary
steps have been taken to result in, a first priority perfected
security interest in the Financed Vehicle in favor of the Seller and
this security interest has been validly assigned to the Seller, the
Trust and the Indenture Trustee; and
o each Receivable, at the time it was originated, complied, and at the
date of issuance of the Notes and any Subsequent Transfer Data,
complies in all material respects with applicable federal, state and
local laws, including consumer credit, truth in lending, equal credit
opportunity and disclosure laws.
Pursuant to the Receivables Purchase Agreement and the Sale and Servicing
Agreement, the Seller will be obligated to repurchase or replace subject to
limits on replacement set forth in the Sale and Servicing Agreement a Receivable
from the Trust, if the interests of the Noteholders, the Insurer or the Trust in
the Receivable are materially adversely affected by a breach of any
representation or warranty made by the Seller, with respect to the Receivable,
if the breach has not been cured following discovery by or notice to the Seller
of the breach. Pursuant to the Sale and Servicing Agreement, the Servicer will
be obligated to purchase or replace a Receivable from the Trust if the interests
of the Noteholders, the Insurer or the Trust in the Receivables are materially
adversely affected by a breach of some of its servicing obligations under the
Sale and Servicing Agreement, including its obligation to maintain perfection of
the first priority security interest created by each Receivable in the related
Financed Vehicle or other covenants with respect to the Servicer, if the breach
has not been cured following the discovery or notice to the Servicer of the
breach. Each Receivable will be purchased from the Trust or replaced by the
Seller or the Servicer, as the case may be, at a price equal to the Purchase
Amount. The purchase or replacement obligations will constitute the sole remedy
available to the Noteholders or the Indenture Trustee for any uncured breaches.
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Receivables. The documents evidencing the Initial Receivables and
Subsequent Receivables will be delivered to the Indenture Trustee on the Closing
Date and Subsequent Transfer Date. In addition, the Seller's accounting records
and computer systems will be marked to reflect the sale and assignment, and UCC
financing statements reflecting the sale and assignment will be filed. See
"Certain Legal Aspects of the Receivables--Security Interests in Financed
Vehicles" in the accompanying prospectus.
ACCOUNTS
Each Obligor has been instructed to make payments with respect to the
Receivables after the applicable Cutoff Date to a Lockbox which has been
established and will be maintained by Mellon Bank, N.A. (the "Lockbox Bank").
Upon receipt of payments in the Lockbox, the Lockbox Bank will deposit funds
into an account maintained by the Lockbox Bank at a depository institution (the
"Lockbox Account") acceptable to the Insurer. The Indenture Trustee will
establish the Collection Account (the "Collection Account") in the name of the
Indenture Trustee for the benefit of the Noteholders and the Insurer. All
payments made on or with respect to the Receivables previously deposited in the
Lockbox Account will be transferred to the Collection Account within two
Business Days of the receipt of available funds tin this prospectus supplement.
Upon receipt, but in no event later than two Business Days after the receipt of
amounts in respect of Receivables, each of the Servicer and the Seller will
remit all amounts received by it in respect of the Receivables in the form of
checks with payment coupons directly to the Lockbox. Other payments received by
each of the Servicer and the Seller will be deposited into a local servicing
account for processing, and then transferred to the Collection Account within
two Business Days of the receipt of available funds tin this prospectus
supplement. The Collection Account will be maintained with the Indenture Trustee
as long as the Indenture Trustee's deposits have a rating acceptable to the
Insurer and the Rating Agencies. If the deposits of the Indenture Trustee no
longer have an acceptable rating, the Indenture Trustee shall cause the accounts
to be moved to a bank or trust company having acceptable ratings.
The Indenture Trustee will also establish and maintain an account, in its
name, on behalf of Noteholders and the Insurer, in which amounts released from
the Collection Account for distribution to Noteholders will be deposited and
from which all distributions to Noteholders will be made (the "Note Distribution
Account").
On the Closing Date, a cash amount equal to approximately $[ ] (the
"Initial Pre-Funded Amount") will be deposited in an account (the "Pre-Funding
Account") which will be established with the Indenture Trustee. The "Funding
Period" is the period from the Closing Date until the earliest of the date on
which:
(1) the amount on deposit in the Pre-Funding Account is less than
$100,000,
(2) a Servicer Termination Event occurs under the Sale and Servicing
Agreement or an Insurance Agreement Event of Default occurs, or
(3) the Payment Date in [ ].
The Initial Pre-Funded Amount, as reduced from time to time during the
Funding Period by the amount used to purchase Subsequent Receivables in
accordance with the Sale and Servicing Agreement, is referred to in this
prospectus supplement as the "Pre-Funded Amount." The Seller expects that the
Pre-Funded Amount will be reduced to less than $100,000 on or before the Payment
Date in [ ]. Any Pre-Funded Amount remaining at the end of the Funding Period
will be payable to the Noteholders as described in this prospectus supplement.
The "Mandatory Redemption Date" is the earlier of (1) the Payment Date in [ ]
and (2) if the last day of the Funding Period occurs on or prior to the
Determination Date in [ ], then the [ ] Payment Date.
On the Closing Date, a cash amount shall be deposited in an account (the
"Capitalized Interest Account") which will be established with the Indenture
Trustee. The amount, if any, deposited in the Capitalized Interest Account will
be applied on the Payment Dates occurring in [ ], [ ] and [ ], and to fund an
amount (the "Monthly Capitalized Interest Amount") equal to the amount of
interest accrued for each Payment Date at the excess of (1) the weighted average
interest rate on the Class A Notes over (2) [ ]%, on the portion of the Class A
Notes having a principal balance in excess of the Aggregate Principal Balances
of the Receivables. Any amounts remaining in the Capitalized Interest Account on
the Mandatory Redemption Date and not used for these purposes are required to be
paid to the Class A Noteholders on the relevant date. See "Description of the
Transaction Documents--Accounts."
All of these Accounts shall be Eligible Deposit Accounts (as defined in the
prospectus) acceptable to the Insurer, so long as no Insurer Default has
occurred and is continuing.
Consistent with the Sale and Servicing Agreement and its normal collection
practices and procedures, the Servicer may, in its discretion, arrange with the
Obligor on a Receivable to extend or modify the payment schedule, subject to
particular limitations. No extension or modification in accordance with the Sale
and Servicing Agreement will result in a repurchase obligation for the Servicer.
SERVICING PROCEDURES
The Servicer will make all reasonable efforts to collect all payments due
with respect to the Receivables and will continue these collection procedures as
it follows with respect to all comparable motor vehicle receivables that it
services for itself or others, in a manner consistent with the Sale and
Servicing Agreement. If the Servicer determines that eventual payment in full of
a Receivable is unlikely, the Servicer will follow its normal collection
practices and procedures, including the repossession and disposition of the
Financed Vehicle securing the Receivable at a public or private auction, or the
taking of any other action permitted by applicable law.
The Servicer will not be required under the Sale and Servicing Agreement to
make any advances of principal or interest due on any Receivable.
COLLECTIONS
The Servicer or the Seller, as the case may be, will remit or cause to be
remitted the aggregate Purchase Amount of any Receivables required to be
purchased by it from the Trust to the Collection Account. Under the Sale and
Servicing Agreement, the amounts of any recoveries in respect of any Receivables
repurchased by Dealers pursuant to any Dealer Recourse constitute collections on
the Receivables.
For purposes of the Sale and Servicing Agreement, collections on a
Receivable, other than a Receivable purchased by the Servicer or the Seller,
which are not late fees or other administrative fees and expenses collected
during a Collection Period are required to be applied first to the Contract
Scheduled Payment. To the extent that the collections on a Receivable during a
Collection Period exceed the Contract Scheduled Payment on the Receivable, the
collections are required to be applied to prepay the Receivable in full. If the
collections are insufficient to prepay the Receivable in full, any partial
prepayment of principal during a Collection Period will be immediately applied
to reduce the principal balance of the Receivable during that Collection Period.
SERVICING COMPENSATION
The Servicer is entitled under the Sale and Servicing Agreement to receive
on each Payment Date a fee (the "Servicer Fee") equal to the sum of (a) the
product of one-twelfth and [ ]% (the "Servicing Fee Rate") and the Principal
Balance outstanding at the beginning of the calendar month immediately preceding
the month in which the Payment Date occurs and (b) any late fees. If the Backup
Servicer, or any other entity becomes the successor Servicer, it will receive
compensation at the Servicing Fee Rate. The Servicer will also be reimbursed for
particular expenses related to the repossession of Financed Vehicles (the
"Servicer Expenses"). The Servicer Fee and Servicer Expenses will be paid out of
collections from the Receivables pursuant to the distribution described under
"The Notes--Priority of Distribution Amounts".
The Servicer Fee and the Servicer Expenses will compensate the Servicer for
performing the functions of a third-party servicer of the Receivables as an
agent for the Trust, including collecting and posting all payments, responding
to inquiries of Obligors on the Receivables, investigating delinquencies,
reporting any required tax information to Obligors, paying costs of collections
and monitoring the collateral. In addition, the Servicer Fee will (a) compensate
the Servicer for administering the Receivables, including accounting for
collections, furnishing monthly and annual statements with respect to payments
and generating federal income tax information, if any, and (b) reimburse the
Servicer for some of the taxes, independent accountants' fees and other costs
incurred in connection with administering the Receivables.
BACKUP SERVICING AND BACKUP SERVICING COMPENSATION
Pursuant to the Sale and Servicing Agreement, [ ] will perform particular
duties as the Backup Servicer. In addition, following the resignation or removal
of the Servicer, the Backup Servicer has agreed to serve as the successor
Servicer under the Sale and Servicing Agreement. The Backup Servicer will be
required to carry out its duties in accordance with the customary and usual
procedures of institutions which perform similar functions. On each Payment
Date, the Backup Servicer will be entitled to receive a fee for acting as Backup
Servicer (the "Backup Servicer Fee") equal to one-twelfth the product of [ ]
basis points and the outstanding Note Balance. In addition, following the
resignation or removal of the Servicer, the Backup Servicer will be reimbursed
for particular costs and expenses associated with the transition of the Backup
Servicer to Servicer (the "Servicer Transition Expenses").
The Sale and Servicing Agreement will provide that the Backup Servicer may
not resign from its obligations and duties as Backup Servicer under the Sale and
Servicing Agreement, except upon determination that, by reason of a change in
legal requirements, the Backup Servicer's performance of these duties would be
in violation of particular legal requirements and the Controlling Party does not
elect to waive the obligations of the Backup Servicer to perform the duties that
render it legally unable to act or to delegate those duties to another Person.
No resignation will become effective until a successor backup servicer has
assumed the Backup Servicer's servicing obligations and duties under the Sale
and Servicing Agreement. Notwithstanding the foregoing, the Backup Servicer may
resign for any reason, provided an entity acceptable to the Controlling Party
has assumed the Backup Servicer's obligations and duties under the Sale and
Servicing Agreement prior to the effectiveness of any resignation and the Rating
Agency Condition is also satisfied with respect to the resignation and
assumption of the Backup Servicer's obligations.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that the Servicer will cause
a firm of nationally recognized independent certified public accountants to
deliver to the Servicer, on or before [ ] of each year, commencing [ ], a
statement to the effect that the firm has audited the books and records of the
Servicer and issued its report on the books and records from the fiscal year
ended on the immediately preceding [ ]. The Servicer will deliver a copy of the
report to the Indenture Trustee, the Insurer, the Backup Servicer and the Rating
Agencies.
The Sale and Servicing Agreement will also provide for delivery to the
Indenture Trustee, the Insurer, the Backup Servicer and the Rating Agencies, on
or before [ ] of each year, commencing [ ], of a certificate signed by an
officer of the Servicer stating that, to the officer's knowledge, the Servicer
has fulfilled its obligations under the Sale and Servicing Agreement throughout
the preceding 12 months, or, for the initial report, for a longer period as will
have elapsed from the date of issuance of the Notes, or, if there has been a
default in the fulfillment of any obligation, describing each default. A copy of
the certificate may be obtained by any Noteholder by a request in writing to the
Indenture Trustee addressed to the Corporate Trust Office.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as Servicer under the Sale and Servicing
Agreement, except (1) upon determination that, by reason of a change in legal
requirements, the Servicer's performance of these duties would be in violation
of particular legal requirements and (2) the Insurer, or, if an Insurer Default
has occurred and is continuing, a Note Majority, does not elect to waive the
obligations of the Servicer to perform the duties that render it legally unable
to act or to delegate those duties to another Person. No resignation will become
effective until the Backup Servicer or a successor servicer has assumed the
Servicer's servicing obligations and duties under the Sale and Servicing
Agreement.
The Sale and Servicing Agreement will further provide that neither the
Servicer nor any of its stockholders, directors, officers, employees or agents,
will be liable to the Trust or the Indenture Trustee for taking any action or
for refraining from taking any action pursuant to the Sale and Servicing
Agreement; provided, however, that neither the Servicer nor any Person will be
protected against any liability that would otherwise be imposed by reason of the
Servicer's material breach of the Sale and Servicing Agreement, willful
misfeasance, bad faith or negligence, other than errors in judgment, in the
performance of its duties.
Subject to the provisions of the Sale and Servicing Agreement, any entity
into which the Servicer may be merged or consolidated, resulting from any
merger, conversion or consolidation to which the Servicer is a party, which
acquires all or substantially all of the assets of the Servicer, or succeeding
to the business of the Servicer, which in any case assumes the obligations of
the Servicer, will be the successor of the Servicer, under the Sale and
Servicing Agreement. The Servicer may at any time perform specific duties as
Servicer through other subcontractors with the prior written consent of the
Insurer.
SERVICER TERMINATION EVENTS; RIGHTS UPON SERVICER TERMINATION EVENT
A "Servicer Termination Event" under the Sale and Servicing Agreement will
include:
o the Servicer's failure to make deposits into the Collection Account or
to deliver to the Indenture Trustee any proceeds or payments payable
to the Noteholders or the Insurer required to be so deposited or
delivered in accordance with the Sale and Servicing Agreement, which
failure continues unremedied for a period of two Business Days, one
Business Day with respect to payment of Purchase Amounts, after the
earlier of (x) discovery of the failure by the Servicer and (y) notice
of the failure is given by the Indenture Trustee to the Servicer;
o the Servicer's failure or failures to satisfy any other covenant or
agreement set forth in the Sale and Servicing Agreement, which failure
or failures, individually or in the aggregate, materially and
adversely affect the rights of Noteholders or the Insurer and remains
uncured for a period of 60 days after the earlier of the date on which
(a) it obtains actual knowledge of the failure or (b) it receives
written notice of the failure from (1) the Insurer or the Indenture
Trustee or (2) if an Insurer Default has occurred and is continuing,
the Note Majority;
o partiuclar events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings with respect to the
Servicer indicating its insolvency;
o so long as an Insurer Default shall not have occurred and be
continuing, the Insurer shall not have delivered an extension notice,
o so long as an Insurer Default shall not have occurred and be
continuing, an Insurance Agreement Event of Default shall have
occurred or an event of default under any other Insurance Agreement
relating to any series of securities shall have occurred;
o a claim is made under the Policy; or
o any representation or warranty shall prove to be incorrect in any
material respect and this incorrectness shall have a material adverse
effect on the interest of the Trust, the Noteholders or the Insurer in
the Receivables, which has not been cured within 30 days.
"Insurer Default" shall mean the occurrence and continuance of any of the
following events:
(a) the Insurer shall have failed to make a payment required under the
Policy in accordance with its terms;
(b) the Insurer shall have
o filed a petition or commenced any case or proceeding under any
provision or chapter of the United States Bankruptcy Code or any
similar federal or state law relating to the insolvency,
bankruptcy, rehabilitation, liquidation or reorganization,
o made a general assignment for the benefit of its creditors, or
o had an order for relief entered against it under the United
States Bankruptcy Code or any other similar federal or state law
relating to insolvency, bankruptcy, rehabilitation, liquidation
or reorganization which is final and nonappealable; or
(c) a court of competent jurisdiction, the New York Department of Justice
or other competent regulatory authority shall have entered a final and
nonappealable order, judgment or decree (1) appointing a custodian,
trustee, agent or receiver for the Insurer or for all or any material
portion of its property or (2) authorizing the taking of possession by
a custodian, trustee, agent or receiver of the Insurer, or the taking
of possession of all or any material portion of the property of the
Insurer.
As long as a Servicer Termination Event under the Sale and Servicing
Agreement remains unremedied, (x) provided that no Insurer Default shall have
occurred and be continuing, the Insurer in its sole and absolute discretion, or
(y) if an Insurer Default shall have occurred and be continuing, then the Note
Majority may terminate all of the rights and obligations of the Servicer under
the Sale and Servicing Agreement. Upon termination, all authority, power,
obligations and responsibilities of the Servicer under the Sale and Servicing
Agreement, other than obligations and responsibilities arising prior to the
termination, will automatically pass to the Backup Servicer, or other successor
servicer appointed by the Insurer, provided that no Insurer Default shall have
occurred and be continuing.
WAIVER OF PAST DEFAULTS
As set forth under "Certain Matters Regarding Servicer--Waiver of Past
Defaults" in the prospectus, the Insurer may, so long as no Insurer Default
shall have occurred and be continuing, on behalf of the Noteholders, waive any
default by the Servicer in the performance of its obligations under the Sale and
Servicing Agreement and its consequences. No waiver will impair the Noteholders'
rights with respect to subsequent defaults.
AMENDMENT
The Sale and Servicing Agreement may be amended by the Issuer, the Seller,
the Servicer, the Company, the Indenture Trustee and the Backup Servicer, with
the prior written consent of the Insurer, so long as no Insurer Default has
occurred and is continuing, but without the consent of any of the
Certificateholders or the Noteholders, to cure any ambiguity, to correct or
supplement any provision in this prospectus supplement or for the purpose of
adding any provision to or changing in any manner or eliminating any provision
of this prospectus supplement or modifying in any manner the rights of the
Noteholders; PROVIDED, HOWEVER, that the action must not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
the Noteholders. The Seller, the Issuer, the Servicer, the Company, the Backup
Servicer and the Indenture Trustee may also amend the Sale and Servicing
Agreement with the prior written consent of the Insurer, so long as no Insurer
Default has occurred and is continuing, and a Note Majority to add, change or
eliminate any provisions of the Sale and Servicing Agreement or to modify the
rights of the Noteholders; provided, however, that the action will not:
o increase or reduce in any manner the amount of, or accelerate or delay
the timing of, collections of payments on Receivables or distributions
that are required to be made for the benefit of the Noteholders or
Certificateholders;
o reduce the aforesaid percentage of the Noteholders or
Certificateholders which is required to consent to any amendment,
without, in either case, the consent of the Holders of all Notes and
Certificates outstanding; PROVIDED, FURTHER, that if an Insurer
Default has occurred and is continuing, the action shall not
materially adversely affect the interest of the Insurer; or
o result in a downgrade or withdrawal of the then current rating of the
Notes by the Rating Agencies without the consent of each Noteholder.
The above should in no way be construed to require the consent of the
Noteholders or Certificateholders to a reduction in the Target
Overcollateralization Amount or the required level of the Class A Reserve
Account.
LIST OF NOTEHOLDERS; VOTING OF NOTES
Upon written request by three or more Noteholders or any one or more
Noteholders with an aggregate principal balance evidencing not less than 25% of
the Note Balance and upon compliance by these Noteholders with other provisions
of the Sale and Servicing Agreement, the Indenture Trustee will afford the
Noteholders, within five Business Days after receipt of the request, access
during business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the Sale
and Servicing Agreement and the Notes.
If the Seller, the Seller or any of their affiliates owns any Notes, the
Note will not have voting rights under the Sale and Servicing Agreement or the
other Related Documents.
The Sale and Servicing Agreement will not provide for the holding of any
annual or other meetings of Noteholders.
TERMINATION
The respective obligations of the Issuer, the Seller, the Servicer, the
Company, the Backup Servicer and the Indenture Trustee pursuant to the Sale and
Servicing Agreement will terminate upon the latest of:
o the maturity or other liquidation of the last Receivable and the
payment to Noteholders and the Insurer of amounts required to be paid
under the Notes, the Indenture and the Insurance Agreement;
o the expiration of the Policy in accordance with its terms; or
o the payment to Noteholders of all amounts required to be paid to them
pursuant to the Indenture and the expiration of any related preference
period.
In order to avoid excessive administrative expense, the Servicer has the
option to purchase from the Trust, as of the last day of any month as of which
the Aggregate Principal Balance with respect to the Receivables is less than or
equal to 10% of the Original Pool Balance, all remaining Receivables at a price
equal to the aggregate of the Purchase Amounts of the Receivables as of that
last day, plus the appraised value of any other property held by the Trust, with
the prior written consent of the Insurer, if the redemption would result in a
claim under the Policy or if the redemption would result in any amount owing to
the Insurer remaining unpaid. The Indenture Trustee will give written notice of
termination to each Noteholder of record. The final distribution to any
Noteholder will be made only upon surrender and cancellation of that Holder's
Note at the office or agency of the Indenture Trustee specified in the notice of
termination; PROVIDED, HOWEVER, that if on the Payment Date upon which final
payment of the Notes is to be made, there are five or fewer Noteholders of
record, the final payment to that Noteholder will be made by check or wire
transfer as described above and each Noteholder shall present and surrender its
Note at the office or agency designated in the notice of final distribution
referred to above within 30 days after the Payment Date.
THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy.
Simultaneously with the issuance of the Class A Notes, the Insurer will
deliver the Policy to the Indenture Trustee for the benefit of each Class A
Noteholder. Under the Policy, the Insurer will unconditionally and irrevocably
guarantee to the Indenture Trustee, on each Payment Date, for the benefit of
each Class A Noteholder the full and complete payment of (1) Scheduled Payments
on the Class A Notes and (2) the amount of any Scheduled Payment which
subsequently is avoided in whole or in part as a preference payment under
applicable law. In the event the Indenture Trustee fails to make a claim under
the Policy, Class A Noteholders do not have the right to make a claim directly
under the Policy, but may sue to compel the Indenture Trustee to do so.
"Scheduled Payments" means payments which are scheduled to be made on the
Class A Notes during the term of the Policy in accordance with the original
terms of the Class A Notes when issued and without regard to any subsequent
amendment or modification of the Class A Notes, the Sale and Servicing Agreement
or the Indenture that has not been consented to by the Insurer, which "Scheduled
Payments", are
(1) the Class A Interest Payment Amount, with respect to a Payment Date
and
(2) the Class A Principal Payment Amount with respect to a Payment Date.
Scheduled Payments do not include payments which become due on an
accelerated basis as a result of
o a default by the Trust,
o an election by the Trust to pay principal on an accelerated basis,
o the occurrence of an Event of Default under the Indenture or
o any other cause,
unless the Insurer elects, in its sole discretion, to pay in whole or in part
the principal due upon acceleration, together with any accrued interest to the
date of acceleration.
In the event the Insurer does not so elect, the Policy will continue to
guarantee Scheduled Payments due on the Class A Notes in accordance with their
original terms. Scheduled Payments shall not include
(1) any portion of a Class A Interest Payment Amount due to the Class A
Noteholders because the appropriate notice and certificate for payment
in proper form was not timely Received by the Insurer,
(2) any portion of a Class A Interest Payment Amount due to Class A
Noteholders representing interest on any Class A Interest Carryover
Shortfall or
(3) any Class A Mandatory Redemption Amounts,
unless the Insurer elects, in its sole discretion, to pay the amount in whole or
in part. Scheduled Payments shall not include, any amounts due in respect of the
Class A Notes attributable to any increase in interest rate, penalty or other
sum payable by the Trust by reason of any default or event of default in respect
of the Class A Notes or by reason of any deterioration of the creditworthiness
of the Trust nor shall coverage be provided under the Policy in respect of any
taxes, withholding or other charge imposed with respect to any Noteholder by any
governmental authority due in connection with the payment of any Scheduled
Payment to a Class A Noteholder.
Payment of claims on the Policy made in respect of Scheduled Payments will
be made by the Insurer following Receipt by the Insurer of the appropriate
notice for payment on the later to occur of (1) 12:00 noon, New York City time,
on the third Business Day following Receipt of notice for payment, and (2) 12:00
noon, New York City time, on the date on which the payment was due on the Class
A Notes.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Insurer shall cause the payment to be made on the later of
(a) the date when due to be paid pursuant to the Order referred to below
or
(b) the first to occur of
(1) the fourth Business Day following Receipt by the Insurer from the
Indenture Trustee of
o a certified copy of the order (the "Order") of the court or
other governmental body that exercised jurisdiction to the
effect that the Class A Noteholder is required to return
Scheduled Payments made with respect to the Class A Notes
during the term of the Policy because the payments were
avoidable as preference payments under applicable bankruptcy
law,
o a certificate of the Class A Noteholder that the Order has
been entered and is not subject to any stay and
o an assignment duly executed and delivered by the Class A
Noteholder, in a form as is reasonably required by the
Insurer and provided to the Class A Noteholder by the
Insurer, irrevocably assigning to the Insurer all rights and
claims of the Class A Noteholder relating to or arising
under the Class A Notes against the Trust or otherwise with
respect to the preference payment, or
(2) the date of Receipt by the Insurer from the Indenture
Trustee of the items referred to in clauses (A), (B) and (C)
above if, at least four Business Days prior to the date of
Receipt, the Insurer shall have Received written notice from
the Indenture Trustee that these items were to be delivered
on that date and the date was specified in the notice.
This payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Indenture Trustee or any Class A Noteholder directly, unless a Class A
Noteholder has previously paid the amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
the payment shall be disbursed to the Indenture Trustee for distribution to the
Class A Noteholder upon proof of the payment reasonably satisfactory to the
Insurer. In connection with the foregoing, the Insurer shall have the rights
provided pursuant to the Sale and Servicing Agreement including, without
limitation, the right to direct all matters relating to any preference claim and
subrogation to the rights of the Indenture Trustee and each Class A Noteholder
in the conduct of any proceeding with respect to a preference claim.
OTHER PROVISIONS OF THE POLICY
The terms "Receipt" and "Received" with respect to the Policy shall mean
actual delivery to the Insurer and to its fiscal agent, if any, prior to 12:00
noon, New York City time, on a Business Day; delivery either on a day that is
not a Business Day or after 12:00 noon, New York City time, shall be deemed to
be Received on the next succeeding Business Day. If any notice or certificate
given under the Policy by the Indenture Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be denied not to have been
Received, and the Insurer or its fiscal agent shall promptly so advise the
Indenture Trustee, and the Indenture Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than a Saturday,
Sunday, legal holiday or other day on which commercial banking institutions in
Wilmington, Delaware, the City of New York or any other location of any
successor Servicer, successor Owner Trustee or successor Indenture Trustee are
authorized or obligated by law, executive order or governmental decree to be
closed.
The Insurer's obligations under the Policy in respect of Scheduled Payments
shall be discharged to the extent funds are transferred to the Indenture Trustee
as provided in the Policy whether or not the funds are properly applied by the
Indenture Trustee.
The Insurer shall be subrogated to the rights of each Class A Noteholder to
receive payments of principal and interest to the extent of any payment by the
Insurer under the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of the Insurer ranking not less than pari passu with other unsecured
and unsubordinated indebtedness of the Insurer for borrowed money. Claims
against the Insurer under the Policy and each other financial guaranty insurance
policy issued by the Policy constitute pari passu claims against the general
assets of the Insurer. The terms of the Policy cannot be modified or altered by
any other agreement or instrument, or by the merger, consolidation or
dissolution of the Trust. The Policy may not be canceled or revoked prior to
distribution in full of all Scheduled Payments with respect to the Notes. THE
POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED
IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. The Policy is governed by the laws
of the State of New York.
It is a condition to issuance that the Class A Notes be rated [ ] by [ ]
and [ ] by [ ]. The ratings by the Rating Agencies of the Class A Notes will be
based on the issuance of the Policy. A rating is not a recommendation to
purchase, hold or sell Class A Notes. In the event that the rating initially
assigned to any of the Class A Notes is subsequently lowered or withdrawn for
any reason, including by reason of a downgrading of the claims-paying ability of
the Insurer, no person or entity will be obligated to provide any additional
credit enhancement with respect to the Class A Notes. Any reduction or
withdrawal of a rating may have an adverse effect on the liquidity and market
price of the Notes. See "Ratings" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of some of the related Federal income
tax consequences of the purchase, ownership and disposition of the Class A
Notes. This discussion does not address every aspect of the Federal income tax
laws that may be relevant to holders of Class A Notes in light of their personal
investment circumstances or to particular types of Class A Noteholders subject
to special treatment under the Federal income tax laws, including, without
limitation, banks and thrifts, insurance companies, dealers in securities,
foreign investors, regulated investment companies, individuals, trusts and
estates and pass-through entities, the equity holders of which are any of the
foregoing. This discussion is directed to prospective purchasers who purchase
Class A Notes in the initial distribution of the Class A Notes and who hold the
Class A Notes as "capital assets" within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). Prospective purchasers
are urged to consult their own tax advisors in determining the Federal, state,
local, foreign and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Notes.
The following summary is based upon current provisions of the Code, the
Treasury regulations promulgated under the Code, judicial authority, and ruling
authority, all of which are subject to change, which change may be retroactive.
The Issuer will be provided with an opinion of Federal Tax Counsel regarding
some of the related Federal income tax matters discussed below. An opinion of
Federal Tax Counsel, however, is not binding on the Internal Revenue Service
(the "IRS") or the courts. Moreover, there are no cases or IRS rulings on
similar transactions with terms similar to those of the Class A Notes. As a
result, the IRS may disagree with all or a part of the discussion below. No
ruling on any of the issues discussed below will be sought from the IRS.
TAX CHARACTERIZATION OF THE ISSUER
Stroock & Stroock & Lavan LLP will deliver its opinion that the Issuer will
not be classified as an association, or publicly traded partnership, taxable as
a corporation for Federal income tax purposes. This opinion will be based on the
assumption of compliance by all parties with the terms of the Trust Agreement
and related documents.
If the Issuer were taxable as a corporation for Federal income tax
purposes, the Issuer would be subject to corporate income tax on its taxable
income. The Issuer's taxable income would include all its income on the
Receivables, possibly reduced by its interest expense on the Class A Notes. Any
corporate income tax could materially reduce cash available to make payments on
the Class A Notes and distributions on the Certificates, and Certificateholders,
and possibly Class A Noteholders, could be liable for any tax that is not paid
by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE CLASS A NOTES
TREATMENT OF THE CLASS A NOTES AS INDEBTEDNESS. The Issuer will agree, and
the Class A Noteholders will agree by their purchase of Class A Notes, to treat
the Class A Notes as debt for Federal, state and local income and franchise tax
purposes. Federal Tax Counsel will advise the Issuer that in its opinion the
Class A Notes will be classified as debt for Federal income tax purposes.
OID, INDEXED SECURITIES, ETC. It is not anticipated that the Class A Notes
will be issued with original issue discount ("OID") within the meaning of
Section 1273 of the Code.
INTEREST INCOME ON THE CLASS A NOTES. Based on the above assumptions,
except as discussed below, the Class A Notes will not be considered issued with
OID. If the Class A Notes were treated as being issued with OID, the excess of
the "stated redemption price at maturity" of the Class A Notes over their issue
price would constitute OID. The stated interest on the Class A Notes will be
taxable to a Class A Noteholder as ordinary interest income when received or
accrued in accordance with the Class A Noteholder's method of tax accounting.
Under the OID Regulations, a holder of a Class A Note issued with a DE MINIMIS
amount of OID must include this OID in income, on a pro rata basis, as principal
payments are made on the Class A Note. A purchaser who buys a Class A Note for
more or less than its principal amount will generally be subject, respectively,
to the premium amortization or market discount rules of the Code.
SALE OR OTHER DISPOSITION. If a Class A Noteholder sells a Class A Note,
the holder will recognize gain or loss in an amount equal to the difference
between the amount realized on the sale and the holder's adjusted tax basis in
the Class A Note. The adjusted tax basis of a Class A Note to a particular Class
A Noteholder will equal the holder's cost for the Class A Note, increased by any
market discount, and gain previously included by the Class A Noteholder in
income with respect to the Class A Note and decreased by the amount of premium,
if any, previously amortized and by the amount of principal payments previously
received by the Class A Noteholder with respect to the related Class A Note. Any
gain or loss will be capital gain or loss, except for gain representing accrued
interest, including OID, and accrued market discount not previously included in
income. Capital losses generally may be used by a corporate taxpayer only to
offset capital gains, and by an individual taxpayer only to the extent of
capital gains plus $3,000 of other income.
Alternatively, if, contrary to the opinion of Federal Tax Counsel, the
Issuer were treated as a publicly traded partnership taxable as a corporation,
it would be subject to Federal income tax, and any similar state or local taxes,
at corporate tax rates on its taxable income generated by ownership of the
Receivables. This tax could result in reduced distributions to Class A
Noteholders. Distributions to Class A Noteholders generally would not be
deductible in computing the taxable income of the publicly traded partnership.
In addition, all or a portion of any distributions would, to the extent of the
current and accumulated earnings and profits of the corporation, be treated as
dividend income to the Class A Noteholders, and in the case of Class A
Noteholders that are foreign persons would be subject to withholding tax.
FOREIGN HOLDERS. Interest paid, or accrued, to a Class A Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"Foreign Person") generally will be considered "portfolio interest," and
generally will not be subject to United States Federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
Foreign Person (1) does not own actually or constructively 10% or more of the
capital or profits of interests in the Issuer and is not actually or
constructively a "10 percent shareholder" of the Trust, the Seller or the
Seller, including a 10% owner of the Certificates, or "controlled foreign
corporation" with respect to which the Issuer, the Seller, or the Seller is a
"related person" within the meaning of the Code and (2) provides the Trustee or
other person who is otherwise required to withhold U.S. tax with respect to the
Class A Notes with an appropriate statement, on Form W-8 or a similar form,
signed under penalties of perjury, certifying that the beneficial owner of the
Class A Note is a Foreign Person and providing the foreign person's name and
address. If the information provided in this statement changes, the Foreign
Person must inform the Issuer within 30 days of the change. If a Class A Note is
held through a securities clearing organization or other financial institutions,
the organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the Foreign Person that
owns the Class A Note. Under recently finalized Treasury regulations (the "Final
Regulations") this statement requirement may also be satisfied with other
documentary evidence with respect to an offshore account or through some types
of foreign intermediaries. Those regulations will apply for payments made after
December 31, 1999. If the interest is not portfolio interest, then it will be
subject to United States Federal income and withholding tax at a rate of 30%,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States Federal income and withholding tax, provided that (a) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (b) 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.
If a Foreign Person is engaged in a trade or business and interest on the
Class A Note is effectively connected with the conduct of that trade or business
in the United States, the Foreign Person, although exempt from the withholding
tax discussed above, will be subject to United States federal income tax on the
interest on a net income basis in the same manner as if it were a United States
person if the Foreign Person properly executed IRS Form 4224 annually. In
addition, if the Foreign Person is a foreign corporation, it may be subject to a
branch profits tax equal to 30%, or lower treaty rate, of its effectively
connected earnings and profits for the taxable year, subject to adjustments.
If the IRS were to contend successfully that the Class A Notes are
interests in a partnership, not taxable as a corporation, a Class A Noteholder
that is a foreign person might be required to file a U.S. Federal income tax
return and pay tax on its share of partnership income at regular U.S. rates,
including the branch profits tax, and would be subject to withholding tax on its
share of partnership income. If the Class A Notes were recharacterized as
interests in a "publicly traded partnership" taxable as a corporation,
distributions on the Class A Notes treated as dividends would generally be
subject to withholding tax on the gross amount of the dividends at the rate of
30% unless the rate were reduced by an applicable treaty. If the Class A Notes
are recharacterized as equity interests in a partnership, or, contrary to the
opinion of Federal Tax Counsel, in a publicly traded partnership taxable as a
corporation, any taxes required to be so withheld will be treated for all
purposes of the Class A Notes as having been paid to the related Class A
Noteholder.
BACKUP WITHHOLDING. Each holder of a Class A Note, other than an exempt
holder such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident, will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct Federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Class A
Noteholder fail to provide the required certification, the Issuer will be
required to withhold 31% of the amount otherwise payable to the holder, and
remit the withheld amount to the IRS as a credit against the holder's Federal
income tax liability. The Final Regulations make modifications to the backup
withholding and information reporting rules. Prospective investors should
consult their own advisors as to the application of the Final Regulations.
CERTAIN STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences" above, potential purchasers should consider the
state income tax consequences of the acquisition, ownership and disposition of
the Class A Notes. State income tax law may vary substantially from state to
state, and this discussion does not purport to describe any aspect of the income
tax laws of any state. Therefore, potential purchasers should consult their own
tax advisors with respect to the various tax consequences of an investment in
the Class A Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan, as well as individual retirement
accounts and particular types of Keogh Plans subject to those provisions, and
entities deemed to hold plan assets of these plans (each, a "Benefit Plan"),
from engaging in particular transactions involving "plan assets" with persons
that are "parties in interest" under ERISA or "disqualified persons" under the
Code with respect to the Benefit Plan. A violation of these "prohibited
transaction" rules may generate excise tax and other penalties and liabilities
under ERISA and the Code for these persons. ERISA also imposes particular duties
on persons who are fiduciaries of Benefit Plans subject to ERISA. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Benefit Plan is considered to be a fiduciary of
the Benefit Plan, subject to exceptions not here relevant.
Some transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchases Class A Notes if assets of the Issuer were deemed to be assets of
the Benefit Plan. Under a regulation issued by the United States Department of
Labor (the "Plan Assets Regulation"), the assets of the Issuer would be treated
as plan assets of a Benefit Plan for the purposes of ERISA and the Code only if
the Benefit Plan acquired an equity interest in the Issuer and none of the
exceptions contained in the Plan Assets Regulation was applicable. An "equity
interest" is defined under the Plan Assets Regulation as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there is little guidance on
the subject, the Issuer believes that, at the time of their issuance the Class A
Notes should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. The debt status of the Class A Notes
could be affected subsequent to their issuance by particular types of changes in
the financial condition of the Issuer.
Without regard to whether Class A Notes are treated as an equity interest
under the Plan Assets Regulation, the acquisition or holding of the Class A
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Issuer, the Seller, the Servicer, the Backup
Servicer, the Indenture Trustee or the Owner Trustee is or becomes a party in
interest or a disqualified person with respect to a Benefit Plan or in the event
that a subsequent transfer of a Class A Note occurs between a Benefit Plan and a
party in interest or disqualified person with respect to the Plan. Some
exemptions from the prohibited transaction rules could be applicable to the
purchase and holding of Class A Notes by a Benefit Plan depending on the type
and circumstances of the plan fiduciary making the decision to acquire the Class
A Notes. Included among these exemptions, each of which contains several
conditions which must be satisfied before the exemption applies, are: PTCE 90-1,
regarding partiuclar transactions entered into by insurance company pooled
separate accounts; PTCE 95-60, regarding particular transactions entered into by
insurance company general accounts; PTCE 96-23, regarding particular
transactions effected by "in-house asset managers"; PTCE 91-38 regarding
particular types of transactions entered into by bank collective investment
funds; and PTCE 84-14, regarding particular transactions effected by "qualified
professional asset managers." By acquiring a Class A Note, each purchaser and
each transferee of a Class A Note shall be deemed to represent and warrant that
either (1) it is not acquiring a Class A Note with the assets of a Benefit Plan;
or (2) its purchase and holding of the Class A Notes will qualify for prohibited
transaction exemptive relief under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE
90-1, PTCE 84-14 or some other applicable exemption.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and some church plans (as defined in Section 3(33) of ERISA) may
not be subject to ERISA requirements. However, governmental plans can be
subject, under federal, fiduciary, state or local law, to restrictions which are
similar to ERISA and church plans may be subject to other types of prohibited
transaction restrictions under the Code.
A Benefit Plan fiduciary considering the purchase of Class A Notes should
consult its tax and/or legal advisors regarding whether the assets of the Issuer
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential consequences.
RATINGS
It is a condition to issuance that each of the Class A-1 Notes and the
Class A-2 Notes be rated [ ] by [ ] and [ ] by [ ]. The ratings by the Rating
Agencies of the Class A Notes will be based on the issuance of the Policy. A
rating is not a recommendation to purchase, hold or sell Class A Notes. In the
event that the rating initially assigned to any of the Class A Notes is
subsequently lowered or withdrawn for any reason, including by reason of a
downgrading of the claims-paying ability of the Insurer, no person or entity
will be obligated to provide any additional credit enhancement with respect to
the Class A Notes. Any reduction or withdrawal of a rating may have an adverse
effect on the liquidity and market price of the Class A Notes.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated [ ] (the "Underwriting Agreement"), the Company has agreed to cause the
Trust to sell to Deutsche Banc Alex. Brown (the "Underwriter"), and the
Underwriter has agreed to purchase, all of the Class A Notes.
Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all the Class A Notes offered by
this prospectus supplement, if any are taken.
The Seller has been advised by the Underwriter that the Underwriter
proposes to offer the Class A Notes from time to time for sale in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Underwriter may effect these transactions by selling Class A Notes to or through
dealers and these dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter and any purchasers of
Class A Notes for whom they may act as agents. The Underwriter and any dealers
that participate with the Underwriter in the distribution of the Class A Notes
may be deemed to be underwriters, and any discounts or commissions received by
them and any profit on the resale of Class A Notes by them may be deemed to be
underwriting discounts or commissions under the Securities Act of 1933, as
amended (the "Securities Act").
The Class A Notes are a new issue of securities with no established trading
market. The Trust has been advised by the Underwriter that it intends to make a
market in the Class A Notes, but the Underwriter is not obligated to make a
market and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the Class A
Notes.
An affiliate of the underwriter provides a warehouse facility to the
Seller.
The Seller has agreed to indemnify the Underwriter against particular types
of liabilities, including liabilities under the Securities Act.
EXPERTS
The consolidated balance sheets of Financial Security and Subsidiaries as
of December 31, [ ] 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, [ ], incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance on
the report of [ ], independent accountants, given on the authority of that firm
as experts in accounting and auditing.
LEGAL MATTERS
Some legal matters relating to the Class A Notes and some related federal
income tax and other matters will be passed upon for the Seller by [ ]. Some
legal matters relating to the Class A Notes will be passed upon for the
Underwriter and the Company Stroock & Stroock & Lavan LLP, New York, New York.
<PAGE>
GLOSSARY
AGGREGATE PRINCIPAL BALANCE: With respect to the Closing Date, the Cutoff
Date Principal Balance, and with respect to any Determination Date, the sum of
the Principal Balances, computed as of the last day of the related Collection
Period end date, for all Receivables, other than Liquidated Receivables and
Purchased Receivables.
AMOUNT FINANCED: With respect to a Receivable, the aggregate amount
advanced extended under the Receivable toward the purchase price of the Financed
Vehicle and related costs, including amounts of credit extended in respect of
accessories, insurance premiums, service and warranty policies or contracts and
other items customarily financed as part of motor vehicle retail installment
contracts or promissory notes, and related costs.
AVAILABLE FUNDS: With respect to any Determination Date, the sum of
(1) the "Collected Funds" received by the Servicer during the related
Collection Period,
(2) all Purchase Amounts deposited in the Collection Account for the
related Collection Period,
(3) all income received from investments of funds in the Collection
Account during the related Collection Period,
(4) the Monthly Capitalized Interest Amount with respect to the Payment
Date,
(5) the Insurer Optional Deposit, if any, and
(6) any remaining Pre-Funded Amount applied to the mandatory redemption of
Notes.
CERTIFICATEHOLDER: The holder of a Certificate
CLASS: A class of Notes.
CLASS A NOTE BALANCE: The sum of (1) the Class A-1 Note Balance and (2) the
Class A-2 Note Balance.
CLASS A-1 FINAL SCHEDULED PAYMENT DATE: [ ] or, if this day is not a
Business Day, the next succeeding Business Day.
CLASS A-2 FINAL SCHEDULED PAYMENT DATE: [ ], or, if this day is not a
Business Day, the next succeeding Business Day.
CLASS B NOTE BALANCE: An amount equal to $[ ] on the Closing Date and
after, an amount equal to the initial Class B Note Balance reduced by all
amounts distributed to the Class B Noteholders that are allocable to principal.
COLLECTED FUNDS: With respect to any Determination Date, the amount of
funds in the Collection Account representing collections on the Receivables
received by the Servicer during the related Collection Period, including all
Liquidation Proceeds collected during the related Collection Period, but
excluding any Purchase Amounts, and all amounts paid by Dealers under Dealer
Agreements or Dealer Assignments with respect to the Receivables during the
related Collection Period.
COLLECTION PERIOD: With respect to any Payment Date or Determination Date,
the calendar month preceding the month in which the Payment Date or
Determination Date occurs.
CONTROLLING PARTY: The Insurer, so long as an Insurer Default shall not
have occurred and be continuing, otherwise, the Indenture Trustee for the
benefit of the Noteholders; provided, however, that the Owner Trustee for the
benefit of the Certificateholder will be the Controlling Party after all unpaid
principal and interest on the Notes shall have been paid in full and all amounts
due to the Insurer have been paid and the Policy has expired in accordance with
its terms.
CORPORATE TRUST OFFICE: The office of the Indenture Trustee at which its
corporate trust business shall be principally administered, which office as of
the date of this prospectus supplement is located at [ ].
CRAM DOWN LOSS: With respect to a Receivable, if a court of appropriate
jurisdiction in an insolvency proceeding shall have issued an order reducing the
amount owed on a Receivable or otherwise modifying or restructuring the Contract
Scheduled Payments to be made on a Receivable, an amount equal to (1) the excess
of the Principal Balance of the Receivable immediately prior to the order over
the Principal Balance of the Receivable as so reduced and/or (2) if the court
shall have issued an order reducing the effective rate of interest on the
Receivable, the net present value, using as the discount rate the higher of the
APR on the Receivable or the rate of interest, if any, specified by the court in
the order, of the Contract Scheduled Payments as so modified or restructured. A
Cram Down Loss shall be deemed to have occurred on the date of issuance of the
order.
CUTOFF DATE: With respect to the Initial Receivables, the Initial Cutoff
Date, and with respect to the Subsequent Receivables, the Subsequent Cutoff
Date.
DEALER AGREEMENT: An agreement generally between the Seller and a Dealer
relating to the sale of retail installment contracts to the Seller and all
documents and instruments relating to that agreement.
DEALER ASSIGNMENT: With respect to a Receivable, the executed assignment
conveying a Receivable to the Seller.
DEFICIENCY CLAIM AMOUNT: With respect to any Determination Date, the
positive difference, if any, of (1) the sum of the related Scheduled Payments
plus the amounts described in clauses (1), (2) and (3) under the heading "The
Notes--Priority of Distribution Amounts" minus (2) the amount of Available Funds
with respect to the Determination Date, which amount will be withdrawn from the
Class A Reserve Account to the extent funds are on deposit tin this prospectus
supplement in accordance with the terms of the Class A Reserve Account Agreement
and deposited into the Collection Account on the related Payment Date.
DETERMINATION DATE: With respect to a Collection Period, the 5th Business
Day preceding the Payment Date in the next calendar month; provided, however
that the first Determination Date will be the Closing Date.
HOLDER OR NOTEHOLDER: The Person in whose name a Note is registered in the
Note Register.
LIQUIDATION PROCEEDS: With respect to a Liquidated Receivable,
o proceeds from the disposition of Financed Vehicles securing the
Liquidated Receivables,
o any insurance proceeds or rebates, or
o other monies received from the Obligor or otherwise, less amounts
required to be refunded to the Obligor.
MANAGED RECEIVABLE: Any retail installment contract, including any related
promissory note, for a Financed Vehicle, and all rights and obligations under
the retail installment contract, generally originated by and currently serviced
by the Seller for Obligors.
NOTE BALANCE: The sum of the Class A Note Balance and Class B Note Balance.
NOTE MAJORITY: As of any date of determination, Holders of Class A-1 Notes
and Class A-2 Notes and Class B Notes representing more than 50% of the Note
Balance.
PAYMENT AMOUNT: With respect to a Payment Date, the sum of (1) the
Available Funds as of the last day of a Collection Period, plus (2) the
Deficiency Claim Amount, if any, with respect to the Payment Date.
PERSON: Any legal person, including any individual, corporation, limited
liability company, partnership, joint venture, estate, association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision of these or any other entity.
PURCHASED RECEIVABLE: A Receivable that was purchased as of the close of
business on the last day of a Collection Period by the Seller or the Servicer as
the result of the violation of particular representations or warranties of the
Seller under the Sale and Servicing Agreement or a breach by the Servicer of
some of the Servicer's obligations.
RATING AGENCY CONDITION: With respect to any action, that the Rating Agency
has been given prior notice of and that the Rating Agency has notified the
Seller, the Seller, the Servicer and the Indenture Trustee in writing that the
action will not result in a reduction or withdrawal of the then current rating
of the Notes.
SALE AND SERVICING AGREEMENT: The Sale and Servicing Agreement between the
Seller, in its individual capacity and as Servicer, ACE Securities Corp., as
Company, [ ] Auto Receivables Owner Trust [ ]- [ ] as purchaser, and [ ], as
Indenture Trustee and Backup Servicer.
SERVICER'S CERTIFICATE: With respect to each Collection Period, a
certificate, completed by and executed on behalf of the Servicer, in accordance
with the applicable Sale and Servicing Agreement provisions.
SERVICER RECEIVABLES FILES: The following documents or instruments in the
Servicer's possession with respect to each Receivable: (1) documents evidencing
or relating to any Insurance Policy; and (2) any and all other documents, in
original or electronic form, that the Servicer keeps on file in accordance with
its customary procedures relating to the individual Receivable, Obligor or
Financed Vehicle.
STATE: Any state of the United States or the District of Columbia.
TRANSACTION DOCUMENTS: The Sale and Servicing Agreement, the Indenture, the
Trust Agreement, the Notes, the Receivables Purchase Agreement, the Underwriting
Agreement and the other agreements executed in connection with the closing of
the transactions described in this prospectus supplement.
TRUST AGREEMENT: The Trust Agreement between ACE Securities Corp., the
Certificateholder, the Seller, and [ ], as Owner Trustee.
<PAGE>
INDEX OF TERMS
Set forth below is a list of the defined terms used in this prospectus
supplement and the pages on which the definitions of these terms may be found.
10 percent shareholder..................................................S-65
ABS.....................................................................S-29
ABS Tables..............................................................S-29
Actuarial Receivable....................................................S-23
Additional Funds Available..............................................S-35
Aggregate Principal Balance.............................................S-70
Amount Financed.........................................................S-70
Available Funds.........................................................S-70
Backup Servicer Fee.....................................................S-55
Benefit Plan............................................................S-66
Business Day............................................................S-62
capital assets..........................................................S-63
Capitalized Interest Account............................................S-54
Certificate.............................................................S-15
Certificateholder.......................................................S-70
Class...................................................................S-70
Class A Interest Carryover Shortfall....................................S-35
Class A Interest Payment Amount.........................................S-35
Class A Mandatory Redemption Amount.....................................S-35
Class A Note Balance....................................................S-70
Class A Notes...........................................................S-15
Class A Overcollateralization Amount....................................S-35
Class A Principal Payment Amount........................................S-36
Class A Reserve Account.................................................S-44
Class A Target Overcollateralization Amount.............................S-36
Class A-1 Final Scheduled Payment Date..................................S-70
Class A-1 Interest Carryover Shortfall..................................S-36
Class A-1 Interest Payment Amount.......................................S-36
Class A-1 Mandatory Redemption Amount...................................S-36
Class A-1 Note Balance..................................................S-41
Class A-1 Note Factor...................................................S-49
Class A-1 Notes.........................................................S-15
Class A-1 Principal Carryover Shortfall.................................S-36
Class A-1 Principal Payment Amount......................................S-37
Class A-2 Final Scheduled Payment Date..................................S-70
Class A-2 Interest Carryover Shortfall..................................S-37
Class A-2 Interest Payment Amount.......................................S-37
Class A-2 Mandatory Redemption Amount...................................S-37
Class A-2 Note Balance..................................................S-41
Class A-2 Note Factor...................................................S-50
Class A-2 Notes.........................................................S-15
Class A-2 Principal Carryover Shortfall.................................S-37
Class A-2 Principal Payment Amount......................................S-37
Class B Interest Carryover Shortfall....................................S-38
Class B Interest Payment Amount.........................................S-38
Class B Note Balance....................................................S-70
Class B Notes...........................................................S-15
Class B Principal Payment Amount........................................S-38
Closing Date............................................................S-15
Code....................................................................S-63
Collected Funds.........................................................S-70
Collection Account......................................................S-53
Collection Period.......................................................S-71
Contract Scheduled Payment..............................................S-38
controlled foreign corporation..........................................S-65
Controlling Party.......................................................S-71
Corporate Trust Office..................................................S-71
Cram Down Loss..........................................................S-71
Cutoff Date.............................................................S-71
Dealer Agreement........................................................S-71
Dealer Assignment.......................................................S-71
Dealer Recourse.........................................................S-17
Defaulted Receivable....................................................S-38
Deficiency Claim Amount.................................................S-71
Determination Date......................................................S-71
disqualified persons....................................................S-66
Draw Date...............................................................S-39
DTC.....................................................................S-34
equity interest.........................................................S-67
Events of Default.......................................................S-48
excess interest.........................................................S-44
Excess Overcollateralization Amount.....................................S-39
excess principal........................................................S-44
Exchange Act............................................................S-33
Final Regulations.......................................................S-65
Financed Vehicles.......................................................S-17
Foreign Person..........................................................S-65
Funding Period..........................................................S-53
Holder..................................................................S-72
Holders.................................................................S-34
Indenture...............................................................S-16
in-house asset managers.................................................S-67
Initial Cutoff Date.....................................................S-16
Initial Financed Vehicles...............................................S-16
Initial Pre-Funded Amount...............................................S-53
Initial Receivables.....................................................S-16
Insurance Agreement Indenture Cross Defaults............................S-48
Insurer.................................................................S-18
Insurer Default.........................................................S-57
Insurer Optional Deposit................................................S-39
IRS.....................................................................S-63
Issuer..................................................................S-15
Liquidated Receivable...................................................S-39
Liquidation Proceeds....................................................S-72
Lockbox Account.........................................................S-53
Lockbox Bank............................................................S-53
Managed Receivable......................................................S-72
Mandatory Redemption Date...............................................S-54
Monthly Capitalized Interest Amount.....................................S-54
Note Balance............................................................S-72
Note Distribution Account...............................................S-53
Note Majority...........................................................S-72
Noteholder..............................................................S-72
Noteholders.............................................................S-34
Notes...................................................................S-15
Obligors................................................................S-16
OC Stabilization Date...................................................S-39
OID.....................................................................S-64
Order...................................................................S-61
Original Pool Balance...................................................S-34
Owner Trustee...........................................................S-16
parties in interest.....................................................S-66
Payment Amount..........................................................S-72
Person..................................................................S-72
plan assets.............................................................S-66
Plan Assets Regulation..................................................S-66
Policy Claim Amount.....................................................S-39
portfolio interest......................................................S-65
Precomputed Receivables.................................................S-22
Pre-Funded Amount.......................................................S-54
Pre-Funding Account.....................................................S-53
Principal Balance.......................................................S-40
Principal Payment Amount................................................S-39
publicly traded partnership.............................................S-66
Purchase Amount.........................................................S-41
Purchased Receivable....................................................S-72
qualified professional asset managers...................................S-67
Rating Agency Condition.................................................S-72
Receipt.................................................................S-62
Receivables.............................................................S-15
Receivables File........................................................S-18
Received................................................................S-62
Redemption Price........................................................S-35
related person..........................................................S-65
Rule of 78's Receivables................................................S-22
Sale and Servicing Agreement............................................S-72
Scheduled Payments......................................................S-60
Securities Act..........................................................S-68
Servicer Expenses.......................................................S-55
Servicer Fee............................................................S-55
Servicer Receivables Files..............................................S-72
Servicer Termination Event..............................................S-57
Servicer Transition Expenses............................................S-55
Servicer's Certificate..................................................S-72
Servicing Fee Rate......................................................S-55
Simple Interest Receivable..............................................S-22
State...................................................................S-73
stated redemption price at maturity.....................................S-64
Subsequent Cutoff Date..................................................S-16
Subsequent Financed Vehicles............................................S-17
Subsequent Purchase Agreement...........................................S-17
Subsequent Receivables..................................................S-17
Subsequent Transfer Date................................................S-18
Transaction Documents...................................................S-73
Trust...................................................................S-15
Trust Agreement.....................................................S-16, 73
Trust Property..........................................................S-16
Underwriter.............................................................S-68
Underwriting Agreement..................................................S-68
Weighted Average Life...................................................S-29
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS
ACE SECURITIES CORP.
COMPANY
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
AUTO RECEIVABLES AND RECEIVABLES SECURITIES TRUSTS
--------------------
THE TRUST:
Each trust will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each trust will generally consist of one or more
of the following:
1. One or more pools of
o motor vehicle installment loan agreements or motor vehicle retail
installment sale contracts secured by new and used automobiles,
recreational vehicles, including motor homes, campers, boats, boat
motors, motorcycles, jet skis, waverunners, all-terrain-vehicles, and
snowmobiles, vans, trucks, buses and trailers, and security interests
in the vehicles financed by the motor vehicle installment loan
agreements or retail installment sale contracts,
o private securities evidencing ownership interests in or secured by
loans similar to the types of loans described above;
2. Government Securities;
3. All monies due under the above assets, which may be net of amounts
payable to the servicer; and
4. Funds or accounts established for the related trust, or one or more
forms of enhancement.
The assets in your trust are specified in the prospectus supplement for
that particular trust, while the types of assets that may be included in a
trust, whether or not in your trust, are described in greater detail in this
prospectus.
THE SECURITIES:
ACE Securities Corp. Will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
The date of this prospectus is _________, 2000
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
LIMITED LIQUIDITY MAY RESULT
IN DELAYS IN YOUR ABILITY TO SELL
SECURITIES OR LOWER RETURNS........... There will be no market for
the securities of any series prior to
their issuance, and there can be no
assurance that a secondary market will
develop. If a secondary market does
develop, there can be no assurance that
it will provide holders with liquidity
of investment or that the market will
continue for the life of the securities
of the related series. Deutsche Banc
Alex. Brown presently expects to make a
secondary market in the securities, but
has no obligation to do so. Absent a
secondary market for the securities you
may experience a delay if you choose to
sell your securities or the price you
receive may be less than you would
receive for a comparable liquid
security.
LIMITED ASSETS FOR PAYMENTS -
NO RECOURSE TO COMPANY,
SELLER OR SERVICER.................... The company does not have, nor
is it expected to have, any significant
assets. The securities of a series will
be payable solely from the assets of the
trust fund for that series. Except for
any related insurance policies or credit
support, there will be no recourse to
the company or any other person for any
default on the notes or any failure to
receive distributions on the
certificates with respect to any series.
Consequently, holders of securities of
each series must rely solely upon
payments with respect to the assets
constituting the trust fund for a series
of securities, including, if applicable,
any amounts available pursuant to any
enhancement for that series, for the
payment of principal of and interest on
the securities of that series.
The only obligations, if any,
of the company with respect to the
securities of any series will be with
respect to its breach of specific
representations and warranties. The
company does not have, and is not
expected in the future to have, any
significant assets with which to meet
any obligation to repurchase assets with
respect to which there has been a breach
of any representation or warranty. If,
for example, the company were required
to repurchase a receivable, its only
sources of funds to make the repurchase
would be from funds obtained from the
enforcement of a corresponding
obligation, if any, on the part of the
originator of the receivable, or the
seller, as the case may be, or from a
reserve fund established to provide
funds for repurchases. If the company
does not have sufficient assets and no
other party is obligated to repurchase
defective assets, you may experience a
loss.
LIMITS ON ENHANCEMENT MAY
RESULT IN LOSSES TO YOU............... Although we intend the
enhancement for the securities to reduce
the risk of delinquent payments or
losses to holders of a series of
securities entitled to the benefit of
the enhancement, the amount of the
enhancement will be limited, as set
forth in the related prospectus
supplement. In addition, the amount
available will decline and could be
depleted prior to the payment in full of
the related series of securities, and
losses on the primary assets could
result in losses to holders of those
securities.
TIMING AND RATE OF PREPAYMENTS
MAY RESULT IN LOWER YIELD............. The yield to maturity
experienced by a holder of securities
may be affected by the rate and timing
of payments of principal of the
receivables or of the underlying
receivables relating to the private
securities. The rate and timing of
principal payments of the securities of
a series will be affected by a number of
factors, including the following:
o the extent of prepayments,
which may be influenced by a
variety of factors,
o the manner of allocating
principal payments among the
classes of securities of a
series as specified in the
related prospectus supplement,
and
o the exercise of any right of
optional termination.
Prepayments may also result
from repurchases of receivables or
underlying receivables, as applicable,
due to material breaches of the seller's
or the company's representations or
warranties.
Interest payable on the
securities of a series on a distribution
date will include all interest accrued
during the period specified in the
related prospectus supplement. In the
event interest accrues during the
calendar month prior to a distribution
date, the effective yield to holders
will be reduced from the yield that
would otherwise be obtainable if
interest payable on the security were to
accrue through the day immediately
preceding each distribution date, and
the effective yield at par to holders
will be less than the indicated coupon
rate.
RISKS OF SUBORDINATED SECURITIES...... To the extent specified in the
applicable prospectus supplement,
distributions of interest on and
principal of one or more classes of
securities of a series may be
subordinated in priority of payment to
interest and principal due on one or
more other classes of securities of the
related series. Any subordinated
securities will be affected to a greater
degree by any losses on the receivables
or of the underlying receivables
relating to the private securities.
POTENTIAL LACK OF SECURITY.......... The company will assign
security interests in the financed
vehicles securing the receivables to the
related trust. Due to administrative
burden and expense, however, we will not
cause the certificates of title to the
financed vehicles to be amended to
reflect the assignment to the trust
unless otherwise specified in the
prospectus supplement. In the absence of
amendment, a trust may not have a
perfected security interest in the
financed vehicles securing the
receivables in some states. If a trust
does not have a perfected security
interest in a financed vehicle, its
ability to realize in the event of a
default on that financed vehicle may be
adversely affected.
RISK OF COMMINGLING................... We will require the servicer
to deposit all payments on the
receivables collected during each
collection period into the related
collection account within two business
days of receipt of the payments.
However, if a servicer satisfies
particular requirements for less
frequent remittances we will not require
the servicer to deposit the amounts into
the collection account until the
business day preceding each distribution
date.
Pending deposit into the
collection account, collections may be
invested by the servicer at its own risk
and for its own benefit and will not be
segregated from funds of the servicer.
If the servicer were unable to remit the
funds, the applicable securityholders
might incur a loss. To the extent set
forth in the related prospectus
supplement, the servicer may, in order
to satisfy the requirements described
above, obtain a letter of credit or
other security for the benefit of the
related trust to secure timely
remittances of collections on the
receivables.
REMOVAL OF A SERVICER
AFTER A SERVICER DEFAULT.............. The related prospectus
supplement may provide that with respect
to a series of securities issued by an
owner trust, upon the occurrence of a
servicer default, the related indenture
trustee or noteholders may remove the
servicer without the consent of the
related trustee or any
certificateholders. The trustee or the
certificateholders with respect to a
series may not have the ability to
remove the servicer if a servicer
default occurs. In addition, the
noteholders with respect to a series
have the ability, with specified
exceptions, to waive defaults by the
servicer, including defaults that could
materially adversely affect the
certificateholders of the series.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST........ Issuance of the securities in
book-entry form may reduce the liquidity
of these securities in the secondary
trading market since investors may be
unwilling to purchase securities for
which they cannot obtain physical
certificates. Since transactions in the
securities can be effected only through
The Depository Trust Company and any
other entities set forth in the related
prospectus supplement, your ability to
pledge a security to persons or entities
that do not participate in The
Depository Trust Company or any other
entities or otherwise to take actions in
respect of the related securities may be
limited due to lack of a physical
certificate representing the securities.
You may experience some delay
in the receipt of distributions of
interest and principal on the securities
since the distributions will be
forwarded by the trustee to The
Depository Trust Company and The
Depository Trust Company will credit the
distributions to the accounts of its
participants which will subsequently
credit them to your account either
directly or indirectly through indirect
participants.
<PAGE>
THE TRUSTS
With respect to each series of securities, ACE Securities Corp., the
company, and/or [ ], the seller, or one of its affiliates will establish a
separate trust (each, a "Trust") pursuant to a trust agreement (a "Trust
Agreement") between the company and the related trustee or pooling and servicing
agreement (a "Pooling and Servicing Agreement") among the company, the servicer
and the trustee for the related Trust, as applicable, for the transactions
described in this prospectus and in the related prospectus supplement. The
property of each Trust will include Primary Assets and all payments due under
the Primary Assets on and after the applicable cutoff date in the case of
Precomputed Receivables and all payments received under the Precomputed
Receivables on and after the applicable cutoff date or closing date, as
specified in the related prospectus supplement, in the case of Simple Interest
Receivables, Collateral Certificates, Government Securities and Private Label
Custody Receipt Securities. On the applicable closing date, after the issuance
of the notes and/or certificates of a given series, the company will transfer or
sell Primary Assets to the Trust in the outstanding principal amount specified
in the related prospectus supplement. The property of each Trust may also
include:
o amounts as from time to time may be held in separate trust accounts
established and maintained pursuant to the related Trust Agreement,
sale and servicing agreement (a "Sale and Servicing Agreement") among
the company, the servicer and the related Trust or Pooling and
Servicing Agreement, as applicable, and the proceeds of these
accounts, as described in this prospectus and in the related
prospectus supplement;
o security interests in vehicles financed by the Receivables (the
"Financed Vehicles") and any other interest of a seller in the
Financed Vehicles;
o the rights to proceed from claims on physical damage, credit life and
disability insurance policies covering Financed Vehicles or the
obligors, as the case may be;
o any property that has secured a Receivable and that has been acquired
by the applicable Trust; and
o any and all proceeds of the Primary Assets or the foregoing.
To the extent specified in the related prospectus supplement, a Reserve Account
or other form of credit enhancement may be a part of the property of a given
Trust or may be held by the trustee for the benefit of holders of the related
securities.
The servicer specified in the related prospectus supplement, as servicer
under the Pooling and Servicing Agreement or Sale and Servicing Agreement, as
applicable, will service the Receivables held by each Trust and will receive
fees for these services. See "Description of the Transfer and Servicing
Agreements--Servicing Compensation and Payment of Expenses" in this prospectus
and "Description of the Transfer and Sale and Servicing Agreement--Servicing
Compensation" in the related prospectus supplement. To facilitate the servicing
of Receivables and unless otherwise specified in the related prospectus
supplement, each seller and each trustee will authorize the servicer to retain
physical possession of the Receivables held by each Trust and other documents
relating to possession of the Receivables as custodian for each Trust. Due to
the administrative burden and expense, the certificates of title to the Financed
Vehicles will not be amended to reflect the sale and assignment of the security
interest in the Financed Vehicles to a Trust. In the absence of an amendment, a
Trust may not have a perfected security interest in some of the Financed
Vehicles in some states. See "Certain Legal Aspects of the Receivables" and
"Description of the Transfer and Servicing Agreements--Sale and Assignment of
Primary Assets". In the case of Primary Assets consisting of Collateral
Certificates, Government Securities and/or Private Label Custody Receipt
Securities, the trustee specified in the related prospectus supplement will
manage the Collateral Certificates, Government Securities and/or Private Label
Custody Receipt Securities.
If the protection provided to (1) holders of notes issued by an owner trust
by the subordination of the related certificates and by the Reserve Account, if
any, or any other available form of credit enhancement for the series or (2)
certificateholders by any Reserve Account or other form of credit enhancement is
insufficient, the noteholders or certificateholders, as the case may be, will
have to look to payments by or on behalf of obligors on Receivables or on the
Collateral Certificates, the Government Securities, and the Private Label
Custody Receipt Securities, as applicable, and the proceeds from the
repossession and sale of Financed Vehicles that secure defaulted Receivables for
distributions of principal and interest on the securities. In this event, some
factors, such as the applicable Trust's not having perfected security interests
in all of the Financed Vehicles, may limit the ability of a Trust to realize on
the collateral securing the related Primary Assets, or may limit the amount
realized to less than the amount due under Receivables. Securityholders may be
subject to delays in payment on, or may incur losses on their investment in, the
securities as a result of defaults or delinquencies by obligors and depreciation
in the value of the related Financed Vehicles. See "Description of the Transfer
and Servicing Agreements--Credit and Cash Flow Enhancement" and "Certain Legal
Aspects of the Receivables".
The principal offices of each Trust and the related trustee will be
specified in the applicable prospectus supplement.
THE TRUSTEE
The trustee for each Trust will be specified in the related prospectus
supplement. The trustee's liability in connection with the issuance and sale of
the related securities is limited solely to the express obligations of the
trustee set forth in the related Trust Agreement and Sale and Servicing
Agreement or the related Pooling and Servicing Agreement, as applicable. A
trustee may resign at any time, in which event the servicer will be obligated to
appoint a successor trustee. The servicer may also remove the related trustee if
the trustee ceases to be eligible to continue as trustee under the related Trust
Agreement or Pooling and Servicing Agreement, as applicable, and will be
obligated to appoint a successor trustee. Any resignation or removal of a
trustee and appointment of a successor trustee will not become effective until
the acceptance of the appointment by the successor trustee.
THE RECEIVABLES POOLS
The motor vehicle installment loan agreements or motor vehicle retail
installment sale contracts secured by new and used automobiles, recreational
vehicles, including motor homes, campers, boats, boat motors, motorcycles, jet
skis, waverunners, all-terrain-vehicles and snowmobiles, vans, trucks, buses and
trailers (the "Receivables") in a Receivables Pool have been or will be
originated or acquired by a seller in the ordinary course of business, in
accordance with its credit and underwriting standards as described in the
related prospectus supplement.
The Receivables to be sold to each Trust will be selected from a seller's
portfolio for inclusion in a Receivables Pool based on several criteria, which
criteria include that, subject to particular limitations which, if applicable,
will be specified in the related prospectus supplement, each Receivable
o is secured by a new or used vehicle,
o was originated or acquired, either from a motor vehicle dealer or a
financial institution, by the seller,
o provides for level monthly payments, except for the last payment,
which may be different from the level payments, that, unless otherwise
provided in the related prospectus supplement, amortize the amount
financed over the original term to maturity of the related Receivable,
o is a Precomputed Receivable or a Simple Interest Receivable and
o satisfies the other criteria, if any, set forth in the related
prospectus supplement. No selection procedures believed by the seller
to be adverse to Securityholders were or will be used in selecting the
Receivables.
"Precomputed Receivables" consist of either (1) monthly actuarial
receivables ("Actuarial Receivables") or (2) receivables that provide for
allocation of payments according to the "sum of periodic balances" or "sum of
monthly payments" method, similar to the "Rule of 78s" ("Rule of 78S
Receivables"). An Actuarial Receivable provides for amortization of the loan
over a series of fixed level monthly installment payments. Each monthly
installment, including the monthly installment representing the final payment on
the Receivable, consists of (x) an amount of interest equal to 1/12 of the
stated contract interest rate under the related Receivable multiplied by the
unpaid principal balance of the loan, plus (y) an amount allocable to principal
equal to the remainder of the monthly payment. A Rule of 78s Receivable provides
for the payment by the obligor of a specified total amount of payments, payable
in equal monthly installments on each due date, which total represents the
principal amount financed plus add-on interest in an amount calculated at the
stated contract interest rate under the related Receivable for the term of the
receivable. The rate at which the amount of add-on interest is earned and,
correspondingly, the amount of each fixed monthly payment allocated to reduction
of the outstanding principal amount are calculated in accordance with the Rule
of 78s.
"Simple Interest Receivables" are receivables that provide for the
amortization of the amount financed under them over a series of fixed level
monthly payments. However, unlike the monthly payment under an Actuarial
Receivable, each monthly payment consists of an installment of interest that is
calculated on the basis of the outstanding principal balance of the receivable
multiplied by the stated contract interest rate under the related Receivable and
further multiplied by the period elapsed, as a fraction of a calendar year,
since the preceding payment of interest was made. As payments are received under
a Simple Interest Receivable, the amount received generally is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if an obligor pays a fixed monthly
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if an obligor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. In either case, the obligor is obligated to pay a fixed
monthly installment until the final scheduled payment date, at which time the
amount of the final installment may be increased or decreased as necessary to
repay the then outstanding principal balance.
In the event of the prepayment in full, voluntarily or by acceleration, of
a Rule of 78s Receivable, under the terms of the contract a "refund" or "rebate"
will be made to the obligor of the portion of the total amount of payments then
due and payable allocable to "unearned" add-on interest, calculated in
accordance with a method equivalent to the Rule of 78s. If an Actuarial
Receivable is prepaid in full, with minor variations based upon state law, the
Actuarial Receivable requires that the rebate be calculated on the basis of a
constant interest rate. If a Simple Interest Receivable is prepaid, rather than
receive a rebate, the obligor is required to pay interest only to the date of
prepayment. The amount of a rebate under a Rule of 78s Receivable generally will
be less than the amount of a rebate on an Actuarial Receivable and generally
will be less than the remaining scheduled payments of interest that would have
been due under a Simple Interest Receivable for which all payments were made on
schedule.
To the extent provided in the related prospectus supplement, each Trust
will account for the Rule of 78s Receivables as if the Receivables were
Actuarial Receivables. Amounts received upon prepayment in full of a Rule of 78s
Receivable in excess of the then outstanding principal balance of the Receivable
and accrued interest on the Receivable, calculated pursuant to the actuarial
method, will not be paid to noteholders or passed through to certificateholders
of the applicable series, but will be paid to the servicer as additional
servicing compensation.
Information with respect to each Receivables Pool will be set forth in the
related prospectus supplement, including, to the extent appropriate, the
composition and distribution by annual percentage rate and by states of
origination of the Receivables, the portion of each Receivables Pool consisting
of Precomputed Receivables and of Simple Interest Receivables, and the portion
of each Receivables Pool secured by new vehicles and by used vehicles.
DELINQUENCIES, REPOSSESSIONS AND NET LOSSES
Information concerning the experience of a seller pertaining to
delinquencies, repossessions and net losses with respect to Receivables will be
set forth in each prospectus supplement. There can be no assurance that the
delinquency, repossession and net loss experience on any Receivables Pool will
be comparable to prior experience or to the information.
NEW AND USED FINANCED VEHICLES
The extension of credit to an obligor on a Receivable is based on an
assessment of an applicant's ability to repay the amounts due on the Receivable
and the adequacy of the related Financed Vehicle. An assessment generally does
not distinguish between new or used vehicles. Rather, the amount advanced under
a motor vehicle loan generally will not exceed 100% of the value of the
collateral unless otherwise specified in the related prospectus supplement. For
new motor vehicles, the value equals the dealer invoice for the motor vehicle
that serves as collateral, plus sales tax, license fee, title fee, the cost of
service and warranty contracts, and any premium for credit life and disability
insurance obtained in connection with the loan. For used motor vehicles, the
value equals the wholesale price reported in the most recent edition of the
National Automotive dealers Association Used Car Guide, the National Auto
Research Division Black Book or any other industry guide as specified in the
related prospectus supplement, plus sales tax, license fee, title fee, the cost
of service and warranty contracts, and any premium for credit life and
disability insurance obtained in connection with the loan. The maximum age of
any used motor vehicle acceptable as collateral generally is ten model years.
Additional information with respect to delinquencies, repossessions and net
losses with respect to Receivables secured by new or used Financed Vehicles will
be set forth in each prospectus supplement.
THE COLLATERAL CERTIFICATES
Primary Assets for a series may consist, in whole or in part, of Collateral
Certificates, which include certificates evidencing an undivided interest in, or
notes or loans secured by, motor vehicle installment loan agreements and motor
vehicle retail installment sale contracts. These Collateral Certificates will
have previously been offered and distributed to the public pursuant to an
effective registration statement or are being registered under the securities
Act in connection with the offering of a series of securities, which offering,
distribution and registration may have been undertaken, or may be undertaken, by
the company and/or one or more affiliates of the company, in each case, subject
to exceptions which, if applicable, will be described in the related prospectus
supplement. Collateral Certificates will have been issued pursuant to a pooling
and servicing agreement, a sale and servicing agreement, a trust agreement, an
indenture or similar agreement (an "Underlying Trust Agreement"). The servicer
(the "Underlying Servicer") of the underlying motor vehicle installment loans or
sale contracts will have entered into the Underlying Trust Agreement with a
trustee (the "Underlying Trustee").
The issuer of the Collateral Certificates (the "Underlying Issuer") will be
o a financial institution, corporation or other entity engaged generally
in the business of purchasing or originating motor vehicle installment
loan agreements and motor vehicle retail installment sale contracts,
o a limited purpose corporation organized for the purpose of, among
other things, establishing trusts, acquiring and selling receivables
to the trusts and selling beneficial interests in these trusts, or
o one of the trusts.
If so specified in the related prospectus supplement, the Underlying Issuer may
be the company and/or one or more affiliates of the company. The obligations of
the Underlying Issuer will generally be limited to specific representations and
warranties with respect to the assets conveyed by it to the related trust. The
related prospectus supplement will, subject to exceptions which, if applicable,
will be described in the related prospectus supplement, provide that the
Underlying Issuer will not have guaranteed any of the assets conveyed to the
related trust or any of the Collateral Certificates issued under the Underlying
Trust Agreement.
Distributions of principal and interest will be made on the Collateral
Certificates on the dates specified in the related prospectus supplement. The
Collateral Certificates may be entitled to receive nominal or no principal
distribution or nominal or no interest distributions. Principal and interest
distributions will be made on the Collateral Certificates by the Underlying
Trustee or the Underlying Servicer. The Underlying Issuer or the Underlying
Servicer may have the right to repurchase assets underlying the Collateral
Certificates after a specific date or under other circumstances specified in the
related prospectus supplement.
ENHANCEMENT RELATING TO COLLATERAL CERTIFICATES
Enhancement in the form of reserve funds, subordination of other securities
issued in connection with the Collateral Certificates, guarantees, letters of
credit, cash collateral accounts, insurance policies or other types of
enhancement may be provided with respect to the Receivables underlying the
Collateral Certificates or with respect to the Collateral Certificates
themselves. The type, characteristics and amount of enhancement will be a
function of particular characteristics of the Receivables and other factors and
will have been established for the Collateral Certificates on the basis of
requirements of rating agencies.
ADDITIONAL INFORMATION
The related prospectus supplement for a series for which the Primary Assets
include Collateral Certificates will specify, to the extent relevant and to the
extent the information is reasonably available to the company and the company
reasonably believes the information to be reliable:
o the aggregate approximate principal amount and type of the Collateral
Certificates to be included in the Primary Assets;
o the characteristics of the receivables which comprise the underlying assets
for the Collateral Certificates;
o the expected and final maturity of the Collateral Certificates;
o the interest rate of the Collateral Certificates;
o the Underlying Issuer, the Underlying Servicer, if other than the
Underlying Issuer, and the Underlying Trustee for the Collateral
Certificates;
o characteristics of the enhancement, if any, such as reserve funds,
insurance funds, insurance policies, letters of credit or guarantees
relating to the receivables underlying the Collateral Certificates or to
the Collateral Certificates themselves;
o the terms on which the underlying receivables for the Collateral
Certificates may, or are required to, be purchased prior to their stated
maturity or the stated maturity of the Collateral Certificates; and
o the terms on which receivables may be substituted for those originally
underlying the Collateral Certificates.
THE GOVERNMENT SECURITIES
Primary Assets for a series may include any combination of
o receipts or other instruments created under the Department of the
Treasury's Separate Trading of Registered Interest and Principal of
securities, or STRIPS, program ("Treasury Strips"), which interest
and/or principal strips evidence ownership of specific interest and/or
principal payments to be made on particular United States Treasury
Bonds ("Treasury Bonds"),
o Treasury Bonds and
o other debt securities ("GSEs Bonds") of United States government
sponsored enterprises ("GSEs"; and together with Treasury Strips and
Treasury Bonds, collectively, "Government Securities").
The Government Securities, if any, included in a Trust are intended to
assure investors that funds are available to make specified payments of
principal and/or interest due on the related securities. Accordingly, the
Government Securities, if any, included in a Trust are intended both to (1)
support the ratings assigned to these securities, and (2) perform a function
similar to that described in this prospectus under "Description of the Transfer
and Servicing Agreements--Credit and Cash Flow Enhancement". A description of
the respective general features of Treasury Bonds, Treasury Strips and GSE Bonds
is set forth below.
The prospectus supplement for each series of securities the Trust with
respect to which contains Government Securities will contain information as to:
(1) the title and series of each Government Security, the aggregate
principal amount, denomination and form of each Government Security;
(2) the limit, if any, upon the aggregate principal amount of the
Government Security;
(3) the dates on which, or the range of dates within which, the principal
of, and premium, if any, on, the Government Security will be payable;
(4) the rate or rates, or the method of determination of the rate or
rates, at which the Government Security will bear interest, if any,
the date or dates from which the interest will accrue, and the dates
on which the interest will be payable;
(5) whether the Government Security was issued at a price lower than the
principal amount of that Government Security;
(6) material events of default or restrictive covenants provided for with
respect to the Government Security;
(7) the rating of the Government Security, if any;
(8) the issuer of each Government Security;
(9) the material risks, if any, posed by any Government Securities and
issuers of the Government Securities (which risks, if appropriate,
will be described in the "Risk Factors" section of the related
prospectus supplement); and
(10) any other material terms of the Government Security.
With respect to a Trust which includes a pool of Government Securities, the
related prospectus supplement will, to the extent applicable, describe the
composition of the Government Securities' pool, particular material events of
default or restrictive covenants common to the Government Securities, and, on an
aggregate, percentage or weighted average basis, as applicable, the
characteristics of the pool with respect to the terms set forth in (3), (4) and
(5) of the preceding sentence and any other material terms regarding the pool.
The Government Securities included in a Trust will be senior, unsecured,
nonredeemable obligations of the issuer of the Government Securities, will be
denominated in United States dollars and, if rated, will be rated at least
investment grade by at least one nationally recognized rating agency. In
addition, the inclusion of Government Securities in a Trust with respect to a
series of securities is conditioned upon their characteristics being in form and
substance satisfactory to the Rating Agency rating the related series of
securities.
TREASURY BONDS
Treasury Bonds are issued by and are the obligations of the United States
of America. Accordingly, the payment of principal and interest on each Treasury
Bond will be guaranteed by the full faith and credit of the United States of
America. Interest is typically payable on the Bonds semiannually. Treasury Bonds
are issued in registered form in denominations of $1,000, $5,000, $10,000,
$100,000 and $1,000,000 and in book-entry form in integral multiples of these
amounts.
TREASURY STRIPS
In general, Treasury Strips are created by separating, or stripping, the
principal and interest components of Treasury Bonds that have an original
maturity of 10 or more years from the date of issue. A particular Treasury Strip
evidences ownership of the principal payment or one of the periodic interest
payments, generally semiannual, due on the Treasury Bond to which the Treasury
Strip relates.
In 1985 the Department of the Treasury announced that all new issues of
Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs (which
are described below under "--Private Label Custody Receipt Securities"), and
investment banks no longer sponsor new issues of custodial receipts.
Treasury Strips may be either "serial" or "callable". A serial Treasury
Strip evidences ownership of one of the periodic interest payments to be made on
a Treasury Bond. No payments are made on the Treasury Strip, nor is it
redeemable, prior to its maturity, at which time the holder becomes entitled to
receive a single payment of the face amount of the Treasury Strip. Callable
Treasury Strips relate to payments scheduled to be made after the related
Treasury Bonds have become subject to redemption. These Treasury Strips evidence
ownership of both principal of the related Treasury Bonds and each of the
related interest payments commencing, typically, on the first interest payment
date following the first optional redemption date. If the underlying Treasury
Bonds are actually redeemed, holders of callable Treasury Strips generally
receive a payment equal to the principal portion of the total face amount of the
Treasury Strips plus the interest payment represented by the Treasury Strips
maturing on the redemption date. No callable Treasury Strips will be included in
a Trust. The face amount of any Treasury Strip is the aggregate of all payments
scheduled to be received on the Treasury Strip. Treasury Strips are available in
registered form and generally may be transferred and exchanged by the holders of
the Treasury Strips in accordance with procedures applicable to the particular
issue of the Treasury Strips.
A holder of a private label Treasury Strip, as opposed to a STRIP, cannot
enforce payment on that Treasury Strip against the Treasury. Instead, the holder
must look to the custodian for payment. The custodian, and the holder of a
Treasury Strip that obtains ownership of the underlying Treasury Bond, can
enforce payment of the underlying Treasury Bond against the Treasury. If any
private label Treasury Strips are included in a Trust with respect to any series
of securities, the prospectus supplement for the series will include the
identity and a brief description of each custodian that issued the Treasury
Strips. If the company knows that the company of the Treasury Bonds underlying
the Treasury Strips is the company or any of its affiliates, the company will
disclose that fact in the related prospectus supplement.
GSE BONDS
As specified in the applicable prospectus supplement, the obligations of
one or more of the following GSEs may be included in a Trust: Federal National
Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Association
("Freddie Mac"), Student Loan Marketing Association ("Sallie Mae"), REFCO,
Tennessee Valley Authority ("TVA"), Federal Home Loan Banks ("FHLB"), to the
extent the obligations represent the joint and several obligations of the twelve
Federal Home Loan Banks, and Federal Farm Credit Banks ("FFCB"). GSE debt
securities are exempt from registration under the securities Act pursuant to
Section 3(a)(2) of the securities Act, or are deemed by statute to be so exempt,
and are not required to be registered under the Exchange Act. The securities of
any GSE, including a GSE Guaranteed Bond, will be included in a Trust only to
the extent that (1) its obligations are supported by the full faith and credit
of the United States government or (2) the organization makes publicly available
its annual report which shall include financial statements or similar financial
information with respect to the organization (a "GSE Issuer"). Unless otherwise
specified in the related prospectus supplement, the GSE Bonds will not be
guaranteed by the United States and do not constitute a debt or obligation of
the United States or of any agency or instrumentality of the United States other
than the related GSE.
Unless otherwise specified in the related prospectus supplement, none of
the GSE Bonds will have been issued pursuant to an indenture, and no trustee is
provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be governed
by a fiscal agency agreement. A Fiscal Agent is not a trustee for the holders of
the GSE Bonds and does not have the same responsibilities or duties to act for
the holders as would a trustee.
GSE Bonds may be subject to particular contractual and statutory
restrictions which may provide some protection to securityholders against the
occurrence or effects of specified events. Unless otherwise specified in the
related prospectus supplement, each GSE is limited to activities as will promote
its statutory purposes as set forth in the publicly available information with
respect to the issuer. A GSE's promotion of its statutory purposes, as well as
its statutory, structural and regulatory relationships with the federal
government, may cause or require the GSE to conduct its business in a manner
that differs from what an enterprise which is not a GSE might employ.
THE FEDERAL NATIONAL MORTGAGE ASSOCIATION
Fannie Mae is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act. It is the largest investor in home mortgage loans in the United States.
Fannie Mae originally was established in 1938 as a corporation wholly owned by
the United States government to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder owned and privately managed
corporation by legislation enacted in 1968 and 1970. Fannie Mae provides funds
to the mortgage market by purchasing mortgage loans from lenders, thus
replenishing their funds for additional lending. Fannie Mae acquires funds to
purchase loans from many capital market investors that ordinarily may not invest
in mortgage loans, therefore expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. Fannie Mae also issues
mortgage-backed securities ("MBS"). Fannie Mae receives guaranty fees for its
guaranty of timely payment of principal of and interest on MBS. Fannie Mae
issues MBS primarily in exchange for pools of mortgage loans from lenders. The
issuance of MBS enables Fannie Mae to further its statutory purpose of
increasing the liquidity of residential mortgage loans.
Fannie Mae prepares an Information Statement annually which describes
Fannie Mae, its business and operations and contains Fannie Mae's audited
financial statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge from the Office of Investor Relations, Fannie Mae,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016, telephone (202) 752-7115.
Fannie Mae is not subject to the periodic reporting requirements of the Exchange
Act.
THE FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a publicly held government-sponsored enterprise created on
July 24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act, Title
III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC Act").
Freddie Mac's statutory mission is to provide stability in the secondary market
for home mortgages, to respond appropriately to the private capital market and
to provide ongoing assistance to the secondary market for home mortgages,
including mortgages secured by housing for low- and moderate-income families
involving a reasonable economic return to Freddie Mac, by increasing the
liquidity of mortgage investments and improving the distribution of investment
capital available for home mortgage financing. The principal activity of Freddie
Mac consists of the purchase of conventional residential mortgages and
participation interests in those mortgages from mortgage lending institutions
and the sale of guaranteed mortgage securities backed by the mortgages so
purchased. Freddie Mac generally matches and finances its purchases of mortgages
with sales of guaranteed securities. Mortgages retained by Freddie Mac are
financed with short- and long-term debt, cash temporarily held pending
disbursement to security holders, and equity capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Freddie Mac. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained from Freddie Mac by writing or calling Freddie Mac's Investor
Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia, 22102; outside
Washington, D.C. metropolitan area, telephone (800) 336-3672; within Washington,
D.C. metropolitan area, telephone (703) 759-8160. Freddie Mac is not subject to
the periodic reporting requirements of the Exchange Act.
THE STUDENT LOAN MARKETING ASSOCIATION
Sallie Mae is a stockholder-owned corporation established by the 1972
amendments to the Higher Education Act of 1965, as amended, to provide
liquidity, primarily through secondary market and warehousing activities, for
lenders participating in federally sponsored student loan programs, primarily
the Federal Family Education Loan ("FFEL") program and the Health Education
Assistance Loan Program. Under the Higher Education Act, Sallie Mae is
authorized to purchase, warehouse, sell and offer participations or pooled
interests in, or otherwise deal in, student loans, including, but not limited
to, loans insured under the FFEL program, and to make commitments for any of the
foregoing. Sallie Mae is also authorized to buy, sell, hold, underwrite and
otherwise deal in obligations of eligible lenders, if the obligations are issued
by the eligible lenders for the purpose of making or purchasing federally
guaranteed student loans under the Higher Education Act. As a federally
chartered corporation, Sallie Mae's structure and operational authorities are
subject to revision by amendments to the Higher Education Act or other federal
enactments.
Sallie Mae prepares an Information Statement annually which describes
Sallie Mae, its business and operations and contains Sallie Mae's audited
financial statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge upon written request to the Corporate and Investor
Relations Division of Sallie Mae at 1050 Thomas Jefferson Street, N.W.,
Washington, D.C. 20007, telephone (202) 298-3010. Sallie Mae is not subject to
the periodic reporting requirements of the Exchange Act.
THE RESOLUTION FUNDING CORPORATION
REFCO is a mixed-ownership government corporation established by Title V of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"). The sole purpose of REFCO is to provide financing for the Resolution
Trust Corporation (the "RTC"). REFCO is to be dissolved, as soon as practicable,
after the maturity and full payment of all obligations issued by it. REFCO is
subject to the general oversight and direction of the Oversight Board, which is
comprised of the Secretary of the Treasury, the Chairman of the Board of
Governors of the Federal Reserve System, the Secretary of Housing and Urban
Development and two independent members to be appointed by the President with
the advice and consent of the Senate. The day-to-day operations of REFCO are
under the management of a three-member Directorate comprised of the Director of
the Office of Finance of the FHLB and two members selected by the Oversight
Board from among the presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases involving
failed savings and loan institutions pursuant to policies established by the
Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the Secretary/Treasurer,
Resolution Funding Corporation, Suite 1000, 11921 Freedom Drive, Reston,
Virginia 22090; telephone (703) 487-9517. REFCO is not subject to the periodic
reporting requirements of the Exchange Act.
THE FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks constitute a system of twelve federally
chartered corporations (collectively, the "FHLB"), each wholly owned by its
member institutions. The mission of the FHLB is to enhance the availability of
residential mortgage credit by providing a readily available, low-cost source of
funds to their member institutions. A primary source of funds for the FHLB is
the proceeds from the sale to the public of debt instruments issued as
consolidated obligations, which are the joint and several obligations of all the
FHLB. The FHLB are supervised and regulated by the Federal Housing Finance
Board, which is an independent federal agency in the executive branch of the
United States government, but obligations of the FHLB are not obligations of the
United States government.
The Federal Home Loan Bank System produces annual and quarterly financial
reports in connection with the original offering and issuance by the Federal
Housing Finance Board of consolidated bonds and consolidated notes of the FHLB.
Unless otherwise specified in the applicable prospectus supplement, questions
regarding financial reports should be directed to the Deputy Director, Financial
Reporting and Operations Division, Federal Housing Finance Board, 1777 F Street,
N.W., Washington, D.C. 20006; telephone (202) 408-2901. Unless otherwise
specified in the applicable prospectus supplement, copies of financial reports
may be obtained by written request to Capital Markets Division, Office of
Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive, Reston,
Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to the
periodic reporting requirements of the Exchange Act.
TENNESSEE VALLEY AUTHORITY
TVA is a wholly owned corporate agency and instrumentality of the United
States of America established pursuant to the Tennessee Valley Authority Act of
1933, as amended (the "TVA Act"). TVA's objective is to develop the resources of
the Tennessee Valley region in order to strengthen the regional and national
economy and the national defense. The programs of TVA consist of power and
nonpower programs. For the fiscal year ending September 30, 1995, TVA received
$139 million in congressional appropriations from the federal government for the
nonpower programs. The power program is required to be self-supporting from
revenues it produces. The TVA Act authorizes TVA to issue evidences of
indebtedness that may be serviced only from proceeds of its power program. TVA
bonds are not obligations of or guaranteed by the United States government.
TVA prepares an Information Statement annually which describes TVA, its
business and operations and contains TVA's audited financial statements. From
time to time TVA prepares supplements to its Information Statement which include
specific unaudited financial data and other information concerning the business
and operations of TVA. Unless otherwise specified in the applicable prospectus
supplement, these documents can be obtained by writing or calling Tennessee
Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee 37902-1499,
Attention: Vice President and Treasurer, telephone (423) 632-3366. TVA is not
subject to the periodic reporting requirements of the Exchange Act.
FEDERAL FARM CREDIT BANKS
The Farm Credit System is a nationwide system of lending institutions and
affiliated service and other entities (the "System"). Through its Banks ("FCBs")
and related associations, the System provides credit and related services to
farmers, ranchers, producers and harvesters of aquatic products, rural
homeowners, some farm-related businesses, agricultural and aquatic cooperatives
and rural utilities. System institutions are federally chartered under the Farm
Credit Act of 1971, as amended (the "Farm Credit Act"), and are subject to
regulation by a Federal agency, the Farm Credit Administration (the "FCA"). The
FCBs and associations are not commonly owned or controlled. They are
cooperatively owned, directly or indirectly, by their respective borrowers.
Unlike commercial banks and other financial institutions that lend to the
agricultural sector in addition to other sectors of the economy, under the Farm
Credit Act the System institutions are restricted solely to making loans to
qualified borrowers in the agricultural sector, to some related businesses and
to rural homeowners. Moreover, the System is required to make credit and other
services available in all areas of the nation. In order to fulfill its broad
statutory mandate, the System maintains lending units in all 50 states and the
Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the sale
of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable on all
Systemwide Debt Securities. Systemwide Debt Securities are issued by the FCBs
through the Federal Farm Credit Banks Funding Corporation, as agent for the FCBs
(the "Funding Corporation").
Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent to the Farm Credit System Annual
Information Statement and particular press releases issued from time to time by
the Funding Corporation. Unless otherwise specified in the applicable prospectus
supplement, this information and the Farm Credit System Annual Report to
Investors for the current and two preceding fiscal years are available for
inspection at the Federal Farm Credit Banks Funding Corporation, Investment
Banking Services Department, 10 Exchange Place, Suite 1401, Jersey City, New
Jersey 07302, telephone (201) 200-8000. Upon request, the Funding Corporation
will furnish, without charge, copies of the above information. The FCBs are not
subject to the periodic reporting requirements of the Exchange Act.
PRIVATE LABEL CUSTODY RECEIPT SECURITIES
If so specified in the applicable prospectus supplement, the Trust for a
series may include any combination of (1) receipts or other instruments, other
than Treasury Strips, evidencing ownership of specific interest and/or principal
payments to be made on particular Treasury Bonds held by a custodian ("Private
Label Custody Strips") and (2) receipts or other instruments evidencing
ownership of specific interest and/or principal payments to be made on specific
Resolution Funding Corporation ("REFCO") bonds ("REFCO Strips"; and together
with Private Label Custody Strips, "Private Label Custody Receipt Securities").
The Private Label Custody Receipt Securities, if any, included in a Trust are
intended to assure investors that funds are available to make specified payments
of principal and/or interest due on the related securities. Accordingly, the
Private Label Custody Receipt Securities, if any, included in a Trust are
intended both to (1) support the ratings assigned to the securities, and (2)
perform a function similar to that described in this prospectus under
"Description of the Transfer and Servicing Agreements--Credit and Cash Flow
Enhancement". A description of the respective general features of Private Label
Custody Strips and REFCO Strips is set forth below.
The prospectus supplement for each series of securities the Trust with
respect to which contains Private Label Custody Receipt Securities will contain
information as to:
(1) the title and series of each Private Label Custody Receipt Security,
the aggregate principal amount, denomination and form of each Private
Label Custody Receipt Security;
(2) the limit, if any, upon the aggregate principal amount of each Private
Label Custody Receipt Security;
(3) the dates on which, or the range of dates within which, the principal
of, and premium, if any, on, each Private Label Custody Receipt
Security will be payable;
(4) the rate or rates, or the method of determination of the rate or
rates, at which each Private Label Custody Receipt Security will bear
interest, if any, the date or dates from which the interest will
accrue, and the dates on which the interest will be payable;
(5) whether each Private Label Custody Receipt Security was issued at a
price lower than the principal amount of that Private Label Custody
Receipt Security;
(6) material events of default or restrictive covenants provided for with
respect to each Private Label Custody Receipt Security;
(7) the rating of each Private Label Custody Receipt Security, if any;
(8) the issuer of each Private Label Custody Receipt Security;
(9) the material risks, if any, posed by each Private Label Custody
Receipt Security and the issuer of each Private Label Custody Receipt
Security, which risks, if appropriate, will be described in the "Risk
Factors" section of the related prospectus supplement; and
(10) any other material terms of each Private Label Custody Receipt
Security.
With respect to a Trust which includes a pool of Private Label Custody Receipt
Securities, the related prospectus supplement will, to the extent applicable,
describe the composition of the Private Label Custody Receipt Securities' pool,
particular material events of default or restrictive covenants common to the
Private Label Custody Receipt Securities, and, on an aggregate, percentage or
weighted average basis, as applicable, the characteristics of the pool with
respect to the terms set forth in (3), (4) and (5) of the preceding sentence and
any other material terms regarding the pool.
The Private Label Custody Receipt Securities included in a Trust will be
senior, unsecured, nonredeemable obligations of the issuers of the Private Label
Custody Receipt Securities, will be denominated in United States dollars and, if
rated, will be rated at least investment grade by at least one nationally
recognized rating agency. In addition, the inclusion of Private Label Custody
Receipt Securities in a Trust with respect to a series of securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related series of securities. Each Trust will be
provided with an opinion of Federal Tax Counsel to the effect that the Private
Label Custody Receipt Securities included in the Trust are exempt from the
registration requirements of the securities Act. A copy of the opinion will be
filed with the SEC in a Current Report on Form 8-K or in a post-effective
amendment to the Registration Statement.
PRIVATE LABEL CUSTODY STRIPS
The first "stripping" of Treasury Bonds occurred in the 1970s when
government securities dealers physically separated coupons from definitive
certificates and offered them to investors as tax-deferred investments.
Investors were able to purchase the "strip" at a deep discount and pay no
federal income tax until resale or maturity. This tax treatment was limited in
1982 by the Tax Equity and Fiscal Responsibility Act ("TEFRA") which required
holders of strips to accrue a portion of the discount toward par annually and
report this accrual, even though unrealized, as taxable income. TEFRA also
required that all new Treasury issues be made available only in book-entry form.
The shift to "book-entry only" Treasury Bonds created a shortage of the
physical certificates needed for stripping. In response, various dealers created
custodial receipt programs in which Treasury Bonds in book-entry form were
deposited with custodians who would then issue certificates evidencing rights in
principal and interest payments. Some of the better known programs first came to
market in 1982 and 1983. Although available eventually in denominations as small
as $1,000, these custodial receipts lacked the liquidity of the physical strips.
While physical strips had multiple market-makers, custodial receipts were
proprietary and, as such, the sole market-maker would usually be an affiliate of
the program's sponsor. As a result, the market that developed for the receipts
was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security known
as a TR (Treasury Receipt). A large secondary market quickly developed in these
generic Treasury Strips.
Treasury Receipts, physical strips and the proprietary receipts trade at
varying discounts from STRIPS which reflect, among other things, lower levels of
liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip, as opposed to a STRIP, cannot
enforce payment on a Treasury Strip against the Treasury, instead, the holder
must look to the custodian for payment. The custodian, and the holder of a
Private Label Custody Strip that obtains ownership of the underlying Treasury
Bond, can enforce payment of the underlying Treasury Bond against the Treasury.
If any Private Label Custody Strips are included in a Trust with respect to any
series of securities, the prospectus supplement for the series will include the
identity and a brief description of each custodian that issued the Private Label
Custody Strips. If the company knows that the company of the Treasury Bonds
underlying the Private Label Custody Strips is the company or any of its
affiliates, the company will disclose this fact in the related prospectus
supplement.
REFCO STRIPS
A REFCO Bond may be divided into its separate components, consisting of:
(1) each future semiannual interest distribution (an "Interest Component"); and
(2) the principal payment (the "Principal Component") (each component
individually referred to in this prospectus as a "REFCO Strip"). REFCO Strips
are not created by REFCO. Instead, third parties such as investment banking
firms create them. Each REFCO Strip has an identifying designation and CUSIP
number. REFCO Strips generally trade in the market for Treasury Strips at yields
of a few basis points over Treasury Strips of similar maturities. REFCO Strips
are viewed generally by the market as liquid investments.
For a REFCO Bond to be separated into its components, the par amount of the
REFCO Bond must be in an amount which, based on the stated interest rate of the
REFCO Bond, will produce a semiannual interest payment of $1,000 or an integral
multiple of $1,000. REFCO Bonds may be separated into their components at any
time from the issue date until maturity. Once created, REFCO Strips are
maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on the REFCO Strip against
REFCO. Instead, the holder must look to the custodian for payment. The
custodian, and the holder of a REFCO Strip that obtains ownership of the
underlying REFCO Bond, can enforce payment of the underlying REFCO Bond against
REFCO. The identity and a brief description of each custodian that has issued
any REFCO Strip included in a Trust will be set forth in the related prospectus
supplement. If the company knows that the company of the REFCO Bonds underlying
the REFCO Strips included in the Trust is the company or any of its affiliates,
the company will disclose this fact in the related prospectus supplement.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the notes, if any, and the certificates of any
series generally will be influenced by the rate at which the principal balances
of the related Primary Assets are paid, which payment may be in the form of
scheduled amortization or prepayments. With respect to securities backed by
Receivables and to receivables underlying Collateral Certificates, the term
"prepayments" includes prepayments in full, partial prepayments, including those
related to rebates of extended warranty contract costs and insurance premiums,
liquidations due to defaults, as well as receipts of proceeds from physical
damage, credit life and disability insurance policies, or the Repurchase Amount
of Receivables and/or Collateral Certificates repurchased by the company or a
seller or purchased by a servicer for administrative reasons. With respect to
securities backed by Government Securities and/or Private Label Custody Receipt
Securities, as applicable, the term "prepayments" means the Repurchase Amount of
Government Securities and/or Private Label Custody Receipt Securities
repurchased by the company or purchased by a servicer for administrative
reasons. Substantially all of the Receivables and receivables underlying
Collateral Certificates are prepayable at any time without penalty to the
obligor. The rate of prepayment of automotive receivables is influenced by a
variety of economic, social and other factors, including the fact that an
obligor generally may not sell or transfer the Financed Vehicle securing a
receivable without the consent of the related seller. The rate of prepayment on
receivables may also be influenced by the structure of the loan. In addition,
under some circumstances, the related seller will be obligated to repurchase
Receivables from a given Trust pursuant to the related Receivables Purchase
Agreement as a result of breaches of representations and warranties, and the
servicer will be obligated to purchase Receivables from the Trust pursuant to
the Sale and Servicing Agreement or Pooling and Servicing Agreement as a result
of breaches of specific covenants. See "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets" and "Servicing
Procedures". See also "Certain Matters Regarding the Servicer--Termination"
regarding the servicer's option to purchase Primary Assets from a given Trust.
In light of the above considerations, there can be no assurance as to the
amount of principal payments to be made on the notes and/or certificates of a
series on each Distribution Date since the amount will depend, in part, on the
amount of principal collected on the related Primary Assets during the
applicable Collection Period. Any reinvestment risks resulting from a faster or
slower incidence of payment of Primary Assets will be borne entirely by the
noteholders and certificateholders. The related prospectus supplement may set
forth some additional information with respect to the maturity and prepayment
considerations applicable to particular Primary Assets and the related series of
securities.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each class of notes will be a seven-digit
decimal which the servicer or trustee will compute prior to each distribution
with respect to the class of notes indicating the remaining outstanding
principal balance of that class of notes, as of the applicable Distribution
Date, after giving effect to payments to be made on the applicable Distribution
Date, as a fraction of the initial outstanding principal balance of the class of
notes. The "Certificate Pool Factor" for each class of certificates will be a
seven-digit decimal which the servicer or trustee will compute prior to each
distribution with respect to the class of certificates indicating the remaining
certificate balance of the class of certificates, as of the applicable
Distribution Date, after giving effect to distributions to be made on the
applicable Distribution Date, as a fraction of the initial certificate balance
of the class of certificates. Each Note Pool Factor and each Certificate Pool
Factor will be 1.0000000 as of the related closing date, and after will decline
to reflect reductions in the outstanding principal balance of the applicable
class of notes or the reduction of the certificate balance of the applicable
class of certificates. A noteholder's portion of the aggregate outstanding
principal balance of the related class of notes will be the product of (1) the
original denomination of the noteholder's Note and (2) the applicable Note Pool
Factor at the time of determination. A certificateholder's portion of the
aggregate outstanding certificate balance for the related class of certificates
will be the product of (a) the original denomination of the certificateholder's
Certificate and (b) the applicable Certificate Pool Factor at the time of
determination.
As provided in the related prospectus supplement, the noteholders, if any,
and the certificateholders will receive reports on or about each Distribution
Date concerning payments received on the Receivables, the Pool Balance and each
Note Pool Factor or Certificate Pool Factor, as applicable. In addition,
Securityholders of record during any calendar year will be furnished information
for tax reporting purposes not later than the latest date permitted by law. See
"Certain Information Regarding the Securities-- Statements to Securityholders".
THE SELLER AND THE SERVICER
Information with respect to the seller and the servicer will be set forth
in the related prospectus supplement.
USE OF PROCEEDS
If so provided in the related prospectus supplement, the net proceeds from
the sale of the securities of a series will be applied by the applicable Trust
to the purchase of the Primary Assets from the company or the seller, as
applicable. The company will use the portion of the net proceeds paid to it to
purchase the Primary Assets.
DESCRIPTION OF THE NOTES
Each owner trust will issue one or more classes of notes pursuant to an
indenture (an "Indenture") between the related owner trust and the indenture
trustee, a form of which has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. The following summary describes
the material provisions of each Indenture which are anticipated to be common to
any notes included in a series of securities. The following summary does not
purport to be a complete description of all terms of the related notes or
Indenture and therefore is subject to, and is qualified in its entirely by
reference to, the provisions of the related notes and Indenture.
If so specified in the related prospectus supplement, each class of notes
will initially be represented by one or more certificates registered in the name
of the nominee of DTC (together with any successor company selected by the
Trust, the "Depository"). The notes will be available for purchase in minimum
denominations of $1,000 or any other minimum denomination as shall be specified
in the related prospectus supplement and integral multiples of $1,000 or any
other minimum denomination so specified in the related prospectus supplement in
book-entry form or any other form as shall be specified in the related
prospectus supplement. If the notes are available in book-entry form only, the
company has been informed by DTC that DTC's nominee will be Cede unless another
nominee is specified in the related prospectus supplement. Accordingly, the
nominee is expected to be the holder of record of the notes of each class. If
the notes are available in book-entry form only, unless and until Definitive
notes are issued under the limited circumstances described in this prospectus or
in the related prospectus supplement, no noteholder will be entitled to receive
a physical certificate representing a Note. If the notes are available in
book-entry form only, all references in this prospectus and in the related
prospectus supplement to actions by noteholders refer to action taken by DTC
upon instructions from it participating organizations, and all references in
this prospectus and in the related prospectus supplement to distributions,
notices, reports and statements to noteholders refer to distributions, notices,
reports and statements to DTC or its nominee, as registered holder of the notes,
for distribution to noteholders in accordance with DTC's procedures with respect
to distributions. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities".
DISTRIBUTION OF PRINCIPAL AND INTEREST
The timing and priority of payment, seniority, allocations of losses,
interest rate and amount of or method of determining payments of principal and
interest on each class of notes of a series will be described in the related
prospectus supplement. The right of holders of any class of notes to receive
payments of principal and interest may be senior or subordinate to the rights of
holders of one or more other class or classes of notes of the series, as
described in the related prospectus supplement. The related prospectus
supplement may provide that payments of interest on the notes will be made prior
to payments of principal on the notes. If so provided in the related prospectus
supplement, a series of notes may include one or more classes of strip notes
entitled to (1) principal payments with disproportionate, nominal or no interest
payments or (2) interest payments with disproportionate, nominal or no principal
payments. Each class of notes may have a different interest rate, which may be a
fixed, variable or adjustable interest rate, and which may be zero for some
classes of strip notes, or any combination of the foregoing. The related
prospectus supplement will specify the interest rate for each class of notes of
a series or the method for determining the interest rate. One or more classes of
notes of a series may be redeemable in whole or in part under the circumstances
specified in the related prospectus supplement, including as a result of the
exercise by the servicer of its option to purchase the related Receivable Pool.
See "Certain Matters Regarding the Servicer--Termination".
To the extent specified in any prospectus supplement, one or more classes
of notes of a given series may have fixed principal payment schedules, as set
forth in the prospectus supplement. Holders of any notes will be entitled to
receive payments of principal on any given Distribution Date in the applicable
amount set forth on the schedule with respect to the notes, in the manner and to
the extent set forth in the related prospectus supplement.
The related prospectus supplement may also provide that payment of interest
to noteholders of all classes within a series will have the same priority. Under
some circumstances, the amount available for payments could be less than the
amount of interest payable on the notes on a Distribution Date, in which case
each class of notes will receive its ratable share, based upon the aggregate
amount of interest due to the class of notes, of the aggregate amount available
to be distributed on the date as interest on the notes of the series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement".
In the case of a series of securities issued by an owner trust that
includes two or more classes of notes, the sequential order and priority of
payment in respect of principal and interest, and any schedule or formula or
other provisions applicable to the determination of the sequential order and
priority of payment in respect of principal and interest, of each class will be
set forth in the related prospectus supplement. Payments in respect of principal
of and interest on any class of notes will be made on a pro rata basis among all
the noteholders of the class or by any other method as is specified in the
prospectus supplement.
If specified in the related prospectus supplement, the Trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion of
the principal collections may be applied by the Trustee to the acquisition of
subsequent Receivables or Collateral Certificates during a specified period
rather than used to distribute payments of principal to Securityholders during
that period. These Securities would then possess an interest only period, also
commonly referred to as a "Revolving Period", which will be followed by an
"Amortization Period", during which principal will be paid. Any interest only or
revolving period may terminate prior to the end of the specified period and
result in the earlier than expected principal repayment of the Securities.
PROVISIONS OF THE INDENTURE
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. "Events of Default" in
respect of a series of notes under the related Indenture will consist of:
(1) a default for five days or more in the payment of any interest on any
Note;
(2) a default in the payment of the principal of, or any installment of
the principal of, any Note when the same becomes due and payable;
(3) a default in the observance or performance of any material covenant or
agreement of the related Trust made in the related Indenture and the
continuation of any default for a period of 30 days, or for a longer
period, not in excess of 90 days, as may be reasonably necessary to
remedy the default; provided that the default is capable of remedy
within 90 days or less and servicer on behalf of the related trustee
delivers an Officer's Certificate to the related indenture trustee to
the effect that the trustee has commenced, or will promptly commence
and diligently pursue, all reasonable efforts to remedy the default,
after notice of the default is given to the related Trust by the
applicable indenture trustee or to the Trust and the related indenture
trustee by the holders of 25% of the aggregate outstanding principal
amount of the notes;
(4) any representation or warranty made by the Trust in the related
Indenture or in any certificate delivered pursuant to the related
Indenture or in connection with the related Indenture having been
incorrect in a material respect as of the time made, if the breach is
not cured with 30 days, or for a longer period, not in excess of 90
days, as may be reasonably necessary to remedy the default; provided
that the default is capable of remedy within 90 days or less and
servicer on behalf of the related trustee delivers an Officer's
Certificate to the related indenture trustee to the effect that the
trustee has commenced, or will promptly commence and diligently
pursue, all reasonable efforts to remedy the default, after notice of
the breach is given to the Trust by the applicable indenture trustee
or to the Trust and the indenture trustee by the holder of 25% of the
aggregate outstanding principal amount of the notes;
(5) particular events of bankruptcy, insolvency, receivership or
liquidation with respect to the Trust or a substantial part of the
property of the Trust and
(6) any other events as may be specified in the prospectus supplement.
The amount of principal required to be paid to noteholders of each series under
the related Indenture on any Distribution Date generally will be limited to
amounts available to be deposited in the applicable Note Distribution Account.
Therefore, the failure to pay principal on a class of notes generally will not
result in the occurrence of an Event of Default until the applicable final
scheduled Distribution Date for the class of notes.
If an Event of Default should occur and be continuing with respect to the
notes of any series, the related indenture trustee or holders of a majority in
principal amount of the notes may declare the principal of the notes to be
immediately due and payable. This declaration may, under some circumstances, be
rescinded by the holders of a majority in principal amount of the notes then
outstanding.
If the notes of any series are declared due and payable following an Event
of Default, the related indenture trustee may institute proceedings to collect
amounts due on the notes, foreclose on the property of the Trust, exercise
remedies as a secured party, sell the related Primary Assets or elect to have
the applicable Trust maintain possession of the Primary Assets and continue to
apply collections on these Primary Assets as if there had been no declaration of
acceleration. Subject to particular limitations that, if applicable, will be
specified in the related prospectus supplement, the indenture trustee will be
prohibited from selling the Primary Assets following an Event of Default, other
than a default in the payment of any principal of, or a default for five days or
more in the payment of any interest on, any Note of the series, unless
o the holders of all outstanding notes consent to the sale,
o the proceeds of the sale are sufficient to pay in full the principal
of and the accrued interest on the outstanding notes at the date of
sale or
o the indenture trustee determines that the proceeds of the Primary
Assets would not be sufficient on an ongoing basis to make all
payments on the notes as these payments would have become due if these
obligations had not been declared due and payable, and the indenture
trustee obtains the consent of the holders of 66 2/3% of the aggregate
outstanding principal amount of the notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related indenture trustee, if an Event of Default occurs and is
continuing with respect to a series of notes, the indenture trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders of the notes if it reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities that might be incurred by it in complying with the request. Subject
to the provisions for indemnification and particular limitations contained in
the related Indenture, the holders of a majority of the aggregate outstanding
principal amount of the notes of a series will have the right to direct the
time, method and place of conducting any proceeding or exercising any remedy
available to the related indenture trustee. In addition, the holders of notes
representing a majority of the aggregate outstanding principal amount of the
notes may, in some cases, waive any default with respect to the notes, except a
default in the payment of principal of or interest on any Note or a default in
respect of a covenant or provision of the Indenture that cannot be modified or
amended without the waiver or consent of the holders of all the outstanding
notes of the series.
Except to the extent provided in the related prospectus supplement, no
holder of a Note will have the right to institute any proceeding with respect to
the related Indenture, unless:
o the holder previously has given to the applicable indenture trustee
written notice of a continuing Event of Default;
o the holders of not less than 25% of the outstanding principal amount
of the notes have made written request to the indenture trustee to
institute a proceeding in its own name as indenture trustee;
o the holder or holders have offered the indenture trustee reasonable
indemnity;
o the indenture trustee has for 60 days failed to institute a
proceeding; and
o no direction inconsistent with a written request has been given to the
indenture trustee during the 60-day period by the holders of a
majority of the outstanding principal amount of the notes of the
series.
With respect to any owner trust, none of the related indenture trustee in
its individual capacity, the related trustee in its individual capacity, any
holder of a Certificate representing an ownership interest in the Trust, or any
of their respective beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the related notes or for the agreements of the Trust contained in
the applicable Indenture.
No Trust may engage in any activity other than as described in this
prospectus or in the related prospectus supplement. No Trust will incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
related notes and the related Indenture, pursuant to any Advances made to it by
the servicer or otherwise in accordance with the Related Documents.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia;
o the entity expressly assumes the Trust's obligation to make due and
punctual payments upon the notes of the related series and to perform
or observe every agreement and covenant of the Trust under the
Indenture;
o no Event of Default shall have occurred and be continuing immediately
after the merger or consolidation;
o the Trust has been advised by each Rating Agency that the merger or
consolidation will not result in the qualification, reduction or
withdrawal of its then-current rating of any class of the notes or
certificates of the series;
o the Trust has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax consequence
to the Trust or to any related noteholder or certificateholder;
o any action as is necessary to maintain the lien and security interest
created by the Indenture has been taken; and
o the Trust has delivered to the related indenture trustee an Officer's
Certificate and an opinion of counsel that the merger complies with
the requirements and conditions precedent of the Indenture.
No owner trust will:
o except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or other documents with
respect to the Trust (the "Related Documents"), sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust;
o claim any credit on or make any deduction from the principal and
interest payment in respect to the related notes, other than amounts
withheld under the Code or applicable state tax laws, or assert any
claim against any present or former holder of the notes because of the
payment of taxes levied or assessed upon the Trust;
o dissolve or liquidate in whole or in part;
o permit the validity or effectiveness of the related Indenture to be
impaired or permit any person to be released from any covenants or
obligations with respect to the related notes under the Indenture
except as may be expressly permitted by the related Indenture;
o permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance to be created on or extent to or otherwise arise
upon or burden the assets of the Trust or any part of the Trust, or
any interest in the Trust or the proceeds of the Trust; or
o permit the lien of the related Indenture not to constitute a valid
first priority security interest, other than with respect to a tax,
mechanics' or similar lien, in the asset of the Trust.
Each indenture trustee and the related noteholders, by accepting the
related notes, will covenant that they will not at any time institute against
the applicable Trust any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law.
MODIFICATION OF INDENTURE. Each trustee and the related indenture trustee
may, with the consent of the holders of a majority of the aggregate outstanding
principal amount of the notes of the related series, execute a supplemental
indenture to add provisions to, change in any manner or eliminate any provisions
of, the related Indenture, or modify (except as provided below) in any manner
the rights of the related noteholders. Except as otherwise provided in the
related Indenture, without the consent of the holder of each outstanding Note
affected by the related supplemental indenture, no supplemental indenture will:
o change the due date of any installment of principal of or interest on
any Note or reduce the principal amount of any Note, the interest rate
specified on any Note or the redemption price with respect to any
Note, change the provisions of the related Indenture relating to the
application of collections on, or the proceeds of the sale of, the
property of the related Trust to payment of principal or interest on
the notes of the series, or change any place of payment where or the
coin or currency in which any Note or any interest on any Note is
payable;
o impair the right to institute suit for the enforcement of specific
provisions of the related Indenture;
o reduce the percentage of the aggregate amount of the outstanding notes
of the series, the consent of the holders of which is required for any
supplemental indenture or for any waiver of compliance with specific
provisions of the related Indenture or of particular defaults under
the related Indenture and their consequences as provided for in the
related Indenture;
o modify or alter the provisions of the related Indenture regarding the
voting of notes held by the applicable owner trust, any other obligor
on the notes, the seller or an affiliate of any of them;
o reduce the percentage of the aggregate outstanding amount of the
notes, the consent of the holders of which is required to direct the
related indenture trustee to sell or liquidate the Primary Assets if
the proceeds of the sale would be insufficient to pay the principal
amount and accrued and unpaid interest on the outstanding notes of the
series;
o decrease the percentage of the aggregate principal amount of the notes
required to amend the sections of the related Indenture that specify
the percentage of the aggregate principal amount of the notes of the
series necessary to amend the related Indenture or other related
agreements; or
o permit the creation of any lien ranking prior to or on a parity with
the lien of the related Indenture with respect to any of the
collateral for the notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the related
Indenture on any of the collateral or deprive the holder of any Note
of the security afforded by the lien of the related Indenture.
An owner trust and the related indenture trustee may also enter into
supplemental indentures, without obtaining the consent of the noteholders of the
related series,
(1) to cure any ambiguity;
(2) to correct or supplement any provisions in the Indenture; or
(3) for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of
the related Indenture;
provided that the action referred to in clause (3) above will not materially and
adversely affect the interest of any noteholder.
ANNUAL COMPLIANCE STATEMENT. Each owner trust will be required to file
annually with the related indenture trustee a written statement as to the
fulfillment of its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. If required by the Trust Indenture Act,
the indenture trustee for each owner trust will mail each year to all related
noteholders a brief report relating to its eligibility and qualification to
continue as indenture trustee under the related Indenture, any amounts advanced
by it under the Indenture, the amount, interest rate and maturity date of
particular indebtedness, if any, owing by the owner trust to the applicable
Indenture Trust in its individual capacity, the property and funds physically
held by the indenture trustee as indenture trustee and any action taken by it
that materially affects the related notes that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. Each Indenture will be discharged
with respect to the collateral securing the related notes upon the delivery to
the related indenture trustee for cancellation of all of the notes or, with
limitations, upon deposit with the indenture trustee of funds sufficient for the
payment in full of all the notes.
THE INDENTURE TRUSTEE
The indenture trustee for a series of notes will be specified in the
related prospectus supplement. The indenture trustee for any series may resign
at any time, in which event the related owner trust will be obligated to appoint
a successor indenture trustee for the series. Additionally, the Holders of a
majority of the outstanding amount of the notes of a series may remove the
related indenture trustee and appoint a successor indenture trustee. An owner
trust may also remove the related indenture trustee if the indenture trustee
ceases to be eligible to continue in that capacity under the related Indenture,
if particular insolvency events occur with respect to the indenture trustee or
if the indenture trustee otherwise becomes incapable of acting as indenture
trustee. In these circumstances, the owner trust will be obligated to appoint a
successor indenture trustee for the applicable series of notes. No resignation
or removal of the indenture trustee and appointment of a successor indenture
trustee for a series of notes will become effective until the acceptance of the
appointment by the successor indenture trustee for the series and payment of all
fees and expenses owed to the outgoing indenture trustee.
DESCRIPTION OF THE CERTIFICATES
Each Trust will issue one or more classes of certificates pursuant to a
Trust Agreement or Pooling and Servicing Agreement, as applicable. A form of
each of the Trust Agreement and the Pooling and Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this prospectus forms
a part. The following summary describes the material provisions of the Trust
Agreement and the Pooling and Servicing Agreement, in each case, which are
anticipated to be common to any certificates included in a series of securities.
The following summary does not purport to be a complete description of all terms
of the related notes, Trust Agreement or Pooling and Servicing Agreement and
therefore is subject to, and is qualified in its entirety by reference to, the
provisions of the related certificates and Trust Agreement or Pooling and
Servicing Agreement, as applicable.
If so specified in the related prospectus supplement and except for the
certificates, if any, of a series purchased by the company, a seller or any of
their respective affiliates, each class of certificates will initially be
represented by one or more certificates registered in the name of the
Depository. The certificates will be available for purchase in minimum
denominations of $10,000 or any other minimum denomination as shall be specified
in the related prospectus supplement and integral multiples of $1,000 in excess
of $10,000 or any other minimum denomination so specified in the related
prospectus supplement in book-entry form only, or any other form as shall be
specified in the related prospectus supplement. If the certificates are
available in book-entry form only, the company has been informed by DTC that
DTC's nominee will be Cede. Accordingly, the nominee is expected to be the
holder of record of the certificates of any series. If the certificates are
available in book-entry form only, unless and until Definitive certificates are
issued under the limited circumstances described in this prospectus or in the
related prospectus supplement, no certificateholder, other than the company, a
seller or any of their respective affiliates, will be entitled to receive a
physical certificate representing a Certificate. If the certificates are
available in book-entry form only, all references in this prospectus and in the
related prospectus supplement to actions by certificateholders refer to actions
taken by DTC upon instructions from the Participants, and all references in this
prospectus and in the related prospectus supplement to distributions, notices,
reports and statements to certificateholders refer to distributions, notices,
reports and statements to DTC or its nominee, as the case may be, as the
registered holder of the certificates, for distribution to certificateholders in
accordance with DTC's procedures with respect to distributions. See "Certain
Information Regarding the Securities--Book-Entry Registration" and "--Definitive
Securities". Any Certificate of a series owned by the company, a seller or any
of their respective affiliates will be entitled to equal and proportionate
benefits under the applicable Trust Agreement or Pooling and Servicing
Agreement, as applicable, except that, unless otherwise provided in the related
Trust Agreement, the certificates will be deemed not to be outstanding for the
purpose of determining whether the requisite percentage of certificateholders
has given any request, demand, authorization, direction, notice, or consent or
taken any other action under the Related Documents.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of losses,
certificate pass-through rate and amount of or method of determining
distributions with respect to principal and interest on each class of
certificates of a series will be described in the related prospectus supplement.
Distributions of interest on these certificates will be made on the dates
specified in the related prospectus supplement (the "Distribution Date") and
will be made prior to distributions with respect to principal of the
certificates. To the extent provided in the related prospectus supplement, a
series of certificates may include one or more classes of strip certificates
entitled to (1) principal distributions with disproportionate, nominal or no
interest distributions or (2) interest distributions with disproportionate,
nominal or no principal distributions. Each class of certificates may have a
different certificate pass-through rate, which may be a fixed, variable or
adjustable certificate pass-through rate, and which may be zero for some classes
of strip certificates, or any combination of the foregoing. The related
prospectus supplement will specify the certificate pass-through rate for each
class of certificates of a series or the method for determining the certificate
pass-through rate.
In the case of a series of securities that includes two or more classes of
certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or formula
or other provisions applicable to the determination of the timing, sequential
order, priority of payment or amount of distributions in respect of interest and
principal, of each class will be as set forth in the related prospectus
supplement. In the case of certificates issued by an owner trust, distributions
in respect of these certificates will be subordinated to payments in respect of
the notes of the related series and to the extent described in the related
prospectus supplement. Distributions in respect of interest on and principal of
any class of certificates will be made on a pro rata basis among all holders of
certificates of the class.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
If so specified in the related prospectus supplement, DTC will act as
securities company for each class of securities offered by this prospectus. Each
class of securities initially will be represented by one or more certificates
registered in the name of Cede, the nominee of DTC. As the nominee of DTC, it is
anticipated that the only "noteholder" and/or "certificateholder" with respect
to a series of securities will be Cede. Beneficial owners of the securities
("Security Owners") will not be recognized as "noteholders" by the related
indenture trustee, as the term is used in each Indenture, or as
"certificateholders" by the related trustee, as the term is used in each Trust
Agreement or Pooling and Servicing Agreement, as applicable, and Security Owners
will be permitted to exercise the rights of noteholders or certificateholders
only indirectly through DTC and its participating members ("Participants").
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code (the "UCC") in effect in the
State of New York, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for the
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thus
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Security Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or an interest in,
the securities may do so only through Participants and Indirect Participants. In
addition, all Security Owners will receive all distributions of principal and
interest from the related indenture trustee or the related trustee, as
applicable, through Participants or Indirect Participants. Under a book-entry
format, Security Owners may experience some delay in their receipt of payments,
since these payments will be forwarded by the applicable trustee or indenture
trustee to DTC's nominee. DTC will then forward the payments to the
Participants, which will then forward them to Indirect Participants or Security
Owners.
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 to
receive and transmit distributions of principal of and interest on the
securities. Participants and Indirect Participants with which Security Owners
have accounts with respect to the securities similarly are required to make
book-entry transfers and to receive and transmit the payments on behalf of their
respective Security Owners. Accordingly, although Security Owners will not
possess physical certificates representing the securities, the Rules provide a
mechanism by which Participants and Indirect Participants will receive payments
and transfer or exchange interests, directly or indirectly, on behalf of
Security Owners.
Because DTC can act only on behalf of Participants, who in turn may act on
behalf of Indirect Participants, the ability of a Security Owner to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise take actions with respect to the securities, may be limited due to the
lack of a physical certificate representing the securities.
DTC has advised the company that it will take any action permitted to be
taken by a Security Owner under the Indenture, Trust Agreement or Pooling and
Servicing Agreement, as applicable, only at the direction of one or more
Participants to whose account with DTC the securities are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent that
these actions are taken on behalf of Participants whose holdings include the
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Except as required by law, none of Deutsche Banc Alex. Brown, the company,
the related seller, the related servicer, or related indenture trustee, if any,
or the related trustee will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
securities of any series held by DTC's nominee, or for maintaining, supervising
or reviewing any records relating to the beneficial ownership interests.
DEFINITIVE SECURITIES
If so stated in the related prospectus supplement, the notes and/or
certificates of a given series will be issued in fully registered, certificated
form ("Definitive notes" and "Definitive certificates", respectively, and,
collectively, "Definitive Securities") to noteholders or certificateholders or
their respective nominees, rather than to DTC or its nominee, only if
o the related trustee of a grantor trust or the related indenture
trustee in the case of an owner trust, as applicable, determines that
DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to the related securities
and the indenture trustee or trustee, as applicable, is unable to
locate a qualified successor,
o the indenture trustee or trustee, as applicable, elects, at its
option, to terminate the book-entry system through DTC or
o after the occurrence of an Event of Default or Servicer Default,
Security Owners representing at least a majority of the outstanding
principal amount of the notes or certificates, as applicable, of the
series, advise the related trustee through DTC that the continuation
of a book-entry system through DTC, or a successor to DTC, is no
longer in the best interests of the related Security Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the related trustee or indenture trustee, as applicable,
will be required to notify the related Security Owners, through Participants, of
the availability of Definitive Securities. Upon surrender by DTC of the
certificates representing all securities of any affected class and the receipt
of instructions for re-registration, the trustee will issue Definitive
Securities to the related Security Owners. Distributions on the related
Definitive Securities will subsequently be made by the related trustee or
indenture trustee, as applicable, directly to the holders in whose name the
related Definitive Securities are registered at the close of business on the
applicable record date, in accordance with the procedures set forth in this
prospectus and in the related Indenture or the related Trust Agreement or
Pooling and Servicing Agreement, as applicable. Distributions will be made by
check mailed to the address of the holders as they appear on the register
specified in the related Indenture, Trust Agreement or Pooling and Servicing
Agreement, as applicable; however, the final payment on any securities, whether
Definitive Securities or securities registered in the name of a Depository or
its nominee, will be made only upon presentation and surrender of the securities
at the office or agency as specified in the notice of final distribution to
Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the related trustee or indenture trustee, or any security registrar appointed
by the related trustee or the indenture trustee, as applicable. No service
charge will be imposed for any registration of transfer or exchange, but the
trustee or indenture trustee may require payment of a sum sufficient to cover
any tax or other governmental charge imposed in connection with a registration
of transfer or exchange.
STATEMENTS TO SECURITYHOLDERS
With respect to each series of securities, on or prior to each Distribution
Date, the related servicer will prepare and forward to the related indenture
trustee or trustee to be included with the distribution to each Securityholder
of record a statement setting forth for the related Collection Period the
following information, and any other information specified in the related
prospectus supplement:
(1) the amount of the distribution allocable to principal of each class of
securities of the series;
(2) the amount of the distribution allocable to interest on each class of
securities of the series;
(3) if applicable, the amount of the Servicing Fee paid to the related
servicer with respect to the related Collection Period;
(4) the outstanding principal balance and Note Pool Factor for each class
of notes, if any, and the certificate balance and Certificate Pool
Factor for each class of certificates of the series as of the related
record date;
(5) the balance of any Reserve Account or other form of credit
enhancement, after giving effect to any additions to the balance of
the Reserve Account or withdrawals from the Reserve Account or
reductions to the Reserve Account to be made on the following
Distribution Date; and
(6) the aggregate amount of realized losses, if any, in respect of
Receivables and any other loss, delinquency or other ratios set forth
in the related prospectus supplement for the related Collection
Period.
Items (1), (2) and (4) above with respect to the notes or certificates of a
series will be expressed as a dollar amount per $1,000 of initial principal
balance of the notes or the initial certificate balance of the certificates, as
applicable.
In addition, within the prescribed period of time for tax reporting
purposes after the end of each calendar year during the term of each Trust, the
related trustee or indenture trustee, as applicable, will mail to each person
who at any time during the related calendar year shall have been a registered
Securityholder a statement containing information for the purposes of the
Securityholder's preparation of federal income tax returns. See "Material
Federal Income Tax Consequences".
LIST OF SECURITYHOLDERS
Three or more holders of the notes of any series or one or more holders of
the notes evidencing not less than 25% of the aggregate outstanding principal
balance of the notes of the series may, by written request to the related
indenture trustee, obtain access to the list of all noteholders maintained by
the indenture trustee for the purpose of communicating with other noteholders
with respect to their rights under the related Indenture or under the notes. The
indenture trustee may elect not to afford the requesting noteholders access to
the list of noteholders if it agrees to mail the desired communication or proxy,
on behalf of and at the expense of the requesting noteholders, to all
noteholders of the series.
Three or more holders of the certificates of any series or one or more
holders of the certificates evidencing not less than 25% of the certificate
balance of the certificates may, by written request to the related trustee,
obtain access to the list of all certificateholders maintained by the trustee
for the purpose of communicating with other certificateholders with respect to
their rights under the related Trust Agreement or Pooling and Servicing
Agreement, as applicable, or under the certificates.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the material provisions, in each case, to
the extent anticipated to be common to any series of securities, of:
o each Receivables Purchase Agreement pursuant to which the seller will
transfer Receivables to the company,
o each Trust Agreement or Pooling and Servicing Agreement pursuant to
which a Trust will be created, Collateral Certificates, Government
Securities and/or Private Label Custody Receipt Securities, as
applicable, may be sold or transferred to the Trust, certificates will
be issued, and the servicer will service Receivables and the trustee
will manage Government Securities, if any and Private Label Custody
Receipt Securities, if any, in the case of a grantor trust,
o each Sale and Servicing Agreement pursuant to which the company will
transfer Receivables to a Trust and the servicer will service
Receivables, in the case of an owner trust, or
o in the case of securities backed by Collateral Certificates, each
Trust Agreement pursuant to which a Trust will be created, Collateral
Certificates will be sold or transferred to the Trust, Government
Securities and Private Label Custody Receipt Securities may be sold or
transferred to the Trust and a trustee will manage Collateral
Certificates, Government Securities, if any, and Private Label Custody
Receipt Securities, if any (collectively, the "Transfer and Servicing
Agreements").
Forms of the Transfer and Servicing Agreements have been filed as exhibits to
the Registration Statement of which this prospectus forms a part. The following
summary does not purport to be a complete description of all of the terms of the
Transfer and Servicing Agreements and therefore is subject to, and is qualified
in its entirety by reference to, the provisions of the related Transfer and
Servicing Agreement.
SALE AND ASSIGNMENT OF PRIMARY ASSETS
In the case of Primary Assets consisting of Receivables, on or prior to the
related closing date, a seller will transfer and assign to the company, pursuant
to a Receivables Purchase Agreement, without recourse, all of its right, title
and interest in and to Receivables in the outstanding principal amount specified
in the related prospectus supplement, including its security interests in the
related Financed Vehicles. Each Receivable will be identified in a schedule
appearing as an exhibit to the related Receivables Purchase Agreement (the
"Schedule of Receivables").
In each Receivables Purchase Agreement the seller will represent and
warrant to the company, among other things, that
o the information set forth in the Schedule of Receivables is correct in
all material respects as of the applicable cutoff date;
o the obligor on each Receivable is contractually required to maintain
physical damage insurance covering the related Financed Vehicle in
accordance with the seller's normal requirements;
o on the closing date, the Receivables are free and clear of all
security interests, liens, charges and encumbrances, and no offsets,
defenses or counterclaims have been asserted or threatened;
o at the closing date, each of the Receivables is secured by a
perfected, first-priority security interest in the related Financed
Vehicle in favor of the seller;
o each Receivable, at the time it was originated, complied and, on the
closing date complies, in all material respects with applicable
federal and state laws, including, without limitation, consumer
credit, truth-in-lending, equal credit opportunity and disclosure
laws; and
o any other representations and warranties that may be set forth in the
related prospectus supplement.
To the extent specified in the related prospectus supplement, as of the
last day of the second Collection Period, or, if the seller so elects, the last
day of the first Collection Period, following the discovery by or notice to the
seller of any breach of a representation and warranty of the seller that
materially and adversely affects the interests of the related Trust in any
Receivable, the seller will be obligated to repurchase the Receivable, unless
the seller cures the breach in a timely fashion. The purchase price for any of
these Receivables will be equal to the unpaid principal balance owed by the
obligor on the Receivable, plus accrued and unpaid interest on the unpaid
principal balance at the applicable APR to the last day of the month of
repurchase (the "Repurchase Amount"). This repurchase obligation will constitute
the sole remedy available to the Securityholders, the related trustee and any
related indenture trustee for any uncured breach.
On the related closing date, the company will transfer and assign to the
related Trust, pursuant to a Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, without recourse, all of its right, title
and interest in and to Primary Assets in the outstanding principal amount
specified in the related prospectus supplement. Concurrently with the transfer
and assignment of Primary Assets to the related Trust, the related trustee or
indenture trustee, as applicable, will execute, authenticate and deliver the
related securities.
Pursuant to the terms of the Sale and Servicing Agreement or the Pooling
and Servicing Agreement, as applicable, the company will assign to the related
Trust the representations and warranties made by the related seller under the
related Receivables Purchase Agreement for the benefit of the related
Securityholders and will make limited representations and warranties with
respect to the other Primary Assets included in the Trust. To the extent that
the related seller does not repurchase a Primary Asset in the event of a breach
of its representations and warranties with respect to the Primary Asset, the
company will not be required to repurchase the Primary Asset unless the breach
also constitutes a breach of one of the company's representations and warranties
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, with respect to that Primary Asset, if any, and the
breach materially and adversely affects the interests of the Securityholders in
any Primary Asset. Neither the seller nor the company will have any other
obligation with respect to the Primary Assets or the securities.
TRUST ACCOUNTS
With respect to each owner trust, the servicer will establish and maintain
with the related indenture trustee, or the trustee will establish and maintain,
(a) one or more accounts, on behalf of the related Securityholders, into which
all payments made on or in respect of the related Primary Assets will be
deposited (the "Collection Account") and (b) an account, in the name of the
indenture trustee on behalf of the noteholders, into which amounts released from
the Collection Account and any Reserve Account or other form of credit
enhancement for payment to the noteholders will be deposited and from which all
distributions to the noteholders will be made (the "Note Distribution Account").
With respect to each owner trust and grantor trust, the servicer or the related
trustee will establish and maintain an account, in the name of the trustee on
behalf of the certificateholders, into which amounts released from the
Collection Account and any Reserve Account or other form of credit enhancement
for distribution to the certificateholders will be deposited and from which all
distributions to the certificateholders will be made (the "Certificate
Distribution Account"). With respect to any grantor trust, the servicer or the
related trustee will also establish and maintain the Collection Account and any
other Trust Account in the name of the related trustee on behalf of the related
certificateholders.
If so provided in the related prospectus supplement, the servicer will
establish for each series of securities an additional account (the "Payahead
Account"), in the name of the related indenture trustee, in the case of an owner
trust, or trustee, in the case of a grantor trust, into which, to the extent
required in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, early payments made by or on behalf of obligors on
Precomputed Receivables will be deposited until the time these payments become
due. Until the time payments are transferred from the Payahead Account to the
Collection Account, they will not constitute collected interest or collected
principal and will not be available for distribution to noteholders or
certificateholders. Any other accounts to be established with respect to a Trust
will be described in the related prospectus supplement.
For each series of securities, funds in the Collection Account, Note
Distribution Account, Certificate Distribution Account and any Reserve Account
or other accounts identified in the related prospectus supplement (collectively,
the "Trust Accounts") will be invested as provided in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, in
Eligible Investments. "Eligible Investments" will generally be limited to
investments acceptable to the Rating Agencies as being consistent with the
rating of the related securities. Eligible Investments will generally be limited
to obligations or securities that mature on or before the date of the next
scheduled distribution to Securityholders of the series. However, to the extent
permitted by the Rating Agencies, funds in any Reserve Account may be invested
in securities that will not mature prior to the date of the next scheduled
distribution with respect to the notes or certificates and will not be sold
prior to maturity to meet any shortfalls. Thus, the amount of available funds on
deposit in a Reserve Account at any time may be less than the balance of that
Reserve Account. If the amount required to be withdrawn from a Reserve Account
to cover shortfalls in collections on the related Receivables (as provided in
the related prospectus supplement) exceeds the amount of available funds on
deposit in the Reserve Account, a temporary shortfall in the amounts distributed
to the related noteholders or certificateholders could result, which could, in
turn, increase the average life of the related notes or certificates. Unless
otherwise and to the extent provided in the related prospectus supplement,
investment earnings on funds deposited in the Trust Accounts, net of losses and
investment expenses (collectively, "Investment Earnings"), will be deposited in
the applicable Collection Account on each Distribution Date and will be treated
as collections of interest on the related Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a company institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank, having
corporate trust powers and acting as trustee for funds deposited in the account,
so long as any of the securities of the company institution have a credit rating
from each Rating Agency in one of its generic rating categories that signifies
investment grade. "Eligible Institution" means, with respect to a Trust, (a) the
corporate trust department of the related indenture trustee or trustee, as
applicable, or (b) a company institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank, (1) that has
either (A) a long-term unsecured debt rating acceptable to the Rating Agencies
or (B) a short-term unsecured debt rating or certificate of deposit rating
acceptable to the Rating Agencies and (2) whose deposits are insured by the
FDIC.
PRE-FUNDING
If so specified in the related prospectus supplement, a portion of the
issuance proceeds of the securities of a particular series (this amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the trustee, which will be used to acquire additional
Receivables from time to time during the time period specified in the related
prospectus supplement (the "Pre-Funding Period"). Prior to the investment of the
Pre-Funded Amount in additional Receivables, the Pre-Funded Amount may be
invested in one or more Eligible Investments. Except as otherwise provided in
the applicable Agreement, an "Eligible Investment" is any of the following, in
each case as determined at the time of the investment or contractual commitment
to invest in the relevant Eligible Investment, to the extent these investments
would not require registration of the Trust Fund as an investment company
pursuant to the Investment Company Act of 1940:
(a) negotiable instruments or securities represented by instruments
in bearer or registered or book-entry form which evidence
(1) obligations which have the benefit of the full faith and
credit of the United States of America, including company
receipts issued by a bank as custodian with respect to any
instrument or security held by the custodian for the benefit
of the holder of the company receipt,
(2) demand deposits or time deposits in, or bankers' acceptances
issued by, any depositary institution or trust company
incorporated under the laws of the United States of America
or any state of the United States of America and subject to
supervision and examination by Federal or state banking or
depositary institution authorities; provided that at the
time of the trustee's investment or contractual commitment
to invest in the relevant Eligible Investment, the
certificates of deposit or short-term deposits, if any, or
long-term unsecured debt obligations, other than the
obligations whose rating is based on collateral or on the
credit of a Person other than the institution or trust
company, of the depositary institution or trust company has
a credit rating in the highest rating category from each
Rating Agency,
(3) certificates of deposit having a rating in the highest
rating category from each Rating Agency or
(4) investments in money market funds which are, or which are
composed of instruments or other investments which are,
rated in the highest rating category from each Rating
Agency;
(b) demand deposits in the name of the trustee in any depositary
institution or trust company referred to in clause (a)(2) above;
(c) commercial paper, having original or remaining maturities of no
more than 270 days, having a credit rating in the highest rating
category from each Rating Agency;
(d) Eurodollar time deposits that are obligations of institutions
whose time deposits carry a credit rating in the highest rating
category from each Rating Agency;
(e) repurchase agreements involving any Eligible Investment described
in any of clauses (a)(1), (a)(3) or (d) above, so long as the
other party to the repurchase agreement has its long-term
unsecured debt obligations rated in the highest rating category
from each Rating Agency; and
(f) any other investment with respect to which each Rating Agency
rating the securities indicates will not result in the reduction
or withdrawal of its then existing rating of the securities.
Except as otherwise provided in the applicable Agreement, any
Eligible Investment must mature no later than the Business Day
prior to the next Distribution Date.
During any Pre-Funding Period, the seller or any other party specified in
the related prospectus supplement will be obligated, subject only to the
availability of additional Receivables, to transfer to the related Trust Fund
additional Receivables from time to time during the related Pre-Funding Period.
Additional Receivables will be required to satisfy specific eligibility criteria
more fully set forth in the related prospectus supplement, which eligibility
criteria will be consistent with the eligibility criteria of the Receivables
included in the Trust Fund as of the closing date subject to exceptions as are
expressly stated in the related prospectus supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of securities will be specified in the related prospectus
supplement, it is anticipated that:
o the Pre-Funding Period will not exceed 90 days from the related
closing date;
o that the additional loans to be acquired during the Pre-Funding Period
will be subject to the same representations and warranties as the
Receivables included in the related Trust Fund on the closing date,
although additional criteria may also be required to be satisfied, as
described in the related prospectus supplement; and
o the Pre-Funded Amount will not exceed 25% of the principal amount of
the securities issued pursuant to a particular offering.
SERVICING PROCEDURES
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the company and each Trust will designate the servicer as
custodian to maintain possession, as the Trust's agent, of the related
Receivables and any other documents relating to the Receivables. The seller's
and the servicer's accounting records and computer systems will be marked to
reflect the sale and assignment of the related Receivables to each Trust, and
UCC financing statements reflecting the sale and assignment will be filed.
The servicer will make reasonable efforts to collect all payments due with
respect to the Receivables and will, consistent with the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, follow
the collection procedures as it follows with respect to comparable Receivables
it services for itself and others. The prospectus supplement will specify that
the servicer may, in its discretion, arrange with the obligor on a Receivable to
extend or modify the payment schedule, but no arrangement will, if inconsistent
with its normal procedures, for purposes of any Sale and Servicing Agreement or
Pooling and Servicing Agreement, reduce the contract rate of, the amount of the
scheduled payments under, or extend the final payment date of, any Receivable
beyond the "Final Scheduled Maturity Date" (as the term is defined with respect
to any Receivables Pool in the related prospectus supplement). Some arrangements
may result in the servicer purchasing the Receivables for the Repurchase Amount,
while others may result in the servicer making Advances. The servicer may sell
the related Financed Vehicle securing any Receivable at a public or private
sale, or take any other action permitted by applicable law. See "Certain Legal
Aspects of the Receivables".
COLLECTIONS
With respect to each Trust, the servicer or the trustee will deposit all
payments on the related Primary Assets, from whatever source, and all proceeds
of the related Primary Assets, collected during the period specified in the
related prospectus supplement (a "Collection Period") into the related
Collection Account not later than two business days after receipt of payments
and proceeds of the related Primary Assets or any other period as specified in
the related prospectus supplement. However, notwithstanding the foregoing, these
amounts may be remitted to the Collection Account by the servicer on a monthly
basis on or prior to the applicable Distribution Date if no Servicer Default
exists and each other condition to making deposits less frequently than daily as
may be specified by the Rating Agencies or set forth in the related prospectus
supplement is satisfied. Pending deposit into the Collection Account, the
collections may be invested by the servicer at its own risk and for its own
benefit and will not be segregated from its own funds. If the servicer were
unable to remit the funds to the Collection Account on any Distribution Date,
Securityholders might incur a loss. To the extent set forth in the related
prospectus supplement, the servicer may, in order to satisfy the requirements
described above, obtain a letter of credit or other security for the benefit of
the related Trust to secure timely remittances of collections on the related
Primary Assets and payment of the aggregate Repurchase Amount with respect to
Receivables repurchased by the servicer.
Collections on a Precomputed Receivable during any Collection Period will
be applied first to the repayment of any outstanding Precomputed Advances made
by the servicer with respect to the Receivable, as described below, and then to
the scheduled monthly payment due on the Receivable. Any portion of the
collections remaining after the scheduled monthly payment has been made (these
excess amounts, the "Payaheads") will, unless the remaining amount is sufficient
to prepay the Precomputed Receivable in full, and subject to limitations which,
if applicable, will be specified in the related prospectus supplement, be
transferred to and kept in the Payahead Account until a later Distribution Date
on which the Payaheads may be applied either to the scheduled monthly payment
due during the related Collection Period or to prepay the Receivable in full.
ADVANCES
If specified in the related prospectus supplement, to the extent the
collections of interest and principal on a Precomputed Receivable for a
Collection Period fall short of the related scheduled payment, the servicer
generally will advance the shortfall (a "Precomputed Advance"). The servicer
will be obligated to make a Precomputed Advance on a Precomputed Receivable only
to the extent that the servicer, in its sole discretion, expects to recoup the
Advance from subsequent collections or recoveries on the Receivable or other
Precomputed Receivables in the related Receivables Pool. The servicer will
deposit the Precomputed Advance in the applicable Collection Account on or
before the business day preceding the applicable Distribution Date. The servicer
will recoup its Precomputed Advance from subsequent payments by or on behalf of
the related obligor or from insurance or liquidation proceeds with respect to
the related Receivable and will release its right to reimbursement in
conjunction with its purchase of the Receivable as servicer or, upon determining
that reimbursement from the preceding sources is unlikely, will recoup its
Precomputed Advance from any collections made on other Precomputed Receivables
in the related Receivables Pool.
If specified in the related prospectus supplement, on or before the
business day prior to each Distribution Date, the servicer will deposit into the
related Collection Account an amount equal to the amount of interest that would
have been due on the related Simple Interest Receivables at their respective
annual percentage rates for the related Collection Period, assuming that the
Simple Interest Receivables are paid on their respective due dates, minus the
amount of interest actually received on the Simple Interest Receivables during
the applicable Collection Period (a "Simple Interest Advance", and together with
Precomputed Advances, "Advances"). If the calculation results in a negative
number, an amount equal to the amount shall be paid to the servicer in
reimbursement of outstanding Simple Interest Advances. In addition, if specified
in the related prospectus supplement, if a Simple Interest Receivable becomes a
Liquidated Receivable (as the term is defined in the related prospectus
supplement), the amount of accrued and unpaid interest on the Simple Interest
Receivable that became a Liquidated Receivable, but not including interest for
the then current collection Period, will be withdrawn from the Collection
Account and paid to the servicer in reimbursement of outstanding Simple Interest
Advances. No advances of principal will be made with respect to Simple Interest
Receivables.
NET DEPOSITS
For administrative convenience, unless the servicer or the trustee is
required to remit collections to the Collection Account on a daily basis as
described under "Collections" above, the servicer or the trustee will be
permitted to make deposits of collections, aggregate Advances and Repurchase
Amounts for any Trust for or in respect of each Collection Period net of
distributions to be made to the servicer with respect to the Collection Period.
The servicer also may cause a single, net transfer to be made from the
Collection Account to the Payahead Account, or vice versa.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
To the extent provided in the related prospectus supplement, with respect
to each Trust the related servicer will be entitled to receive, out of interest
collected on or in respect of the related Primary Assets serviced by the
servicer, a fee for each Collection Period (the "Servicing Fee") in an amount
equal to the percentage per annum specified in the related prospectus supplement
(the "Servicing Fee Rate") of the Pool Balance related to the Primary Assets as
of the first day of the related Collection Period. Unless otherwise provided in
the related prospectus supplement, the Servicing Fee, together with any portion
of the Servicing Fee that remains unpaid from prior Distribution Dates, will be
paid solely to the extent of the Interest Distribution Amount; however, the
Servicing Fee will be paid prior to the distribution of any portion of the
Interest Distribution Amount to the holders of the notes or certificates of any
series.
To the extent provided in the related prospectus supplement, the servicer
will also collect and retain any late fees, prepayment charges and other
administrative fees or similar charges allowed by applicable law with respect to
Receivables and will be entitled to reimbursement from each Trust for some
liabilities. Payments by or on behalf of obligors will be allocated to scheduled
payments under the related Receivable and late fees and other charges in
accordance with the servicer's normal practices and procedures.
If applicable, the Servicing Fee will compensate the servicer for
performing the functions of a third party servicer of motor vehicle receivables
as an agent for the related Trust, including collecting and posting all
payments, responding to inquiries of obligors on the Receivables, investigating
delinquencies, sending payment statements and reporting the collateral. The
Servicing Fee will also compensate the servicer for administering the
Receivables, including making Advances, accounting for collection, furnishing
monthly and annual statements to the related Indenture Trust and/or trustee, and
generating federal income tax information for the Trust and for the related
noteholders and/or certificateholders as well as the Trust's compliance with the
reporting provisions under the Exchange Act. The Servicing Fee may also
reimburse the servicer for particular taxes, the fees of the related indenture
trustee and/or trustee, accounting fees, outside auditor fees, date processing
cost and other costs incurred in connection with administering the Primary
Assets.
DISTRIBUTIONS
With respect to each series of securities, beginning on the Distribution
Date specified in the related prospectus supplement, distributions of principal
and interest, or, where applicable, principal only or interest only, on each
class of securities entitled to these distributions will be made by the related
trustee or indenture trustee, as applicable, to the certificateholders and
noteholders of the series. The timing, calculation, allocation, order, source
and priorities of, and requirements for, all payments to the holders of each
class of notes and/or distributions to holders of each class of certificates
will be set forth in the related prospectus supplement.
With respect to each Trust, on each Distribution Date collections on or in
respect of the related Primary Assets will be transferred from the Collection
Account to the Note Distribution Account or Certificate Distribution Account, as
applicable, for distribution to the noteholders and certificateholders to the
extent provided in the related prospectus supplement. Credit enhancement, such
as a Reserve Account, will be available to cover shortfalls in the amount
available for distribution on the date to the extent specified in the related
prospectus supplement. As and to the extent described in the related prospectus
supplement, distributions in respect of principal of a class of securities of a
series may be subordinate to distributions in respect of interests on the class,
and distributions in respect of one or more classes of certificates of the
series may be subordinate to payments in respect of the notes, if any, of the
series or other classes of certificates. Distributions of principal on the
securities of a series may be based on the amount of principal collected or due,
or the amount of realized losses incurred, in a Collection Period.
CREDIT AND CASH FLOW ENHANCEMENT
The amounts and types of any credit and cash flow enhancement arrangements
and the provider of the credit and cash flow enhancement arrangements, if
applicable, with respect to each class of securities of a series will be set
forth in the related prospectus supplement. To the extent provided in the
related prospectus supplement, credit or cash flow enhancement may be in the
form of subordination of one or more classes of securities, Reserve Accounts,
spread accounts, letters of credit, surety bonds, insurance policies,
over-collateralization, credit or liquidity facilities, guaranteed investment
contracts, swaps or other interest rate protection agreements, repurchase
obligations, other agreements with respect to third party payments or other
support, cash deposits, or any other arrangements that are incidental to or
related to the Primary Assets included in a Trust as may be described in the
related prospectus supplement, or any combination of the foregoing. If specified
in the applicable prospectus supplement, credit or cash flow enhancement for a
class of securities may cover one or more other classes of securities of the
same series, and credit enhancement for a series of securities may cover one or
more other series of securities.
The existence of a Reserve Account or other form of credit enhancement for
the benefit of any class or series of securities is intended to enhance the
likelihood of receipt by the Securityholders of the class or series of the full
amount of principal and interest due on the applicable class or series and to
decrease the likelihood that the Securityholders will experience losses. The
credit enhancement for a class or series of securities will not, as a general
rule, provide protection against all types of loss and will not guarantee
repayment of all principal and interest on a class or series of securities. If
losses occur which exceed the amount covered by credit enhancement or which are
not covered by the credit enhancement, Securityholders will bear their allocable
share of these losses, as described in the prospectus supplement. In addition,
if a form of credit enhancement covers more than one series of securities,
Securityholders of any series will be subject to the risk that credit
enhancement may be exhausted by the claims of Securityholders of other series.
RESERVE ACCOUNT. If so provided in the related prospectus supplement,
pursuant to the related Transfer and Servicing Agreement, the company or the
seller will establish for a series or class or classes of securities an account
(the "Reserve Account"), which will be maintained with the related indenture
trustee or trustee, as applicable. A Reserve Account will be funded by an
initial deposit by the company or the seller, as applicable, on the closing date
in the amount set forth in the related prospectus supplement. As further
described in the related prospectus supplement, the amount on deposit in the
Reserve Account may be increased or reinstated on each Distribution Date, to the
extent described in the related prospectus supplement, by the deposit there of
amounts from collections on the Primary Assets. The related prospectus
supplement will describe the circumstances under which and the manner in which
distributions may be made out of the Reserve Account, either to holders of the
securities covered by the Reserve Account or to the company, the seller or to
any other entity.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, will provide that a firm of independent public accountants will
furnish annually to the related Trust and indenture trustee and/or trustee a
statement as to compliance by the Sale and servicer during the preceding twelve
months, or, in the case of the first statement, during a shorter period that
shall have elapsed since the applicable closing date, with particular standards
relating to the servicing of the Receivables, the servicer's accounting records
and computer files with respect to the servicer's compliance and other matters.
Each Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, will also provide for delivery to the related Trust and indenture
trustee and/or trustee each year of a certificate signed by an officer of the
servicer stating that the servicer has fulfilled it obligations under the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, throughout the preceding twelve months, or, in the case of the first
certificate, during a shorter period that shall have elapsed since the
applicable closing date, or, if there has been a default in the fulfillment of
any obligation, describing each default. The servicer will agree to give each
indenture trustee and/or trustee, as applicable, notice of particular Servicer
Defaults under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable.
Copies of the foregoing statements and certificates may be obtained by
Securityholders by a request in writing addressed to the related trustee or
indenture trustee, as applicable, at the Corporate Trust Office for the trustee
or indenture trustee specified in the related prospectus supplement.
STATEMENTS TO TRUSTEES AND THE TRUST
Prior to each Distribution Date with respect to each series of securities,
the servicer will provide to the applicable indenture trustee, if any, and the
applicable trustee as of the close of business on the last day of the preceding
Collection Period a statement setting forth substantially the same information
as is required to be provided in the periodic reports provided to
Securityholders of the series as described under "Certain Information Regarding
the Securities--Statements to Securityholders".
CERTAIN MATTERS REGARDING THE SERVICER
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
provide that the servicer may not resign from its obligations and duties as
servicer under the applicable Agreement, except upon determination that the
servicer's performance of his duties is no longer permissible under applicable
law or if resignation is required by regulatory authorities. No resignation will
become effective until the related indenture trustee or trustee, as applicable,
or a successor servicer has assumed the servicing obligations and duties under
the related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable.
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
further provide that neither the servicer nor any of its directors, officers,
employees and agents will be under any liability to the related Trust or
Securityholders for taking any action or for refraining from taking any action
pursuant to the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, or for errors in judgment; provided, that neither the
servicer nor any person will be protected against any liability that would
otherwise be imposed by reason of wilful misfeasance, bad faith or gross
negligence in the performance of the servicer's duties or by reason of reckless
disregard of its obligations and duties under the applicable Agreement. In
addition, each Sale and Servicing Agreement and Pooling and Servicing Agreement
will provide that the servicer is under no obligation to appear in, prosecute or
defend any legal action that is not incidental to its servicing responsibilities
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in each Sale and Servicing Agreement and
Pooling and Servicing Agreement, any entity into which the servicer may be
merged or consolidated, or any entity resulting from any merger or consolidation
to which the servicer is a party, or any entity succeeding to all or
substantially all of the business of the servicer, or any corporation which
assumes the obligations of the servicer, will be the successor to the servicer
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable.
SERVICER DEFAULTS
A "Servicer Default" under each Sale and Servicing Agreement and Pooling
and Servicing Agreement will consist of:
(1) any failure by the servicer to deliver to the related trustee or
indenture trustee, as applicable, for deposit in any of the Trust
Accounts any required payment or to direct the related trustee or
Indenture Trust, as applicable, to make any required distributions
from the Trust Accounts, which failure continues unremedied for five
business days after discovery by an officer of the servicer or written
notice of failure is given (a) to the servicer by the related trustee
or indenture trustee, as applicable, or (b) to the servicer and to the
related trustee or indenture trustee, as applicable, by holders of
notes, if any, evidencing not less that 25% of the aggregate
outstanding principal amount of the notes or, in the event a series of
securities includes no notes or if the notes have been paid in full,
by holders of certificates evidencing not less that 25% of the
certificate balance;
(2) any failure by the servicer duly to observe or perform in any material
respect any covenant or agreement in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement, as applicable, which
failure materially and adversely affects the rights of the related
Securityholders and which continues unremedied for 60 days after
written notice of failure is given to the servicer in the same manner
described in clause (1) above;
(3) specific events of bankruptcy, insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and
particular actions by the servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay
its obligations; and
(4) any other events as may be set forth in the related prospectus
supplement.
RIGHTS UPON SERVICER DEFAULT
Generally, in the case of an owner trust, as long as a Servicer Default
under the related Sale and Servicing Agreement remains unremedied, the related
indenture trustee or holders of notes of the related series evidencing not less
than 50% of the aggregate principal amount of the notes then outstanding may
terminate all the rights and obligations of the servicer under the related Sale
and Servicing Agreement, and upon this termination the indenture trustee or a
successor servicer appointed by the indenture trustee will succeed to all the
responsibilities, duties and liabilities of the servicer under the related Sale
and Servicing Agreement and will be entitled to similar compensation
arrangements. Generally, in the case of any grantor trust, as long as a Servicer
Default under the related Pooling and Servicing Agreement remains unremedied,
the related trustee or holders of certificates of the related series evidencing
not less than 25% of the certificate balance may terminate all the rights and
obligations of the servicer under the related Pooling and Servicing Agreement,
and upon this termination the trustee or a successor servicer appointed by the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the related Pooling and Servicing Agreement and will be entitled
to similar compensation arrangements. If, however, a bankruptcy trustee or
similar official has been appointed for the servicer, and no Servicer Default
other than the appointment has occurred, the trustee or official may have the
power to prevent any indenture trustee or the related noteholders or the trustee
or the related certificateholders from effecting a transfer of servicing. If the
related indenture trustee, if any, or the related trustee is unwilling or unable
to act as successor to the servicer, the indenture trustee or trustee, as
applicable, may appoint, or may petition a court of competent jurisdiction to
appoint, a successor with a net worth of at least $100,000,000 and whose regular
business includes the servicing of motor vehicle receivables. The indenture
trustee, if any, or the trustee may arrange for compensation to be paid to the
successor servicer, which in no event may be greater than the compensation
payable to the servicer under the related Sale and Servicing Agreement or
Pooling and Servicing Agreement, as applicable.
WAIVER OF PAST DEFAULTS
To the extent provided in the related prospectus supplement, (1) in the
case of each owner trust, holders of the related notes evidencing not less than
a majority of the aggregate outstanding principal amount of the notes, or of
certificates evidencing not less than a majority of the outstanding certificate
balance, in the case of any default that does not adversely affect the indenture
trustee or noteholders, and (2) in the case of each grantor trust, holders of
certificates evidencing not less than a majority of the certificate balance,
may, on behalf of all the noteholders and certificateholders, waive any default
by the servicer in the performance of its obligations under the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, and its
consequences, except a default in making any required deposits to or payments
from any Trust Account or in respect of a covenant or provision in the Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, that
cannot be modified or amended without the consent of each Securityholder, in
which event the related waiver will require the approval of holders of all of
the securities of the series. No waiver will impair the Securityholders' right
with respect to any subsequent Servicer Default.
AMENDMENT
Unless otherwise provided in the related prospectus supplement, each of the
Transfer and Servicing Agreements may be amended by the parties to the Transfer
and Servicing Agreements without the consent of the related noteholders or
certificateholders:
(1) to cure any ambiguity,
(2) to correct or supplement any provisions in the related Transfer and
Servicing Agreement, or
(3) for the purpose of adding any provisions to, or changing in any manner
or eliminating any of the provisions of, the related Transfer and
Servicing Agreement;
provided, that any action in this clause (3) will not, in the opinion of counsel
satisfactory to the related trustee or indenture trustee, as applicable,
adversely affect in any material respect the interests of the company or any
noteholder.
The Transfer and Servicing Agreements may also be amended from time to time
by the parties to the Transfer and Servicing Agreements with the consent of the
holders of notes evidencing at least a majority of the aggregate principal
amount of the then outstanding notes, if any, and with the consent of the
holders of certificates evidencing at least a majority of the aggregate
principal amount of the then outstanding certificates, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the related Transfer and Servicing Agreement or of modifying in any manner
the rights of the noteholders or certificateholders, as applicable; provided
that no amendment may (1) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, collections of payments on or in respect of
the related Primary Assets or distributions that are required to be made for the
benefit of the noteholders or certificateholders or (2) reduce the aforesaid
percentage of the notes or certificates of the series the holders of which are
required to consent to any amendment, without the consent of the holders of all
of the outstanding notes or certificates, as the case may be, of the series.
PAYMENT IN FULL OF THE NOTES
Upon the payment in full of all outstanding notes of a given series and the
satisfaction and discharge of the related Indenture, the related trustee will
succeed to all the rights of the indenture trustee, and the certificateholders
of the series generally will succeed to the rights of the noteholders of the
series under the related Sale and Servicing Agreement.
TERMINATION
The obligations of the related servicer, the related trustee and the
related indenture trustee, if any, with respect to a Trust pursuant to the
related Transfer and Servicing Agreement will terminate upon the latest to occur
of
o the maturity or other liquidation of the last Primary Asset and the
disposition of any amounts received upon liquidation of any remaining
Primary Asset,
o the payment to noteholders, if any, and certificateholders of all
amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements and
o the occurrence of either event described below.
In order to avoid excessive administrative expenses, the related servicer
will be permitted, at its option, to purchase from a Trust all remaining Primary
Assets as of the end of any Collection Period, if the then outstanding Pool
Balance is 10%, or, if any seller is a bank, 5%, or less of the Pool Balance as
of the related cutoff date, at a purchase price equal to the price specified in
the related prospectus supplement.
If and to the extent provided in the related prospectus supplement, the
indenture trustee or trustee, as applicable, will, within ten days following a
Distribution Date as of which the Pool Balance is equal to or less than the
percentage of the original Pool Balance specified in the related prospectus
supplement, solicit bids for the purchase of the Primary Assets remaining in the
Trust, in the manner and subject to the terms and conditions set forth in the
related prospectus supplement. If the indenture trustee or trustee receives
satisfactory bids as described in the related prospectus supplement, then the
Primary Assets remaining in the Trust will be sold to the highest bidder.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTERESTS IN FINANCED VEHICLES
In states in which retail installment contracts such as the Receivables
evidence the credit sale of automobiles, recreational vehicles, vans, trucks,
buses and trailers by dealers to obligors, the contracts also constitute
personal property security agreements and include grants of security interests
in the vehicles under the UCC as in effect in these states. Perfection of
security interests in the automobiles, recreational vehicles, vans, trucks,
buses and trailers financed, directly or indirectly, by a seller is generally
governed by the motor vehicle registration laws of the state in which the
vehicle is located. In general, a security interest in automobiles, recreational
vehicles, vans, trucks, buses and trailers is perfected by obtaining the
certificate of title to the financed vehicle or notation of the secured party's
lien on the vehicles' certificate of title. However, security interests in boats
may be perfected in one of three ways: in certificate of title states, a
security interest is perfected as described above; in other states, a security
interest may be perfected by filing a UCC-1 financing statement, however, a
purchase money lien in consumer goods is perfected without any filing
requirement and if a boat is required to be documented under Federal law, a
preferred mortgage may be obtained under the Ship Mortgage Act by filing the
mortgage with the Coast Guard, which is the exclusive method for perfecting
security interests in documented boats. The applicable seller will represent and
warrant in the Agreement that none of the Receivables are required to be
documented under the Ship Mortgage Act.
Generally all of the Receivables name the seller as obligee or assignee and
as the secured party. The seller will take all actions necessary under the laws
of the state in which the financed vehicle is located to perfect the seller's
security interest in the financed vehicle, including, where applicable, having a
notation of its lien recorded on the vehicle's certificate of title or file a
UCC-1 Financing Statement. If the seller, because of clerical error or
otherwise, has failed to take action with respect to financed vehicle, it will
not have a perfected security interest and its security interest may be
subordinate to the interest of, among others, subsequent purchasers of the
financed vehicle that give value without notice of the seller's security
interest and to whom a certificate of ownership is issued in the purchaser's
name, holders of perfected security interests in the financed vehicle and the
trustee in bankruptcy of the obligor. The seller's security interest may also be
subordinate to third parties in the event of fraud or forgery by the obligor or
administrative error by state recording officials or in the circumstances noted
below.
Pursuant to each Sale and Servicing Agreement and Pooling and Servicing
Agreement, the seller will assign its interests in the Financed Vehicles
securing the related Receivables to the related Trust. However, because of
administrative burden and expense, neither the seller nor the related trustee
will amend any certificate of title to identify the Trust as the new secured
party on the certificates of title relating to the Financed Vehicles. Unless
otherwise specified in the related prospectus supplement, the servicer will hold
certificates of title relating to the Financed Vehicles in its possession as
custodian for the Trust pursuant to the related Sale and Servicing Agreement or
Pooling and Servicing Agreement, as applicable. See "Description of the Transfer
and Servicing Agreements--Sale and Assignment of Primary Assets".
In most states, assignments such as those under the related Trust Agreement
or Pooling and Servicing Agreement, as applicable, are effective conveyances of
a security interest in the related financed vehicle without amendment of any
lien noted on the vehicle's certificate of title, and the assignee succeeds by
assignment to the assignor's rights as secured party. Although re-registration
of the motor vehicle is not necessary in these states to convey a perfected
security interest in the Financed Vehicles to a Trust, because the related Trust
will not be listed as legal owner on the certificates of title to the Financed
Vehicles, a Trust's security interest could be defeated through fraud or
negligence. However, in the absence of fraud or forgery by the vehicle owner or
the servicer or administrative error by state of local agencies, the notation of
the seller's lien on a certificate of title will be sufficient to protect a
Trust against the rights of subsequent purchasers of a Financed Vehicle or
subsequent creditors who take a security interest in a Financed Vehicle. If
there are any Financed Vehicles as to which the seller fails to obtain a
first-priority perfected security interest, the Trust's security interest would
be subordinate to, among others, subsequent purchasers of Financed Vehicles and
holders of perfected security interests in Financed Vehicles. A failure,
however, would constitute a breach of the seller's representations and
warranties under the related Receivables Purchase Agreement and the seller will
be required to repurchase the Receivable from the Trust unless the breach is
cured in a timely manner. See "Description of the Transfer and Servicing
Agreements--Sale and Assignment of Primary Assets" and "Risk Factors--Certain
Legal Aspects--Lack of Security Interests in Financed Vehicles".
Under the laws of most states in which a perfected security interest is
governed by a certificate of title statute, a perfected security interest in a
motor vehicle continues for four months after the vehicle is moved to a new
state from the one in which it is initially registered and after until the owner
re-registers the motor vehicle in the new state. A majority of these states
require surrender of a certificate of title to re-register a vehicle.
Accordingly, a secured party must surrender possession if it holds the
certificate of title of the vehicle or, in the case of vehicles registered in
states providing for the notation of a lien on the certificate of title but not
possession by the secured party, the secured party would receive notice of
surrender from the state of re-registration if the security interest is noted on
the certificate of title. Thus, the secured party would have the opportunity to
reperfect its security interest in the vehicle in the state of relocation.
However, these procedural safeguards will not protect the secured party if,
through fraud, forgery or administrative error, an obligor somehow procures a
new certificate of title that does not list the secured party's lien.
Additionally, in states that do not require a certificate of title for
registration of a vehicle, re-registration could defeat perfection. In the
ordinary course of servicing the Receivables, the servicer will take steps to
effect re-perfection upon receipt of notice of re-registration or information
from the obligor as to relocation. Similarly, when an obligor sells a Financed
Vehicle and the purchaser of that Financed Vehicle attempts to re-register the
vehicle, the seller must surrender possession of the certificate of title or
will receive notice as a result of having its lien noted on the certificate of
title and accordingly will have an opportunity to require satisfaction of the
related Receivable before its lien is released. Under each Sale and Servicing
Agreement and Pooling and Servicing Agreement, the servicer will be obligated to
take appropriate steps, at its own expense, to maintain perfection of security
interests in the related Financed Vehicles and is obligated to purchase the
related Receivable if it fails to do so.
In states which the perfection of a security interest is governed by the
filing of a UCC-1 financing statement, or the obligor moves from a title state
to a non-title state, the servicer will file a UCC-1 financing statement in the
new state of the obligor as soon as possible after receiving notice of the
obligor's change of residence. UCC-1 financing statements expire after five
years. When the term of a loan exceeds five years, the filing must be continued
in order to maintain the servicer's perfected security interest. The servicer
takes steps to effect continuation. In the event that an obligor moves to a
state other than the state in which the UCC-1 financing statement is filed or in
some states to a different county in the state, under the laws of most states
the perfection of the security interest in the boat would continue for four
months after relocation, unless the perfection in the original jurisdiction
would have expired earlier. A new financing statement must be filed in the state
of relocation or, if the state is a title state, a notation on the certificate
of title must be made in order to continue the security interest. The servicer
generally takes steps to effect re-perfection upon notification of an address
change. Generally, in both title states and in non-title states, the servicer
will not re-perfect a state law security interest which has expired or where the
obligor has moved if the Receivable has a small balance, a short remaining term
and the obligor has a good payment record.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes take priority over even a perfected,
first-priority security interest in the vehicle. The Code also grants priority
to particular federal tax liens over the lien of a secured party. The laws of
some states and federal law permit the confiscation of motor vehicles by
governmental authorities under some circumstances if used in unlawful
activities, which may result in the loss of a secured party's perfected security
interest in a confiscated motor vehicle. In each Receivables Purchase Agreement,
the seller will represent and warrant that, as of the date any Receivable is
sold to the Trust, the security interest in the related Financed Vehicle is or
will be prior to all other present liens, other than tax liens and other liens
that arise by operation of law, upon and security interests in the Financed
Vehicle. However, liens for repairs or taxes could arise, or the confiscation of
a Financed Vehicle could occur, at any time during the term of a Receivable. No
notice will be given to the related trustee, the related indenture trustee, if
any, or related Securityholders in the event a lien arises or confiscation
occurs. Any lien or confiscation arising or occurring after the closing date
will not give rise to a repurchase obligation of the seller under the related
Receivables Purchase Agreement.
REPOSSESSION
In the event of default by an obligor, the holder of the related retail
installment sale contract has all the remedies of a secured party under the UCC,
except where specifically limited by other state laws. The UCC remedies of a
secured party include the right to repossession by self-help means, unless these
means would constitute a breach of the peace. Self-help repossession is the
method employed by the servicer in most cases and is accomplished simply by
taking possession of the related motor vehicle. In cases where the obligor
objects or raises a defense to repossession, or if otherwise required by
applicable state law, a court order must be obtained from the appropriate state
court, and the vehicle must then be recovered in accordance with that order. In
some jurisdictions, the secured party is required to notify an obligor debtor of
the default and the intent to repossess the collateral and to give the obligor a
period of time within which to cure the default prior to repossession.
Generally, the right to cure may only be exercised on a limited number of
occasions during the term of the related contract.
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require the secured party to provide the
obligor with reasonable notice of the date, time and place of any public sale
and/or the date after which any private sale of the collateral may be held. The
obligor has the right to redeem the collateral prior to actual sale by paying
the secured party the unpaid principal balance of the obligation, accrued
interest on the unpaid principal balance of the obligation, plus reasonable
expenses for repossessing, holding and preparing the collateral for disposition
and arranging for its sale, plus, in some jurisdictions, reasonable attorneys'
fees or, in some states, by payment of delinquent installments or the unpaid
principal balance of the related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of the resale of any Financed Vehicle generally will be
applied first to the expenses of resale and repossession and then to the
satisfaction of the related indebtedness. While some states impose prohibitions
or limitations on deficiency judgments if the net proceeds from any resale do
not cover the full amount of the indebtedness, a deficiency judgment can be
sought in other states that do not prohibit or limit deficiency judgments.
However, the deficiency judgment would be a personal judgment against the
obligor for the shortfall, and a defaulting obligor can be expected to have very
little capital or sources of income available following repossession; in many
cases, therefore, it may not be useful to seek a deficiency judgment or, if one
is obtained, it may be settled at a significant discount or be uncollectible. In
addition to the notice requirement, the UCC requires that every aspect of the
sale or other disposition, including the method, manner, time, place and terms,
be "commercially reasonable". Generally, courts have held that when a sale is
not "commercially reasonable", the secured party loses its right to a deficiency
judgment. In addition, the UCC permits the debtor or other interested party to
recover for any loss caused by noncompliance with the provisions of the UCC.
Also, prior to a sale, the UCC permits the debtor or other interested person to
restrain the secured party from disposing of the collateral if it is established
that the secured party is not proceeding in accordance with the "default"
provisions under the UCC.
Occasionally, after the resale of a motor vehicle and payment of all
related expenses and indebtedness, there is a surplus of funds. In that case,
the UCC requires the creditor to remit the surplus to any holder of a
subordinate lien with respect to the related vehicle or, if no subordinate
lienholder exists, to the former owner of the vehicle.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon creditors and servicers involved in
consumer finance. These laws include the Truth-in-Lending Act, the Equal Credit
Opportunity Act, the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the
Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z, the
Soldiers' and Sailors' Relief Act, state adaptations of the National Consumer
Act and of the Uniform Consumer Credit Code, and state motor vehicle retail
installment sales acts, retail installment sales acts and other similar laws.
Also, the laws of some states impose finance charge ceilings and other
restrictions on consumer transactions and require contract disclosures in
addition to those required under other restrictions on consumer transactions and
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon creditors who fail
to comply with their provisions. In some cases, this liability could affect the
ability of an assignee, such as a Trust, to enforce consumer finance contracts
such as Receivables.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, other statutes or the common law, has the effect
of subjecting a seller in a consumer credit transaction, and some related
creditors and their assignees, to all claims and defenses that the obligor in
the transaction could assert against the seller of the goods. Liability under
the FTC Rule is limited to the amounts paid by the obligor under the contract,
and the holder of the contract may also be unable to collect any balance
remaining due under the contract from the obligor. Most of the Receivables will
be subject to the requirements of the FTC Rule. Accordingly, each Trust, as
holder of the related Receivables, will be subject to any claims or defenses
that the purchasers of the related Financed Vehicles may assert against the
sellers of those Financed Vehicles. If an obligor were successful in asserting
any claims or defenses, the claim or defense would constitute a breach of the
seller's warranties under the related Receivables Purchase Agreement and would
create an obligation of the seller to repurchase the Receivable unless the
breach is cured in a timely manner. See "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets".
Courts have applied general equitable principles to secured parties
pursuing repossession and litigation involving deficiency balances. These
equitable principles may have the effect of relieving an obligor from some or
all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections of the Fourteenth Amendment to the Constitution of the United
States. Courts have generally either upheld the notice provisions of the UCC and
related laws as reasonable or have found that the creditors' repossession and
resale do not involve sufficient state action to afford constitutional
protection to borrowers.
Under each Receivables Purchase Agreement the seller will represent and
warrant that each Receivable complies in all material respects with all
applicable federal and state laws. Accordingly, if an obligor has a claim
against a Trust for a violation of any law and that claim materially and
adversely affects the interests of the Trust in a Receivable, the violation
would constitute a breach of the seller's representation and warranty and would
create an obligation of the seller to repurchase the Receivable unless the
breach is cured. See "Description of the Transfer and Servicing Agreements--Sale
and Assignment of Primary Assets".
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a creditor to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
creditor from repossessing a motor vehicle and, as part of the rehabilitation
plan, may reduce the amount of the secured indebtedness to the market value of
the motor vehicle at the time of bankruptcy, as determined by the court, leaving
the party providing financing as a general unsecured creditor for the remainder
of the indebtedness. A bankruptcy court may also reduce the monthly payments due
under the related contract or change the rate of interest and time of repayment
of the indebtedness.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material United
States federal income tax consequences of the purchase, ownership and
disposition of securities. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of notes ("Note Owners") or certificates
("Certificate Owners") that are insurance companies, regulated investment
companies or dealers in securities. Moreover, there are no cases or Internal
Revenue Service ("IRS") rulings on similar transactions involving both debt and
equity interests issued by a trust with terms similar to those of the notes and
the certificates. As a result, the IRS might disagree with all or part of the
discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the notes and
the certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated under the Code and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of tax counsel specified in the related prospectus supplement
("Federal Tax Counsel") regarding some related federal income tax matters
discussed below, a copy of which will be filed with the SEC in a Current Report
on Form 8-K or in a post-effective amendment to the Registration Statement. An
opinion of Federal Tax Counsel, however, is not binding on the IRS or the
courts. No ruling on any of the issues discussed below will be sought from the
IRS. The opinion of Federal Tax Counsel specifically addresses only those issues
specifically identified below as being covered by that opinion; however, the
opinion also states that the additional discussion set forth below accurately
sets forth the advice of Federal Tax Counsel with respect to material federal
income tax issues. For purposes of the following summary, references to the
Trust, the notes, the certificates and related terms, parties and documents
shall be deemed to refer, unless otherwise specified in this prospectus, to each
Trust and the notes, certificates and related terms, parties and documents
applicable to the Trust.
OWNER TRUSTS
TAX CHARACTERIZATION OF THE OWNER TRUSTS. In the case of an owner trust,
Federal Tax Counsel will deliver its opinion that the Trust will not be an
association, or publicly traded partnership, taxable as a corporation for
federal income tax purposes. The opinion of Federal Tax Counsel will be based on
the assumption that the terms of the Trust Agreement and related documents will
be complied with, and on counsel's conclusions that the nature of the income of
the Trust, or restrictions, if any, on transfers of the certificates, will
exempt the Trust from the rule that some publicly traded partnerships are
taxable as corporations.
If a Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all of its income on the related Primary
Assets, which might be reduced by its interest expense on the notes. Any
corporate income tax could materially reduce cash available to make payments on
the notes and distributions on the certificates, and Certificate Owners, and
possibly Note Owners, could be liable for any resulting corporate income tax
that is unpaid by the Trust.
TAX CONSEQUENCES TO NOTE OWNERS.
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the Note
Owners will agree by their purchase of notes, to treat the notes as debt for
federal tax purposes. Federal Tax Counsel will, subject to exceptions which, if
applicable, will be specified in the related prospectus supplement, advise the
owner trust that the notes will be classified as debt for federal income tax
purposes, or classified in any other manner as shall be provided in the related
prospectus supplement. 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. If so treated, the Trust might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on notes
recharacterized as equity. Treatment of the notes as equity interests in a
partnership could have adverse tax consequences to some holders, even if the
Trust were not treated as a publicly traded partnership taxable as a
corporation. For example, income allocable to foreign holders might be subject
to U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders might be subject to limitations on their ability to deduct
their share of Trust expenses. The discussion below assumes that the notes will
be characterized as debt for federal income tax purposes.
INTEREST INCOME ON THE NOTES. The taxation of interest on a Note will
depend on whether the interest constitutes "qualified stated interest". Interest
on a Note that constitutes qualified stated interest is includable in a Note
Owner's income as ordinary interest income when actually or constructively
received, if the Note Owner uses the cash method of accounting for federal
income tax purposes, or when accrued, if the Note Owner uses an accrual method
of accounting for federal income tax purposes. Interest that does not constitute
qualified stated interest is included in a Note Owner's income under the rules
described below under "--Original Issue Discount," regardless of the Note
Owner's method of accounting, or, in some circumstances, under rules governing
contingent payments which are set out in regulations issued in final form on
June 11, 1996 (the "1996 Contingent Debt Regulations"). Notwithstanding the
foregoing, interest that is payable on a Note with a fixed maturity of one year
or less from its issue date is included in a Note Owner's income under the rules
described below under "--Short Term notes".
In general, "qualified stated interest" is stated interest that, during the
entire term of the Note, is unconditionally payable at least annually at a
single fixed rate of interest or, subject to some exceptions summarized below,
at a variable rate that is a single "qualified floating rate" or a single
"objective rate". If stated interest is unconditionally payable at two or more
qualified floating rates, a single fixed rate and one or more qualified floating
rates, or a single fixed rate and a single objective rate that is a "qualified
inverse floating rate", all or a portion of the stated interest might be treated
as "qualified stated interest." Under Treasury Regulations issued under Sections
1271-1275 of the Code (the "OID Regulations") interest is considered
unconditionally payable only if reasonable legal remedies exist to compel timely
payment or the debt instrument otherwise contains terms and conditions that make
the likelihood of late payment a remote contingency. If stated interest is
payable at a variable rate other than in accordance with the foregoing, the
interest will not be treated as "qualified stated interest," and it is unclear
whether the payments must be treated as part of a Note's "stated redemption
price at maturity" and governed by the rules described below under "--Original
Issue Discount" or, alternatively, must be taxed as contingent interest under,
or under rules similar to, the 1996 Contingent Debt Regulations, or in some
other manner.
Stated interest generally qualifies as being payable at a "qualified
floating rate" if variations in the value of the rate can reasonably be expected
to measure contemporaneous fluctuations in the cost of newly borrowed funds in
the currency in which the Note is denominated. A variable rate will be
considered a qualified floating rate if the variable rate equals (1) the product
of an otherwise qualified floating rate and a fixed multiple that is greater
than 0.65, but not more than 1.35 or (2) an otherwise qualified floating rate,
or the product described in clause (1), plus or minus a fixed rate. If the
variable rate equals the product of an otherwise qualified floating rate and a
single multiplier greater than 1.35 or less than or equal to 0.65, however, the
rate will generally constitute an objective rate, described more fully below.
Stated interest qualifies as payable at an "objective rate" if the rate is
determined using a single fixed formula and is based on objective financial
information or economic information. However an objective rate does not include
a rate based on information that is within the control of the issuer or a
related party or that is unique to the circumstances of the issuer or a related
party. The IRS may designate other objective rates. An objective rate is a
qualified inverse floating rate if (a) the rate is equal to a fixed rate minus a
qualified floating rate and (b) the variations in the rate can reasonably be
expected to inversely reflect contemporaneous variations in the cost of newly
borrowed funds, disregarding specific caps, floors, governors or similar
restrictions.
All or a portion of interest that otherwise is treated as qualified
stated interest under the rules summarized above will not be treated as
qualified stated interest if, among other circumstances:
o the variable rate of interest is subject to one or more minimum or
maximum rate floors or ceilings or one or more governors limiting the
amount of increase or decrease in each case which are not fixed
throughout the term of the Note and which are reasonably expected as
of the issue date to cause the rate in particular accrual periods to
be significantly higher or lower than the overall expected return on
the Note determined without the floor or ceiling;
o it is reasonably expected that the average value of the variable rate
during the first half of the term of the Note will be either
significantly less than or significantly greater than the average
value of the rate during the final half of the term of the Note;
o the "issue price" of the Note exceeds the total noncontingent
principal payments by more than an amount equal to the lesser of .015
multiplied by the product of the total noncontingent principal
payments and the number of complete years to maturity from the issue
date, or, in some cases, its weighted average maturity, and 15 percent
of the total noncontingent principal,
o the Note does not provide that a qualified floating rate or objective
rate in effect at any time during the term of the Note is set at the
value of the rate on any day that is no earlier than three months
prior to the first day on which the value is in effect and no later
than one year following that first day, or
o if interest is not unconditionally payable.
In these situations, as well as others, it is unclear whether interest payments
constitute qualified stated interest, or must be treated either as part of a
Note's "stated redemption price at maturity" resulting in original issue
discount, or represent contingent payments subject to taxation under, or under
rules similar to, the 1996 Contingent Debt Regulations, or in some other manner.
ORIGINAL ISSUE DISCOUNT. notes may be issued with "original issue
discount". Rules governing original issue discount are set forth in Sections
1271-1275 of the Code and the OID Regulations. The discussion in this prospectus
is based in part on the OID Regulations. Note Owners also should be aware that
the OID Regulations do not address some issues relevant to prepayable securities
such as the notes.
In general, a Note's original issue discount, if any, is the difference
between the "stated redemption price at maturity" of the Note and its "issue
price".
The original issue discount with respect to a Note will be considered to be
zero if it is less than a specified DE MINIMIS amount of 0.25% of the Note's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of the Note to its maturity date or, in the case of notes
that have more than one principal payment or that have interest payments that
are not qualified stated interest, the weighted average maturity of the Note, as
specially defined for tax purposes. Because of the possibility of prepayments,
it is not clear how the DE MINIMIS rules will apply to the notes. It is likely
that the anticipated rate of prepayments assumed in pricing the debt instrument
(the "Prepayment Assumption") will be required to be used in determining the
weighted average maturity of the notes. In the absence of authority to the
contrary, the company presently expects to apply the DE MINIMIS rule by using
the Prepayment Assumption. Generally, a Note Owner includes de minimis original
issue discount in income as principal payments are made. The amount includable
in income with respect to each principal payment equals a pro rata portion of
the entire amount of DE MINIMIS original issue discount with respect to that
Note. Any DE MINIMIS amount of original issue discount includable in income by a
Note Owner is generally treated as a capital gain if the Note is a capital asset
in the hands of the Note Owner.
The "stated redemption price at maturity" of a Note generally will be equal
to the sum of all payments, whether denominated as principal or interest, to be
made with respect to a Note other than "qualified stated interest".
In general, the "issue price" of a Note is the first price at which a
substantial amount of the notes of a class are sold for money to the public,
excluding bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers.
If the notes are determined to be issued with original issue discount, a
holder of a Note must generally include the original issue discount in ordinary
gross income for federal income tax purposes as it accrues in advance of the
receipt of any cash attributable to that income. The amount of original issue
discount, if any, required to be included in a Note Owner's ordinary gross
income for federal income tax purposes in any taxable year will be computed in
accordance with Section 1272(a) of the Code and the OID Regulations. Under
Section 1272(a) of the Code and the OID Regulations, original issue discount
accrues on a daily basis under a constant yield method that takes into account
the compounding of interest. The amount of original issue discount to be
included in income by a holder of a debt instrument, such as a Note, under which
principal payments may be subject to acceleration because of prepayments of
other debt obligations securing this type of instrument, is computed by taking
into account the Prepayment Assumption.
The amount of original issue discount includable in income by a Note Owner
is the sum of the "daily portions" of the original issue discount for each day
during the taxable year on which the holder held the Note. The daily portions of
original issue discount are determined by allocating to each day in any "accrual
period" a pro rata portion of the excess, if any, of (A) the sum of (1) the
present value of all remaining payments to be made on the Note as of the close
of the "accrual period" and (2) the payments during the accrual period of
amounts included in the stated redemption price of the Note over (B) the
"adjusted issue price" of the Note at the beginning of the accrual period.
Generally, the "accrual period" for the notes corresponds to the intervals at
which amounts are paid or compounded with respect to the Note, beginning with
their date of issuance and ending with the maturity date. The "adjusted issue
price" of a Note at the beginning of any accrual period is the sum of the issue
price and accrued original issue discount for each prior accrual period reduced
by the amount of payments other than payments of qualified stated interest made
during each prior accrual period. The Code requires the present value of the
remaining payments to be determined on the bases of
o the original yield to maturity, determined on the basis of compounding
at the close of each accrual period and properly adjusted for the
length of the accrual period,
o events, including actual prepayments, which have occurred before the
close of the accrual period and
o the assumption that the remaining payments will be made in accordance
with the original Prepayment Assumption.
Although original issue discount, if any, will be reported to Note Owners based
on the Prepayment Assumption, no representation is made to Note Owners that the
notes will be prepaid at that rate or at any other rate.
In general, a subsequent purchaser of a Note will also be required to
include in that purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to the Note,
unless the price paid equals or exceeds the Note's stated redemption price at
maturity. If the price paid exceeds the Note's "adjusted issue price" (as
described above), but does not equal or exceed the stated redemption price at
maturity, the amount of original issue discount to be accrued will be reduced in
accordance with a formula set forth in Section 1272(a)(7)(B) of the Code. If the
price paid is less than the Note's adjusted issue price, the purchaser will be
required to include in income any original issue discount on the Note and, to
the extent the price paid is less than the adjusted issue price, the Note will
be treated as having been purchased with "market discount". See "--Market
Discount", below.
The company believes that the owner of a Note determined to be issued with
original issue discount will be required to include the original issue discount
in ordinary gross income for federal income tax purposes computed in the manner
described above. However, the OID Regulations either do not address or are
subject to varying interpretations with respect to several issues concerning the
computation of original issue discount for obligations such as the notes.
If a variable rate Note is deemed to have been issued with original issue
discount, as described above, the amount of original issue discount accrues on a
daily basis under a constant yield method that takes into account the
compounding of interest; provided, however, that the interest associated with a
variable rate Note generally is assumed to remain constant throughout the term
of the Note at a rate that, in the case of a qualified floating rate or
qualified inverse floating rate, equals the value of the qualified floating rate
or qualified inverse floating rate as of the issue date of the Note, or, in the
case of an objective rate other than a qualified floating rate, at a fixed rate
that reflects the yield that is reasonably expected for the Note. A holder of a
variable rate Note would then recognize original issue discount during each
accrual period which is calculated based upon the Note's assumed yield to
maturity. If the interest actually accrued or paid during an accrual period
exceeds (or is less than) the constant interest assumed to be accrued or paid
during the accrual period under the foregoing rules, qualified stated interest
or original issue discount allocable to an accrual period is increased (or
decreased) under rules set forth in the OID Regulations.
The OID Regulations either do not address or are subject to varying
interpretations with respect to several issues concerning the computation of
original issue discount on the notes, including variable rate notes. Additional
information regarding the manner of reporting original issue discount to the
Service and to holders of variable rate notes will be set forth in the
prospectus supplement relating to the issuance of the notes.
MARKET DISCOUNT. notes, whether or not issued with original issue discount,
will be subject to the market discount rules of the Code. A purchaser of a Note
who purchases the Note at a price that is less than the Note's "stated
redemption price at maturity" or, in the case of a Note issued with original
issue discount, at a price that is less than the Note's "adjusted issue price"
(as these terms are described above under "--Original Issue Discount") will be
required to recognize accrued market discount as ordinary income as payments of
principal are received on the Note or upon the sale or exchange of the Note. In
general, the holder of a Note may elect to treat market discount as accruing
either (1) under a constant yield method that is similar to the method for the
accrual of original issue discount or (2) in proportion to accruals of original
issue discount, or, if there is no original issue discount, in proportion to
accruals of stated interest, in each case computed taking into account the
Prepayment Assumption. The amount of accrued market discount for purposes of
determining the amount of ordinary income to be recognized with respect to
subsequent payments on this type of Note is to be reduced by the amount
previously treated as ordinary income.
The Code provides that the market discount in respect of a Note will be
considered to be zero if the amount allocable to the Note is less than a
specified DE MINIMIS amount of 0.25% of the Note's stated redemption price at
maturity multiplied its weighted average remaining life as computed for tax
purposes. If market discount is treated as DE MINIMIS under this rule, the de
minimis market discount would be allocated among the scheduled payments included
in the stated redemption price at maturity of the Note, and the portion of the
discount allocable to each payment would be reported as income when the payment
is made.
The Code grants authority to the Treasury Department to issue regulations
providing for the computation of accrued market discount on debt instruments
such as the notes. Until the time regulations are issued, rules described in the
legislative history for these provisions of the Code will apply. Note Owners who
acquire a Note at a market discount should consult their tax advisors concerning
various methods which are available for accruing that market discount.
In general, the Code requires a holder of a Note having market discount to
defer a portion of the interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the Note. Alternatively, a holder of
a Note may elect to include market discount in gross income as it accrues and,
if the holder makes this election, the holder will be exempt from this rule. The
adjusted basis of a Note subject to the election will be increased to reflect
market discount included in gross income, thus reducing any gain or increasing
any loss on a sale or other taxable disposition.
AMORTIZABLE PREMIUM. A holder of a Note who holds the Note as a capital
asset and who purchased the Note at a price greater than its stated redemption
price at maturity will be considered to have purchased the Note at a premium. In
general, the Note Owner may elect under Code Section 171 to deduct the
amortizable bond premium as it accrues under a constant yield method. A Note
Owner's tax basis in the Note will be reduced by the amount of the amortizable
bond premium deducted. In addition, it appears that the same methods which apply
to the accrual of market discount on obligations providing for principal
payments prior to maturity are intended to apply in computing the amortizable
bond premium deduction with respect to a Note. Although there are Treasury
regulations dealing with amortizable bond premiums, they specifically do not
apply to prepayable debt instruments subject to Section 1272(a)(6), such as the
notes. However, by analogy to the Treasury regulations, any premium in excess of
interest income may be deductible to the extent of prior accruals of interest.
Note Owners who pay a premium for a Note should consult their tax advisors
concerning elections and rules for determining the method for amortizing bond
premium.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit an election to accrue all interest, discount, including de
minimus market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If this election were to be made
with respect to a Note, the Note Owner 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 the Note Owner acquires during the year
of the election or after the year of election. See "--Market Discount" above.
Similarly, a Note Owner that makes this election for a Note that is acquired as
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 the Note
Owner owns at the beginning of the first taxable year to which the election
applies or acquires afterward. See "--Amortizable Premium" above. The election
to accrue interest, discount and premium on a constant yield method with respect
to a Note is irrevocable.
GAIN OR LOSS ON DISPOSITION. If a Note is sold, the selling Note Owner will
recognize gain or loss equal to the difference between the amount realized from
the sale and the selling Note Owner's adjusted basis in the Note. The adjusted
basis generally will equal the cost of the Note to the seller, increased by any
original issue discount and market discount on the Note included in the seller's
income and reduced, but not below zero, by any payments on the Note other than
qualified stated interest and any amortizable premium. Except as discussed above
with respect to market discount, any gain or loss recognized upon a sale,
exchange, retirement, or other disposition of a Note will be capital gain or
loss if the Note is held as a capital asset and as long-term capital gain or
loss if the Note Owner's holding period exceeded one year. Special character
rules apply to debt instruments characterized as contingent debt instruments
under the 1996 Contingent Debt Regulations. In general under those rules gain is
treated as ordinary, and loss is treated as ordinary to the extent of prior
ordinary income inclusion.
SHORT-TERM NOTES. In the case of a Note with a maturity of one year or less
from its issue date (a "Short-Term Note"), no interest is treated as qualified
stated interest, and therefore all interest is included in original issue
discount. Note Owners that report income for federal income tax purposes on an
accrual method and some other Note Owners, including banks and dealers in
securities, are required to include original issue discount in income on
Short-Term notes on a straight-line basis, unless an election is made to accrue
the original issue discount according to a constant yield method based on daily
compounding.
Any other Note Owner of a Short Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount in income
currently are required to defer deductions for any interest paid on indebtedness
incurred or continued to purchase or carry a Short-Term Note in an amount not
exceeding the deferred interest income with respect to the Short-Term Note,
which includes both the accrued original issue discount and accrued interest
that are payable but that have not been included in gross income, until the
deferred interest income is realized. A Note Owner may elect to apply the
foregoing rules, except for the rule characterizing gain on sale, exchange or
retirement as ordinary, with respect to "acquisition discount" rather than
original issue discount. Acquisition discount is the excess of the stated
redemption price at maturity of the Short-Term Note over the Note Owner's basis
in the Short-Term Note. This election applies to all obligations acquired by the
taxpayer on or after the first day of the first taxable year to which the
election applies, unless revoked with the consent of the IRS. A Note Owner's tax
basis in a Short-Term Note is increased by the amount included in the Owner's
income on the Note.
TAXATION OF CERTAIN FOREIGN NOTE OWNERS. As used in this prospectus, the
term "Non-United States Person" means any person other than a "United States
Person". A "United States Person" is an individual who is a citizen or resident
of the United States, a corporation, partnership or other entity treated as such
created or organized in or under the laws of the United States or any political
subdivision of the United States, an estate the income of which is subject to
United States federal income taxation regardless of its source and any trust
with respect to which (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and (2) one or more
United States persons have the authority to control all substantial decisions of
the trust. A "Non-United States Holder" means a Non-United States Person who is
a Note Owner.
On October 6, 1997, Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Holders. The 1997 Withholding Regulations are generally effective for
payments after December 31, 1999, regardless of the issue date of the Note with
respect to which the payments are made, subject to particular transition rules.
The discussion under this heading and under "--Backup Withholding and
Information Reporting," below, is not intended to include a complete discussion
of the provisions of the 1997 Withholding Regulations, and prospective investors
are urged to consult their tax advisors with respect to the effect of the 1997
Withholding Regulation.
In general, Non-United States Holders will not be subject to United States
federal withholding tax with respect to payments of principal and interest on
notes, provided that specific conditions are met. Under United States federal
income tax law now in effect, and subject to the discussion of backup
withholding in the following section, payments of principal and interest,
including original issue discount, with respect to a Note to any Non-United
States Holder will not be subject to United States federal withholding tax,
provided, in the case of interest, including original issue discount, that
o the Holder does not actually or constructively own 10% or more of the
equity of the Trust,
o the Holder is not for federal income tax purposes a controlled foreign
corporation related, directly or indirectly, to the Trust through
equity ownership,
o the Holder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code and
o either (A) the Note Owner certifies, under penalties of perjury, to
the Trust or paying agent, as the case may be, that the Holder is a
Non-United States Holder and provides the Holder's name and address,
or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of
its trade or business (a "financial institution") and holds the Note,
certifies, under penalties of perjury, to the Trust or paying agent,
as the case may be, that the Certificate has been received from the
beneficial owner by it or by a financial institution between it and
the beneficial owner and furnishes the payor with a copy of the
Certificate.
A certificate described in this paragraph is effective only with respect to
payments of interest, including original issue discount, made by the certifying
Non-United States Holder after the issuance of the certificate in the calendar
year of its issuance and the two immediately succeeding calendar years. The
foregoing certification may be provided by the beneficial owner of a Note on IRS
Form W-8.
The 1997 Withholding Regulations provide optional documentation procedures
designed to simplify compliance by withholding agents. The 1997 Withholding
Regulations add "intermediary certification" options for some qualifying
withholding agents. Under one option, a withholding agent will be allowed to
rely on an IRS Form W-8 furnished by a financial institution or other
intermediary on behalf of one or more beneficial owners, or other
intermediaries, without having to obtain the beneficial owner certificate
described in the preceding paragraph, provided that the financial institution or
intermediary has entered into a withholding agreement with the IRS and is thus a
"qualified intermediary". Under another option, an authorized foreign agent of a
United States withholding agent will be permitted to act on behalf of the United
States withholding agent, provided particular conditions are met.
The 1997 Withholding Regulations also provide specific presumptions with
respect to withholding for holders not providing the required certifications to
qualify for the withholding exemption described above. In addition, the 1997
Withholding Regulations replace a number of current tax certification forms
(including IRS Form W-8, IRS Form 1001 and IRS Form 4224, discussed below) with
restated forms and standardize the period of time for which withholding agents
can rely on the certifications.
Notwithstanding the foregoing, interest described in Section 871(h)(4) of
the Code will be subject to United States withholding tax at a 30% rate, or any
lower rate as may be provided by an applicable treaty. In general, interest
described in Section 871(h)(4) of the Code includes, subject to exceptions, any
interest the amount of which is determined by reference to receipts, sales or
other cash flow of the issuer or a related person, any income or profits of the
issuer or a related person, any change in the value of any property of the
issuer or a related person or any dividends, partnership distributions or
similar payments made by the issuer or a related person. Interest described in
Section 871(h)(4) of the Code may include other types of contingent interest
identified by the IRS in future Treasury Regulations. If the Trust issues notes
the interest on which the Trust believes is described in Section 871(h)(4) of
the Code, the United States withholding tax consequences of any of these notes
will be described in the applicable prospectus supplement.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest, including original issue discount, on the Note is
effectively connected with the conduct of that trade or business, the Non-United
States Holder, although exempt from the withholding tax discussed in the
preceding paragraphs, will be subject to United States federal income tax on the
interest, including original issue discount, in the same manner as if it were a
United States person. In lieu of the certificate described above, the Holder
will be required to provide a properly executed IRS Form 4224 annually in order
to claim an exemption from withholding tax. In addition, if the Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30%, or
any lower rate as may be specified by an applicable treaty, of its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, interest, including original issue discount, on a Note will be
included in the earnings and profits of the Holder if the interest, including
original issue discount, is effectively connected with the conduct by the Holder
of a trade or business in the United States.
Generally, any gain or income, other than that attributable to accrued
interest, market discount or original issue discount in some circumstances,
realized upon the sale, exchange, retirement or other disposition of a Note will
not be subject to United States federal income tax unless (1) the gain or income
is effectively connected with a trade or business in the United States of the
Non-United States Holder or (2) in the case of a Non-United States Holder who is
a nonresident alien individual, the Non-United States Holder is present in the
United States for 183 days or more in the taxable year of the sale, exchange,
retirement or other disposition and the individual has a "tax home" (as defined
in Section 911(d)(3) of the Code) in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Under current United States
federal income tax law, information reporting requirements apply to interest,
including original issue discount, and principal payments made to, and to the
proceeds of sales before maturity by, specific non-corporate Note Owners that
are United States Persons.
In addition, a 31% backup withholding tax will apply if a non-corporate
Note Owner
o fails to furnish its Taxpayer Identification Number ("TIN"), which,
for an individual, would be his or her Social Security Number, to the
payor in the manner required,
o furnishes an incorrect TIN and the payor is so notified by the IRS,
o is notified by the IRS that it has failed properly to report payments
of interest and dividends or
o in some circumstances, fails to certify, under penalties of perjury,
that it has not been notified by the IRS that it is subject to backup
withholding for failure properly to report interest and dividend
payments.
Backup withholding will not apply with respect to payments made to particular
exempt recipients, such as corporations, within the meaning of Section 7701(a)
of the Code, and tax-exempt organizations.
In the case of a Non-United States Holder, under Treasury Regulations,
backup withholding and information reporting will not apply to payments of
principal and interest made by the Trust or any paying agent of the Trust on a
Note with respect to which the holder has provided the required certification
under penalties of perjury that it is a Non-United States Holder or has
otherwise established an exemption, provided that (1) the Trust or paying agent,
as the case may be, does not have actual knowledge that the payee is a United
States person and (2) other conditions are satisfied.
Subject to the discussion below, payments to or through the United States
office of a broker will be subject to backup withholding and information
reporting unless the holder certifies under penalties of perjury as to its
status as a Non-United States Holder and other qualifications, and no agent of
the broker who is responsible for receiving or reviewing the statement has
actual knowledge that it is incorrect, and provides his or her name and address
or the holder otherwise establishes an exemption.
In general, if principal or interest payments on a Note are collected
outside the United States by a foreign office of a custodian, nominee or other
agent acting on behalf of a Note Owner, the custodian, nominee or other agent
will not be required to apply backup withholding to payments made to the owner
and will not be subject to information reporting. However, if the custodian,
nominee or other agent is a United States Person for United States federal
income tax purposes, a controlled foreign corporation for United States tax
purposes, or a foreign person 50% or more of whose gross income is effectively
connected with its conduct of a United States trade or business for a specified
three-year period, the custodian, nominee or other agent may be subject to
particular information reporting, but not backup withholding, requirements with
respect to the payment unless the custodian, nominee or other agent has in its
records documentary evidence that the Note Owner is not a United States person
and specific conditions are met or the Note Owner otherwise establishes an
exemption.
Under Treasury Regulations, payments on the sale, exchange or retirement of
a Note effected by or through a foreign office of a broker will not be subject
to backup withholding. However, if the broker is a United States person, a
controlled foreign corporation for United States tax purposes, or a foreign
person 50% or more of whose gross income is effectively connected with its
conduct of a United States trade or business for a specified three-year period,
information reporting, but not backup withholding, will be required unless the
broker has in its records documentary evidence that the Note Owner is not a
United States person and other conditions are met or the Note Owner otherwise
establishes an exemption.
The 1997 Withholding Regulations alter the forgoing rules in some respects.
In particular, the 1997 Withholding Regulations would provide specific
presumptions under which Non-United States Holders may be subject to backup
withholding in the absence of required certifications.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a Note Owner under the backup withholding rules will
be allowed as a refund or a credit against the owner's United States federal
income tax, provided that the required information is furnished to the IRS.
Note Owners should consult their tax advisors regarding the application of
information reporting and backup withholding to their particular situations, the
availability of an exemption from reporting and backup withholding, and the
procedure for obtaining an exemption, if available.
TAX CONSEQUENCES TO CERTIFICATES OWNERS.
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Trust will agree, and the
related Certificate Owners will agree by their purchase of certificates, if
there is more than one Certificate Owner, to treat the Trust 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, the partners of the partnership being the
Certificate Owners, including, to the extent relevant, the seller in its
capacity as recipient of distributions from any Reserve Fund, and the notes
being debt of the partnership, and if there is one Certificate Owner, to treat
the Certificate Owner as the owner of the assets of the Trust and to treat the
Trust as a disregarded entity. However, the proper characterization of the
arrangement involving the Trust, the certificates, the notes, the seller, the
company and the servicer is not certain because there is no authority on
transactions closely comparable to that contemplated in this prospectus. A
variety of alternative characterizations are possible. For example, to the
extent the certificates have particular features characteristic of debt, the
certificates might be considered debt of the seller, the company or the Trust.
As long as a characterization did not result in the Trust being subject to tax
as a corporation, any characterization would not result in materially adverse
tax consequences to Certificate Owners as compared to the consequences from
treatment of the certificates as equity in a partnership, described below. On
December 17, 1996, final Treasury Regulations (the "Check-the-Box Regulations")
were issued which generally permit non-corporate entities, such as the Trust, to
elect whether to be taxed as corporations or partnerships. Under the
Check-the-Box Regulations, the Trust will be classified as a partnership unless
it elects to be classified as an association taxable as a corporation. Except as
expressly provided in the applicable prospectus supplement, the Trust will not
elect to be classified as an association taxable as a corporation. However, the
Check-the-Box Regulations would have no effect on whether a partnership should
be classified as a publicly traded partnership taxable as a corporation.
The following discussion assumes that the certificates represent equity
interests in a partnership, that all payments on the certificates are
denominated in United States dollars, none of the certificates represents
Stripped Certificates 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 the
certificates will be disclosed in the related prospectus supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificate Owner will be required to take into
account separately the Owner's allocable share of income, gains, losses,
deductions and credits of the Trust, whether or not there is a corresponding
cash distribution. Thus, cash basis holders will in effect be required to report
income from the certificates on the accrual basis and Certificate Owners may
become liable for taxes on Trust income even if they have not received cash from
the Trust to pay the taxes. The Trust's income will consist primarily of
interest and finance charges earned on the related Primary Assets, including
appropriate adjustments for market discount, original issue discount and bond
premium, and any gain upon collection or disposition of the Primary Assets.
The Trust's deductions will consist primarily of interest accruing with
respect to the notes, servicing and other fees, and losses or deductions upon
collection or disposition of Primary Assets.
Any Collateral Certificates held by the owner trust will be subject to the
federal income tax treatment described in this prospectus depending on the terms
of the Collateral Certificates and their characterization (for example, as
indebtedness) for federal income tax purposes.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (i.e., the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificate Owners will be allocated taxable income of the
Trust for each month equal to the sum of:
o the interest or other income that accrues on the certificates in
accordance with their terms for the relevant month including, as
applicable, interest accruing at the related certificate pass-through
rate for that month and interest on amounts previously due on the
certificates but not yet distributed;
o any Trust income attributable to discount on the related Primary
Assets that corresponds to any excess of the principal amount of the
certificates over their initial issue price;
o any prepayment premium payable to the Certificate Owners for the
applicable month; and
o any other amounts of income payable to the Certificate Owners for the
applicable month.
The allocation will be reduced by any amortization by the Trust of premium on
Primary Assets that corresponds to any excess of the issue price of certificates
over their principal amount. Losses will generally be allocated in the manner in
which they are borne.
Based on the economic arrangement of the parties, the foregoing approach
for allocating Trust 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 Certificate Owners. Moreover, even
under the foregoing method of allocation, Certificate Owners may be allocated
income equal to the entire certificate pass-through rate plus the other items
described above, even though the Trust might not have sufficient cash to make
current cash distributions of the amount. In addition, because tax allocations
and tax reporting will be done on a uniform basis for all Certificate Owners,
but Certificate Owners may be purchasing certificates at different times and at
different prices, Certificate Owners 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.
All of the taxable income allocated to a Certificate Owner 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 the holder under the Code.
An individual taxpayer's share of expenses of the Trust, including fees to
the servicer, but not interest expense, would be miscellaneous itemized
deductions and thus deductible only to the extent expenses plus all other
Section 212 expenses exceed two percent of the individual's adjusted gross
income. An individual taxpayer will be allowed no deduction for his share of
expenses of the Trust, other than interest, in determining his liability for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of itemized deductions, including those provided for in Section 212 of
the Code, otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a threshold amount specified in the Code, $100,000
(or $50,000 in the case of a separate return by a married individual, adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (1) 3% of the excess of adjusted gross income over the specified
threshold amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the applicable taxable year. Accordingly, deductions might be
disallowed to the individual in whole or in part and might result in the
Certificate Owner being taxed on an amount of income that exceeds the amount of
cash actually distributed to the holder over the life of the Trust. 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 that 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 Trust intends to make all tax calculations relating to income and
allocations to Certificate Owners on an aggregate basis to the extent relevant.
If the IRS were to require that the calculations be made separately for each
Primary Asset, the calculations may result in some timing and character
differences under some circumstances.
DISCOUNT AND PREMIUM. The purchase price paid by the Trust for the related
Primary Assets may be greater or less than the remaining principal balance of
the Primary Assets at the time of purchase. If so, the Primary Assets will have
been acquired at a premium or market discount, as the case may be. See "Tax
Consequences to Note Owners--Market Discount" and "--Amortizable Premium" above.
As indicated above, the Trust will make this calculation on an aggregate basis,
but it is possible that the IRS might require that it be recomputed on a Primary
Asset-by-Primary Asset basis.
If the Trust acquires the Primary Assets at a market discount or premium,
the Trust will elect to include any market discount in income currently as it
accrues over the life of the Primary Assets or to offset any premium against
interest income on the Primary Assets. As indicated above, a portion of the
market discount income or premium deduction may be allocated to Certificate
Owners.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If a termination occurs under Section 708 of the Code, the
Trust will be considered to contribute its assets to a new Trust, which would be
treated as a new partnership, in exchange for certificates in the new Trust. The
original Trust will then be deemed to distribute the certificates in the new
Trust to each of the Owners of certificates in the original Trust in liquidation
of the original Trust. The Trust will not comply with particular technical
requirements that might apply when a constructive termination occurs. As a
result, the Trust may be subject to some tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
Trust might not be able to comply with these requirements 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.
Any gain or loss would be long-term capital gain or loss if the Certificate
Owner's holding period exceeded one year. A Certificate Owner's tax basis in a
Certificate will generally equal its cost, increased by its share of Trust
income allocable to the Certificate Owner and decreased by any distributions
received or losses allocated with respect to the Certificate. In addition, both
the tax basis in the certificates and the amount realized on a sale of a
Certificate would include the Certificate Owner's share, determined under
Treasury Regulations, of the notes and other liabilities of the Trust. A
Certificate Owner acquiring certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the certificates
and, upon a sale or other disposition of some of the certificates, allocate a
portion of the 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.
If a Certificate Owner 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 to the certificates, the excess will generally
give rise to a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificate Owners in
proportion to the principal amount of certificates owned by them as of the close
of the last day of the applicable month. As a result, a Certificate Owner
purchasing certificates may be allocated tax items, which will affect the
purchaser's tax liability and tax basis, attributable to periods before the
actual transaction.
The use of a monthly convention may not be permitted by existing Treasury
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 might be reallocated among the Certificate Owners. The seller will
be authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future laws, regulations or
other IRS guidance.
SECTION 754 ELECTION. In the event that a Certificate Owner sells its
certificates at a profit (or loss), the purchasing Certificate Owner will have a
higher (or lower) basis in the certificates than the selling Certificate Owner
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust 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 will not make an election under
Section 754 of the Code. As a result, Certificate Owners might be allocated a
greater or lesser amount of Trust income than would be appropriate based on
their own purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep complete and
accurate books of the Trust. The trustee will file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Trust and will
report each Certificate Owner's allocable share of items of Trust income and
expense to holders and the IRS on Schedule K-1. The Trust will provide the
Schedule K-1 information to nominees that fail to provide the Trust with the
information statement described below and the nominees will be required to
forward this information to the beneficial owners of the certificates.
Generally, holders must timely file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all the 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 with
a statement containing specific information on the nominee, the beneficial
owners and the certificates so held. The information includes (1) the name,
address and taxpayer identification number of the nominee and (2) as to each
beneficial owner
o the name, address and identification number of the person,
o whether the 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
o particular information on certificates that were held, bought or sold
on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through a
nominee are required to furnish directly to the Trust 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 information
statement to the Trust. The information referred to above for any calendar year
must be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
The company will be designated as the tax matters partner for each Trust in
the related Trust Agreement and, as the tax matters partner, will be responsible
for representing the Certificate Owners in some specific disputes 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 the later of three
years after the date on which the partnership information return is filed or the
last day for filing the return for the applicable year, determined without
regard to extensions. Any adverse determination following an audit of the return
of the Trust by the appropriate taxing authorities could result in an adjustment
of the returns of the Certificate Owners, and, under some circumstances, a
Certificate Owner may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificate Owner's returns and adjustments of items not related to
the income and losses of the Trust.
The Taxpayer Relief Act of 1997 created a special audit system for
qualifying large partnerships that have elected to apply a simplified
flow-through reporting system under new sections 771 through 777. Unless
otherwise specified in the applicable prospectus supplement, a Trust will not
elect to apply the simplified flow-through reporting system.
TAXATION OF CERTAIN FOREIGN CERTIFICATE OWNERS. As used in this prospectus,
the term "Non-United States Owner" means a Certificate Owner that is not a
United States person, as defined under "owner trusts--Tax Consequences to Note
Owners--Backup Withholding and Information Reporting," above.
It is not clear whether the Trust would be considered to be engaged in a
trade or business in the United States for purposes of federal withholding taxes
with respect to Non-United States Owners because there is no clear authority
dealing with that issue under facts substantially similar to those described in
this prospectus. Although it is not expected that the Trust would be engaged in
a trade or business in the United States for these purposes, the Trust will
withhold as if it were so engaged in order to protect the Trust from possible
adverse consequences of a failure to withhold. The Trust expects to withhold on
the portion of its taxable income that is allocable to Non-United States Owners
pursuant to Section 1446 of the Code, as if the income were effectively
connected to a U.S. trade or business, at a rate of 35% for Non-United States
Owners that are taxable as corporations and 39.6% for all other Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. In determining a Certificate Owner's withholding status, the Trust
may rely on IRS Form W-8, IRS Form W-9 or the Certificate Owner's certification
of nonforeign status signed under penalties of perjury.
Each Non-United States Owner might be required to file a U.S. individual or
corporate income tax return on its share of the Trust's income including, in the
case of a corporation, a return in respect of the branch profits tax. Each
Non-United States Owner must obtain a taxpayer identification number from the
IRS and submit that number to the Trust in order to assure appropriate crediting
of the taxes withheld. Assuming the Trust is not engaged in a U.S. trade or
business, a Non-United States Owner would be entitled to a refund with respect
to all or a portion of taxes withheld by the Trust if, in particular, the
Owner's allocable share of interest from the Trust constituted "portfolio
interest" under the Code.
The interest, however, may not constitute "portfolio interest" if, among
other reasons, the underlying obligation is not in registered form or if the
interest is determined without regard to the income of the Trust, in the later
case, the interest being properly characterized as a guaranteed payment under
Section 707(c) of the Code. If this were the case, Non-United States Owners
would be subject to a United States federal income and withholding tax at a rate
of 30 percent on the Trust's gross income, without any deductions or other
allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
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 Certificate Owner fails to comply with particular
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE GRANTOR TRUSTS.
CHARACTERIZATION. In the case of a grantor trust, Federal Tax Counsel will
deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that the Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of certificates (referred to in this prospectus as "grantor
trust certificateholders") will be treated for federal income tax purposes as
owners of a portion of the Trust's assets as described below. The certificates
issued by a Trust that is treated as a grantor trust are referred to in this
prospectus as "grantor trust certificates".
TAXATION OF GRANTOR TRUST CERTIFICATEHOLDERS. Subject to the discussion
below under "Stripped Certificates" and "Subordinated certificates," each
grantor trust certificateholder will be treated as the owner of a pro rata
undivided interest in the Primary Assets and other assets of the Trust.
Accordingly, and subject to the discussion below of the recharacterization of
the Servicing Fee, each grantor trust certificateholder must include in income
its pro rata share of the interest and other income from the Primary Assets,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Trust, at the same time and to
the same extent as these items would be included or deducted by the grantor
trust certificateholder if the grantor trust certificateholder held directly a
pro rata interest in the assets of the Trust and received and paid directly the
amounts received and paid by the Trust. Any amounts received by a grantor trust
certificateholder in lieu of amounts due with respect to any Primary Asset
because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Under Sections 162 and 212 each grantor trust certificateholder will be
entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the servicer, provided that these amounts are reasonable
compensation for services rendered to the Trust. Grantor trust
certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent these expenses plus all other
miscellaneous itemized deductions exceed two percent of the grantor trust
certificateholder's adjusted gross income, and will be allowed no deduction for
these expenses in determining their liabilities for alternative minimum tax. In
addition, Section 68 of the Code provides that the amount of itemized
deductions, including those provided for in Section 212 of the Code, otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code, $100,000 (or $50,000 in the
case of a separate return by a married individual), adjusted for changes in the
cost of living subsequent to 1990, will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
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 the 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 servicing compensation to be received by the servicer may be questioned
by the IRS as exceeding a reasonable fee for the services being performed in
exchange for the servicing compensation, and a portion of the servicing
compensation could be recharacterized as an ownership interest retained by the
servicer or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "--Stripped Certificates" or
"--Subordinated certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a grantor trust Certificate will be treated as purchasing an
interest in each Primary Asset in the Trust at a price determined by allocating
the purchase price paid for the Certificate among all Primary Assets in
proportion to their fair market values at the time of the purchase of the
Certificate. To the extent that the portion of the purchase price of a grantor
trust Certificate allocated to a Primary Asset is less than or greater than the
portion of the stated redemption price at maturity of the Primary Asset, the
interest in the Primary Asset will have been acquired at a discount or premium.
See "--Market Discount" and "--Premium," below.
The treatment of any discount on a Primary Asset will depend on whether the
discount represents original issue discount or market discount. Except as
indicated otherwise in the applicable prospectus supplement, it is not expected
that any Primary Asset will have original issue discount (except as discussed
below under "Stripped Certificates" or "Subordinated certificates"). For the
rules governing original issue discount, see "owner trusts--Tax Consequences to
Note Owners--Original Issue Discount" above. However, in the case of Primary
Assets that constitute short-term Government Securities the rules set out above
dealing with short-term obligations (see "owner trusts--Tax Consequences to Note
Owners-- Short-Term notes" above) are applied with reference to acquisition
discount rather than original issue discount, if the obligations constitute
"short-term Government obligations" within the meaning of Section 1271(a)(3)(B)
of the Code.
The information provided to grantor trust certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Primary Asset is acquired.
MARKET DISCOUNT. A grantor trust certificateholder that acquires an
undivided interest in Primary Assets may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Primary
Asset is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "owner trusts--Tax
Consequences to Note Owners--Market Discount" above.
PREMIUM. To the extent a grantor trust certificateholder is considered to
have purchased an undivided interest in a Primary Asset for an amount that is
greater than the stated redemption price at maturity of the interest, the
grantor trust certificateholder will be considered to have purchased the
interest in the Primary Asset with "amortizable bond premium" equal in amount to
the excess. For a discussion of the rules applicable to amortizable bond
premium, see "owner trusts--Tax Consequences to Note Owners--Amortizable
Premium" above.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to the
stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Primary Asset from ownership of the right to receive
some or all of the related interest payments. In general, where a separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount (see "owner trust--Tax Consequences to Note Owners--Original
Issue Discount"), the difference between the holder's initial purchase price for
the right to receive and the principal or interest payment to be received with
respect to that right.
Certificates will constitute Stripped Certificates and will be subject to
these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable amount
(see "Taxation of grantor trust certificateholders," above);
o if the company or any other party retains a retained yield with
respect to the Primary Assets held by the Trust;
o if two or more classes of certificates are issued representing the
right to non-pro rata percentages of the interest or principal
payments on the Contracts; or
o if certificates are issued which represent the right to interest-only
payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"owner trust--Tax Consequences to Note Owners--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code, the
issue price of a Stripped Certificate will be the purchase price paid by each
holder of the Stripped Certificate and the stated redemption price at maturity
may include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated as
zero under the original issue discount DE MINIMIS rules described above.
SUBORDINATED CERTIFICATES. In the event the Trust issues two classes of
grantor trust certificates that are identical except that one class is a
subordinate class, with a relatively high Certificate Pass Through Rate, and the
other is a senior class, with a relatively low Certificate Pass Through Rate
(referred to in this prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the grantor trust certificateholders will be
deemed to have acquired the following assets: (1) the principal portion of each
Primary Asset plus a portion of the interest due on each Primary Asset (the
"Trust Stripped Bond"), and (2) a portion of the interest due on each Primary
Asset equal to the difference between the Certificate Pass Through Rate on the
Subordinate Certificates and the Certificate Pass Through Rate on the Senior
Certificates, if any, which difference is then multiplied by the Subordinate
Class Percentage (the "Trust Stripped Coupon"). The "Subordinate Class
Percentage" equals the initial aggregate principal amount of the Subordinate
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates. The "Senior Class
Percentage" equals the initial aggregate principal amount of the Senior
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior Class
Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of each asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both assets. The Trust Stripped Bond
will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped coupons" within the meaning of Section 1286 of the Code.
Because the purchase price paid by each Subordinate Certificateholder will be
allocated between that certificateholder's interest in the Trust Stripped Bond
and the Trust Stripped Coupon based on the relative fair market value of each
asset on the date the Subordinate Certificate is purchased, the Trust Stripped
Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped Bond
represented by a Certificate will be reported in the same manner as described
generally above for holders of certificates. The interest income on the
Subordinate Certificates at the Senior Certificate pass-through rate and the
portion of the Servicing Fee that does not constitute excess servicing will be
treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the Trust Stripped Coupon, based on the prepayment assumption used in pricing
the certificates, over the portion of the purchase price allocated to the Trust
Stripped Coupon. The sum of the daily portions of original issue discount on the
Trust Stripped Coupon for each day during a year in which the Subordinate
Certificateholder holds the Trust Stripped Coupon will be included in the
Subordinate Certificateholder's income.
If the Subordinate Certificateholders receive distribution of less than
their share of the Trust's receipts of principal or interest (the "Shortfall
Amount") because of the subordination of the Subordinate Certificates, holders
of Subordinate Certificates would probably be treated for federal income tax
purposes as if they had
o received as distributions their full share of receipts,
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount and
o retained the right to reimbursement of the relevant amounts to the
extent these amounts are otherwise available as a result of
collections on the Primary Assets or amounts available from a Reserve
Account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as current
income any interest income or original issue discount of the Trust
that was a component of the Shortfall Amount, even though that amount
was in fact paid to the Senior Certificateholders,
o a loss would only be allowed to the Subordinate Certificateholders
when their right to receive reimbursement of the Shortfall Amount
became worthless (i.e., when it becomes clear that amount will not be
available from any source to reimburse the loss) and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The OID
regulations permit a grantor trust certificateholder to elect to accrue all
interest, discount, including DE MINIMIS market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield method.
If an election were to be made with respect to an interest in a Primary Asset
with market discount, the Certificate Owner 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 the grantor trust
certificateholder acquires during the year of the election or afterward. See
"--Market Discount" above. Similarly, a grantor trust certificateholder that
makes this election for an interest in a Primary Asset 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 the grantor
trust certificateholder owns at the beginning of the first taxable year to which
the election applies or acquires afterward. See "--Premium" above. The election
to accrue interest, discount and premium on a constant yield method with respect
to a grantor trust Certificate is irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains a
provision requiring original issue discount on any pool of debt instruments the
yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
grantor trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized, exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income, allocable to the Primary Asset and the owner's adjusted basis
in the grantor trust Certificate. The adjusted basis generally will equal the
seller's cost for the grantor trust Certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the grantor trust Certificate, and reduced, but not below zero, by
any premium amortized by the seller and by principal payments on the grantor
trust Certificate previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
Primary Assets represented by a grantor trust Certificate are "capital assets"
within the meaning of Section 1221, except that gain will be treated in whole or
in part as ordinary interest income to the extent of the seller's interest in
accrued market discount not previously taken into income on underlying Primary
Assets having a fixed maturity date of more than one year from the date of
origination. A capital gain or loss will be long-term or short-term depending on
whether or not the grantor trust Certificate has been owned for the long-term
capital gain holding period, currently more than one year.
Notwithstanding the foregoing, any gain realized on the sale or exchange of
a grantor trust Certificate will be ordinary income to the extent of the
seller's interest in accrued market discount on Primary Assets not previously
taken into income. See "--Market Discount," above.
NON-UNITED STATES GRANTOR TRUST CERTIFICATE OWNERS. Amounts paid to
Non-United States Owners of grantor trust certificates will be treated as
interest for purposes of United States withholding tax. The interest
attributable to the underlying Primary Assets will not be subject to the normal
30%, or any lower rate provided for by an applicable tax treaty, withholding tax
imposed on these amounts provided that (1) the Non-U.S. Certificate Owner does
not own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation, within the definition of Section 957, related to any of the issuers
of the Primary Assets and (2) the Certificate Owner fulfills specific
certification requirements. Under these requirements, the Certificate Owner must
certify, under penalty of perjury, that it is not a "United States person" and
must provide its name and address. "United States person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision of the United States, or an estate or trust the income of which is
includable in gross income for United States federal income tax purposes,
without regard to its source. If, however, interest or gain is effectively
connected to the conduct of a trade or business within the United States by the
Certificate Owner, the owner will be subject to United States federal income tax
on the interest or gain at graduated rates and, in the case of a corporation, to
a possible branch profits tax, and will not be subject to withholding tax
provided that the owner meets applicable documentation requirements. Potential
investors who are not United States persons should consult their own tax
advisors regarding the specific tax consequences of owning a Certificate.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Owners of grantor trust certificates. The 1997 Withholding Regulations
are generally effective for payments after December 31, 1999, regardless of the
issue date of the Primary Assets with respect to which payments are made,
subject to particular transition rules. For further discussion, see "owner
trusts--Tax Consequences to Note Owners Taxation of Certain Foreign Note Owners"
above.
BACKUP WITHHOLDING. Distributions made on the grantor trust certificates
and proceeds from the sale of the grantor trust certificates will be subject to
a "backup" withholding tax of 31% if, in general, the grantor trust
certificateholder fails to comply with particular identification procedures,
unless the holder is an exempt recipient under applicable provisions of the
Code. See "owner trusts--Tax Consequences to Note Owners--Backup Withholding and
Information Reporting" above.
STATE AND LOCAL TAX CONSIDERATIONS
An investment in the securities may have state or local income, franchise,
personal property or other tax consequences. These consequences may depend upon,
among other things, the tax laws of the jurisdiction where the Security Owners
reside or are doing business, the characterization of the Trust (e.g., as a
trust, partnership or other entity) for state or local tax purposes, whether the
Trust is considered to be doing business in a particular jurisdiction, and the
classification of the securities as equity or debt or as an undivided interest
in the underlying Primary Assets under the laws of a jurisdiction.
Generally, the tax treatment of the securities for federal income tax
purposes should apply for state and local tax purposes. Thus, if the
certificates or notes are treated as indebtedness for federal income tax
purposes, they should likewise be treated as indebtedness for state and local
tax purposes. In this case, Certificate Owners and Note Owners not otherwise
subject to state or local tax would not become subject to the tax solely because
of their ownership of the securities. However, except as described in the
following paragraph, a Security Owner already subject to tax in a state or
locality could be required to pay additional tax as a result of the holder's
ownership or disposition of securities.
Interest income, including original issue discount, earned on obligations
of the United States Treasury Department and of some government sponsored
enterprises generally is exempt from state and local income taxation. Therefore,
where a grantor trust holds Government Securities as part of the Trust Property,
interest income attributable to Government Securities earned on the certificates
may be exempt from state and local taxation, depending on the form of the
Government Security. However, some states or localities may take a contrary
position. Investors should consult with their own tax advisors concerning the
exemptions from state and local income taxes.
If some or all of the securities are treated as equity interest in a
partnership, not treated as a publicly traded partnership taxable as a
corporation, for federal income tax purposes, the securities generally should be
treated as partnership interests for state and local income tax purposes. In
this case, the partnership should be viewed as a passive holder of investments
and, as a result, should not be subject to state or local taxation and the
Security Owners should not be subject to taxation on income received through the
partnership unless they are already subject to tax in the jurisdiction. However,
if the state or local jurisdiction viewed the partnership as doing business in
the jurisdiction, Security Owners would normally be subject to taxation in that
jurisdiction on their allocable share of the partnership's income even though
they otherwise had no contact with the jurisdiction. Furthermore, depending on
the specific allocation and apportionment formula, if any, used by the
jurisdiction, it is possible that Security Owners in this case may be subject to
tax in the jurisdiction on their income from other sources. Additionally,
notwithstanding the flow-through treatment that generally applies to
partnerships, some states and localities impose an entity level tax on
partnerships and trusts doing business within their jurisdiction.
The foregoing discussion presents some of the state and local tax
consequences that might apply to Security Owners. However, because of the
variation in each state's and locality's tax laws based in whole or in part upon
income, it is impossible to predict the tax consequences to Note Owners and
Certificate Owners in all of the taxing jurisdictions in which they are already
subject to tax. Accordingly, Security Owners are strongly urged to consult their
own tax advisors with respect to state and local tax consequences arising out of
the purchase, ownership and disposition of securities.
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S
OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF NOTES
OR CERTIFICATES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND
CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Set forth below are some consequences under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Code that a fiduciary (a
"Plan Fiduciary") of an "employee benefit plan" (as defined in and subject to
ERISA) or of a "plan" (as defined in Section 4975 of the Code) who has
investment discretion should consider before deciding to invest the plan's
assets in securities. The following summary is intended to be a summary of some
relevant ERISA issues and does not purport to address all ERISA considerations
that may be applicable to a particular plan.
In general, the terms "employee benefit plan" as defined in ERISA and
"plan" as defined in Section 4975 of the Code (a "Plan") refer to any plan or
account of various types which provide retirement benefits or welfare benefits
to an individual or to an employer's employees and their beneficiaries. Plans
include corporate pension and profit-sharing plans, "simplified employee pension
plans", Keogh plans for self-employed individuals, including partners in a
partnership, individual retirement accounts described in Section 408 of the Code
and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts and
circumstances that are relevant to an investment in the securities plays in the
Plan's investment portfolio. Each Plan Fiduciary before deciding to invest in
the securities, must be satisfied that investment in the securities is a prudent
investment for the Plan, that the investments of the Plan, including the
investment in the securities, are diversified so as to minimize the risks of
large losses and that an investment in the securities complies with the Plan and
related trust documents.
Each Plan considering acquiring a Security should consult its own legal and
tax advisors before doing so.
EXEMPT PLANS
ERISA and Section 4975 of the Code do not apply to governmental plans and
some church plans, each as defined in Section 3 of ERISA and Section 4975(g) of
the Code. However, fiduciaries with respect to these plans may be subject to
federal, state or other laws similar in effect to ERISA and Section 4975 of the
Code. The discussion below does not purport to address considerations under the
applicable federal, state or other laws.
INELIGIBLE PURCHASERS
Securities may not be purchased with the assets of a Plan that is sponsored
by or maintained by the company, the trustee, the indenture trustee, the Trust,
the servicer or any of their respective affiliates. securities may not be
purchased with the assets of a Plan if the company, the trustee, the indenture
trustee, the Trust, the servicer or any of their respective affiliates or any
employees of the trustee, the indenture trustee, the Trust or the servicer: (1)
has investment discretion with respect to the investment of the Plan assets; or
(2) has authority or responsibility to give or regularly gives investment advice
with respect to the Plan assets for a fee, pursuant to an agreement or
understanding that the advice will serve as a primary basis for investment
decisions with respect to the Plan assets and that the advice will be based on
the particular investment needs of the Plan. A party that is described in clause
(1) or (2) of the preceding sentence is a fiduciary under ERISA and the Code
with respect to the Plan, and any purchase might result in a "prohibited
transaction" under ERISA and the Code.
PLAN ASSETS
It is possible that the purchase of a Security by a Plan will cause, for
purposes of Title I of ERISA and Section 4975 of the Code, the related assets of
a Trust to be treated as assets of that Plan. A regulation (the "DOL
Regulation") issued under ERISA by the United States Department of Labor (the
"DOL") contains rules for determining when an investment by a Plan in an entity
will result in the underlying assets of the entity being plan assets. The rules
provide that the assets of an entity will not be "plan assets" of a Plan that
purchases an interest in plan assets if the interest is not an "equity
interest". The DOL Regulation defines an equity interest as an interest other
than an instrument that is treated as indebtedness under applicable local law
and that has no substantial equity features. The DOL Regulation provides with
respect to the purchase of an equity interest by a Plan, that the assets of an
entity will not be plan assets of a Plan that purchases an interest in plan
assets if particular exceptions apply including the following: (1) the
investment by all "benefit plan investors" is not "significant"; or (2) the
security issued by the entity is a "publicly offered security". The prospectus
supplement will specify whether any of the exceptions set forth in the
regulation under ERISA may apply with respect to a series of securities.
With respect to clause (1) of the preceding paragraph, the term "benefit
plan investors" includes all plans and accounts of the types described above as
employee benefit plans and accounts, whether or not subject to ERISA, as well as
entities that hold "plan assets" due to investments made in the entities by any
of these plans or accounts. Investments by benefit plan investors will be deemed
not significant if benefit plan investors own, in the aggregate, less than a 25%
interest in the entity, determined without regard to the investments of persons
with discretionary authority or control over the assets of the entity, of any
person who provides investment advice for a fee with respect to the assets and
of "affiliates" of these persons, within the meaning of the DOL Regulation.
Because the availability of this exception to any Trust depends upon the
identity of the certificateholders of the applicable series at any time, there
can be no assurance that any series or class of certificates will qualify for
this exception.
With respect to clause (2) of the second preceding paragraph, a publicly
offered security is one which is
(a) "freely transferable,"
(b) part of a class of securities that is "widely held" and
(c) either
(1) part of a class of securities registered under Section 12(b) or
12(g) of the Exchange Act, or
(2) sold to the Plan as part of a public offering pursuant to an
effective registration statement under the securities Act and
registered under the Exchange Act within 120 days, or any later
time as may be allowed by the securities and Exchange Commission,
after the end of the fiscal year of the issuer in which the
offering of the security occurred.
Whether a security is "freely transferable" is based on all relevant facts and
circumstances. A class of securities is "widely held" only if it is of a class
of securities owned by 100 or more investors independent of the issuer and of
each other.
If none of the exceptions set forth in the DOL Regulation apply, the assets
of a Trust will be deemed to be the assets of each Plan investor for the
purposes of ERISA and Section 4975 of the Code. In this case, the discussion set
forth in the following sections will apply.
CONSEQUENCES OF CHARACTERIZATION AS PLAN ASSETS.
If the assets of a Trust are plan assets, the trustee will be a fiduciary
under ERISA with respect to Plan investors and its duties and liabilities will
be subject to the provisions of ERISA.
In addition, Section 406 of ERISA will prohibit the trustee, among others,
from causing the assets of the Trust to be involved, directly or indirectly, in
specific types of transactions with "parties in interest" to investing Plans
unless statutory or administrative exemption applies. If the prohibited
transaction restrictions of Section 406 of ERISA are violated, ERISA generally
provides for criminal and civil penalties upon the Plan Fiduciary and possibly
other persons. Section 4975(c) of the Code generally imposes excise tax on
"disqualified persons" who engage, directly or indirectly, in similar types of
transactions with the assets of Plans subject to the Section, except that an IRA
that engages in a prohibited transaction may instead forfeit its tax exempt
status, and also requires recession of the transaction.
If the Trust assets are plan assets, Section 406 of ERISA will prohibit the
trustee, among others, from causing the assets of the Trust to be involved,
directly or indirectly, in specific types of transactions with "parties in
interest" to investing Plans unless a statutory or administrative exemption
applies. If the prohibited transaction restrictions of Section 406 of ERISA are
violated, ERISA generally provides for criminal and civil penalties upon the
Plan Fiduciary and possibly other persons. Section 4975(c) of the Code generally
imposes an excise tax on "disqualified persons" who engage, directly or
indirectly, in similar types of transactions with the assets of Plans subject to
the Section, except that an IRA that engages in a prohibited transaction may
instead forfeit its tax-exempt status, and also requires recision of the
transaction.
The types of transactions subject to the prohibited transaction
restrictions of ERISA and Section 4975(c) of the Code include:
(1) sales, exchanges or leases of property, such as the securities,
(2) loans or other extensions of credit and
(3) the furnishing of goods and services. As described in Section
406(b)(1) or Section 4975(c)(1)(E) of the Code, the use of plan
assets by or for the benefit of parties in interest or
disqualified persons may also constitute a prohibited
transaction.
The company, the trustee, the indenture trustee, the Trust, the servicer
and other persons and some affiliates of the trustee, the indenture trustee, the
Trust and the servicer, might be considered or might become a party in interest
or disqualified person with respect to a Plan. If so, the acquisition, holding
or disposition of securities by or on behalf of the Plan could give rise to one
or more "prohibited transactions" within the meaning of Section 406 ERISA and
Section 4975(c) of the Code unless an exemption described below or some other
exemption is available.
PROHIBITED TRANSACTION EXEMPTIONS FOR CERTIFICATES
Deutsche Bank Alex. Brown is the recipient of a final prohibited
transaction exemption, 59 Fed. Reg. 65400 (December 19, 1994) and Deutsche
Morgan Grenfell/C.J. Lawrence Inc. received similar approval (FAN 97-03E) (the
"Underwriter's PTE" or "Deutsche Banc Alex. Brown's PTE" if specified in the
applicable prospectus supplement), which may accord protection from violations
under Sections 406 and 407 of ERISA and Section 4975 of the Code for Plans that
acquire certificates. The Underwriter's PTE applies to certificates (a) which
represent (1) a beneficial ownership interest in the assets of a trust and
entitle the holder to pass-through payments of principal, interest and/or other
payments made with respect to the assets of the trust, or (2) an interest in a
REMIC if the certificates are issued by and are obligations of a trust; and (b)
with respect to which Deutsche Banc Alex. Brown or any of its affiliates is
either the sole underwriter, the manager or co-manager of the underwriting
syndicate or a selling or placement agent. The corpus of a trust to which the
Underwriter's PTE applies include
(1) obligations which bear interest or are purchased at a discount
and which are secured by (A) single-family residential,
multifamily residential or commercial real property, including
obligations secured by leasehold interests on commercial real
property, or (B) shares issued by a cooperative housing
association;
(2) "guaranteed governmental mortgage pool certificates" (as defined
in the Final Regulation) and
(3) undivided fractional interests in the above.
Plans acquiring certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Primary Assets have been included
in other investment pools ("Other Pools");
(b) certificates evidencing interests in Other Pools have been both
(1) rated in one of the three highest generic rating categories
by Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc. and (2) purchased by investors,
other than Plans, for at least one year prior to a Plan's
acquisition of certificates in reliance upon the Underwriter's
PTE;
(c) at the time of acquisition, the class of certificates acquired by
the Plan has received a rating in one of the rating categories
referred to in condition (b) above;
(d) the trustee is not an affiliate of any member of the Restricted
Group;
(e) the class of certificates acquired by the Plan are not
subordinated to other classes of certificates of that series with
respect to the right to receive payment in the event of defaults
or delinquencies on the underlying Primary Assets;
(f) the Plan is an "accredited investor" (as defined in Rule
501(a)(1) of Regulation D under the securities Act);
(g) 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; and
(h) the sum of all payments made to and retained by the Underwriter
or members of any underwriting syndicate in connection with the
distribution of the certificates represents not more than
reasonable compensation for underwriting the certificates; the
sum of all payments made to and retained by the seller pursuant
to the sale of the Primary Assets to the Trust represents not
more than the fair market value of the Primary Assets; and the
sum of all payments made to and retained by the servicer and all
subservicers represents not more than reasonable compensation for
the servicer's services under the Pooling and Servicing Agreement
or Sale and Servicing Agreement and reimbursement of the
servicer's reasonable expenses in connection with the servicer's
services.
In addition, the Underwriter's PTE will not apply to a Plan's investment in
certificates if the Plan fiduciary responsible for the decision to invest in a
class of certificates is an obligor with respect to more than 5% of the fair
market value of the obligations constituting the Primary Assets or an affiliate
of the person and will not apply, unless:
(1) in the case of an acquisition in connection with the initial
issuance of any series of certificates, at least 50% of each class of
certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group;
(2) the Plan's investment in any class of certificates does not exceed
25% of the outstanding certificates of that class at the time of
acquisition;
(3) immediately after the acquisition, no more than 25% of the Plan
assets with respect to which the investing fiduciary has discretionary
authority or renders investment advice are invested in certificates
evidencing interest in trusts sponsored or containing assets sold or
serviced by the same entity; and
(4) the Plan is not sponsored by the company, any Underwriter, the
trustee, the servicer, any subservicer, any credit enhancer or the obligor
under any other credit support mechanism, an obligor with respect to
obligations constituting more than 5% of the aggregate unamortized
principal balance of the Primary Assets on the date of the initial issuance
of certificates, or any of their affiliates (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Underwriter's PTE which extends exemptive relief to particular
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 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 the 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 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, which terms and conditions have been
approved by the Rating Agency;
(3) the transfer of the Additional Loans to the Trust during the
Pre-Funding Period must not result in the certificates receiving a lower
credit rating from the Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial
issuance of the certificates by the Trust;
(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 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 on the closing date;
(5) in order to ensure that the characteristics of the Additional
Loans are substantially similar to the original obligations which were
transferred to the Trust, either: (a) the characteristics of the Additional
Loans must be monitored by an insurer or other credit support provider
which is independent of the company or (b) an independent accountant
retained by the company must provide the company with a letter, with copies
provided to the 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 or Sale and Servicing Agreement ("Pooling Agreement"); in
preparing the 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 some 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 specifically permitted investments;
(8) the Offering Documents must describe:
o any Pre-Funding Account and/or Capitalized Interest Account
used in connection with a Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding Limit
for the Trust; and
o 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; and
(9) the Pooling and Servicing Agreement or Sale 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.
Whether the conditions in the Underwriter's PTE, in addition to, and
including those, relating to pre-funding, will be satisfied as to certificates
or any particular class will depend upon the relevant facts and circumstances
existing at the time the Plan acquires certificates of that class. Any Plan
investor who proposes to use "plan assets" of a Plan to acquire certificates in
reliance upon the Underwriter's PTE should determine whether the Plan satisfies
all of the applicable conditions and consult with its counsel regarding other
factors that may affect the applicability of the Underwriter's PTE.
If for any reason the Underwriter's PTE does not provide an exemption for a
particular Plan's purchase of certificates, some other individual or class
exemption may be applicable, including but not limited to: 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" ("Investor Based Exemptions"). There can
be no assurance that any of these exemptions will apply with respect to any
Plan, or even if it were to apply, that the exemption would cover all
transactions involving the applicable Trust.
PURCHASE OF NOTES
Some transactions involving the purchase of securities which are notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the Primary Assets were deemed to be assets of a Plan. Under the DOL
Regulation, the Trust 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 DOL Regulation is applicable. The
prospectus supplement will indicate whether the notes will be treated as
indebtedness without substantial equity features for purposes of the DOL
Regulation.
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
trustee, the indenture trustee or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to the Plan or
in the event that a Note is purchased in the secondary market and that purchase
constitutes a sale or exchange between a Plan and a party in interest or
disqualified person with respect to the Plan. However, one or more of the
Investor Based Exemptions may be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
GENERAL CONSIDERATIONS
Before a Plan Fiduciary decides to purchase securities on behalf of a Plan,
the Plan Fiduciary should determine whether the Exemption is applicable, whether
any other prohibited transaction exemption, if required, is available under
ERISA and Section 4975 of the Code or whether an exemption from "plan asset"
treatment is available to the applicable Trust. The Plan Fiduciary should also
consult the ERISA discussion in the applicable prospectus supplement for further
information regarding the application of ERISA to any class of certificates.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY THE COMPANY, THE SERVICER, THE TRUSTEE OR ANY OTHER PARTY THAT
THIS INVESTMENT MEETS ALL RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO
INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THE INVESTMENT IS APPROPRIATE FOR ANY
PARTICULAR PLAN. EACH PLAN FIDUCIARY SHOULD CONSULT WITH ITS ATTORNEYS AND
FINANCIAL ADVISORS AS TO THE PROPRIETY OF THIS TYPE OF AN INVESTMENT IN LIGHT OF
THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND THE RESTRICTIONS OF ERISA AND
SECTION 4975 OF THE CODE.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the notes, if any, of a given series and an underwriting agreement
with respect to the certificates of the series (collectively, the "Underwriting
Agreements"), the company will agree to cause the related Trust to sell to the
underwriters named in the Underwriting Agreement and in the related prospectus
supplement, and each of these underwriters will severally agree to purchase, the
principal amount of each class of notes and certificates, as the case may be, of
the related series set forth in the related Underwriting Agreement and in the
related prospectus supplement.
In the Underwriting Agreements with respect to any given series of
securities, the several underwriters will agree, subject to the terms and
conditions set forth in the related Underwriting Agreement, to purchase all of
the notes and certificates, as the case may be, described in the related
Underwriting Agreement that are offered by this prospectus and by the related
prospectus supplement if any of the notes and certificates, as the case may be,
are purchased.
Each prospectus supplement will either (1) set forth the price at which
each class of notes and certificates, as the case may be, being offered by the
related prospectus supplement will be offered to the public and any concessions
that may be offered to particular dealers participating in the offering of the
notes and certificates, as the case may be, or (2) specify that the related
notes and certificates, as the case may be, are to be resold by the underwriters
in negotiated transactions at varying prices to be determined at the time of
sale. After the initial public offering of any notes and certificates, as the
case may be, public offering prices and concessions may be changed.
Pursuant to the Receivables Purchase Agreement between the seller, or its
affiliate, and the company, the seller will indemnify the company and the
related underwriters against specific civil liabilities, including liabilities
under the securities Act, or contribute to payments the company and the several
underwriters may be required to make in respect of the Receivables Purchase
Agreement.
Each Trust may, from time to time, invest the funds in its Trust Accounts
in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of securities, the closing of the sale of any class of securities will be
conditioned on the closing of the sale of all other classes under the related
Underwriting Agreement.
The place and time of delivery for the notes and certificates, as the case
may be, in respect of which this prospectus is delivered will be set forth in
the related prospectus supplement.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the offered securities in which the Underwriter
acts as principal. The Underwriter may also act as agent in these transactions.
Sales will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Some legal matters relating to the securities of any series will be passed
upon by the law firms specified in the related prospectus supplement. Some
related federal income tax and other matters will be passed upon for the Trust
and the seller, by the law firms specified in the related prospectus supplement.
PROSPECTUS SUPPLEMENT
The prospectus supplement relating to a series of securities to be offered
under this prospectus will, among other things, set forth with respect to each
class of securities:
o the interest rate and authorized denominations, as applicable, of each
class of securities;
o specific information concerning the Primary Assets and the related
seller and servicer, as applicable;
o the terms of any Credit or Cash Flow Enhancement applicable to any
class or classes of securities;
o information concerning any other assets in the related Trust;
o the expected date or dates on which the principal amount, if any, of
each class of securities will be paid to holders of the securities;
o the extent to which any class within a series is subordinated to any
other class of the same series; and
o additional information with respect to the plan of distribution of the
securities.
REPORTS TO SECURITYHOLDERS
With respect to each series of securities, the servicer of the related
Primary Assets will prepare for distribution to the related Securityholders
monthly and annual reports concerning the securities and the related Trust. See
"Certain Information Regarding the Securities--Statements to Securityholders."
AVAILABLE INFORMATION
The company, as originator of the Trusts, has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-3
(together with all amendments and exhibits to the Registration Statement, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities being offered by this
prospectus. This prospectus does not contain all of the information set forth in
the Registration Statement, some parts of which have been omitted in accordance
with the rules and regulations of the Commission. In addition, company is
subject to the informational requirements of the securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance with the Exchange Act
files reports and other information with the Commission. The Registration
Statement, reports and other information are available for inspection without
charge at the public reference facilities of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and the regional offices of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of this information can be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the site is http://www.sec.gov.
Upon receipt of a request by an investor who has received an electronic
prospectus supplement and prospectus from the Underwriter or a request by the
investor's representative within the period during which there is an obligation
to deliver a prospectus supplement and Prospectus, the Underwriter will promptly
deliver, or cause to be delivered, without charge, to the investor a paper copy
of the prospectus supplement and prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the company on behalf of the Trust 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 the offering of the securities offered by the
Trust shall be deemed to be incorporated by reference in this prospectus and to
be a part of this prospectus from the dates of filing of the documents. Any
statement contained in this prospectus or in a document incorporated or deemed
to be incorporated by reference in this prospectus shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained in this prospectus, or in the accompanying prospectus
supplement, or in any subsequently filed document that also is or is deemed to
be incorporated by reference in this prospectus modifies or supersedes the
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.
The company on behalf of any Trust will provide without charge to each
person to whom a copy of this prospectus is delivered, on the written or oral
request of the person, a copy of any or all of the documents incorporated in
this prospectus by reference, except the exhibits to these documents. Requests
for copies should be directed to: Secretary, ACE Securities Corp., [ ],
telephone, [ ].
<PAGE>
INDEX OF TERMS
PAGE
1996 Contingent Debt Regulations.........................................53
1997 Act.................................................................72
1997 Withholding Regulations.............................................59
accrual period...........................................................55
Actuarial Receivables.....................................................8
Additional Loans.........................................................80
adjusted issue price.....................................................55
Advances.................................................................40
average interest rate....................................................80
Cede......................................................................1
Certificate Distribution Account.........................................36
Certificate Owners.......................................................52
Certificate Pool Factor..................................................22
Check-the-Box Regulations................................................62
Code.....................................................................52
Collection Account.......................................................36
Collection Period........................................................39
Definitive certificates..................................................32
Definitive notes.........................................................32
Definitive Securities....................................................32
Depository...............................................................23
Deutsche Banc Alex. Brown's PTE..........................................78
Distribution Date........................................................30
DOL......................................................................75
DOL Regulation...........................................................75
DTC.......................................................................1
Eligible Deposit Account.................................................37
Eligible Institution.....................................................37
Eligible Investment......................................................38
Eligible Investments.....................................................37
ERISA....................................................................74
Events of Default........................................................24
Exchange Act.............................................................84
Fannie Mae...............................................................14
Farm Credit Act..........................................................18
FCA......................................................................18
FCBs.....................................................................18
Federal Tax Counsel......................................................52
FFCB.....................................................................14
FFEL.....................................................................16
FHLB.....................................................................14
FHLMC Act................................................................15
Final Scheduled Maturity Date............................................39
Financed Vehicles.........................................................6
financial institution....................................................59
FIRREA...................................................................16
Fiscal Agent.............................................................14
Freddie Mac..............................................................14
FTC Rule.................................................................51
Funding Corporation......................................................18
Government Securities....................................................12
grantor trust certificateholders.........................................68
grantor trust certificates...............................................68
GSE Issuer...............................................................14
GSEs.....................................................................12
GSEs Bonds...............................................................12
Indenture................................................................22
Indirect Participants....................................................31
Interest Component.......................................................20
Investment Earnings......................................................37
Investor Based Exemptions................................................81
IRS......................................................................52
issue price..............................................................54
Loans....................................................................79
MBS......................................................................15
Non-United States Holder.................................................59
Non-United States Owner..................................................67
Non-United States Person.................................................59
Note Distribution Account................................................36
Note Owners..............................................................52
Note Pool Factor.........................................................21
objective rate...........................................................53
Offering Documents.......................................................80
OID Regulations..........................................................53
Other Pools..............................................................78
Participants.............................................................30
Payahead Account.........................................................36
Payaheads................................................................40
Plan.....................................................................75
Plan Fiduciary...........................................................74
Pooling Agreement........................................................80
Pooling and Servicing Agreement...........................................6
Precomputed Advance......................................................40
Precomputed Receivables...................................................8
Pre-Funded Amount........................................................37
Pre-Funding Account......................................................37
Pre-Funding Limit........................................................79
Pre-Funding Period.......................................................38
Prepayment Assumption....................................................55
Principal Component......................................................20
Private Label Custody Receipt Securities.................................18
Private Label Custody Strips.............................................18
PTCE.....................................................................81
qualified inverse floating rate..........................................53
qualified stated interest................................................53
Receivables...............................................................8
REFCO....................................................................18
REFCO Strip..............................................................20
Registration Statement...................................................83
Related Documents........................................................27
Repurchase Amount........................................................36
Reserve Account..........................................................43
Restricted Group.........................................................79
RTC......................................................................16
Rule of 78S Receivables...................................................8
Rules....................................................................31
Sale and Servicing Agreement..............................................6
Sallie Mae...............................................................14
Schedule of Receivables..................................................35
Securities Act...........................................................83
Security Owners..........................................................30
Senior Certificates......................................................70
Senior Class Percentage..................................................70
Servicer Default.........................................................44
Servicing Fee............................................................41
Servicing Fee Rate.......................................................41
Shortfall Amount.........................................................71
Short-Term Note..........................................................58
Simple Interest Advance..................................................40
Simple Interest Receivables...............................................9
stated redemption price at maturity......................................55
Stripped Certificates....................................................69
Subordinate Certificates.................................................70
Subordinate Class Percentage.............................................70
System...................................................................18
Systemwide Debt Securities...............................................18
TEFRA....................................................................20
TIN......................................................................61
Transfer and Servicing Agreements........................................35
Treasury Bonds...........................................................12
Treasury Strips..........................................................12
Trust.....................................................................6
Trust Accounts...........................................................37
Trust Agreement...........................................................6
Trust Stripped Bond......................................................70
Trust Stripped Coupon....................................................70
TVA......................................................................14
TVA Act..................................................................17
UCC......................................................................30
Underlying Issuer........................................................10
Underlying Servicer......................................................10
Underlying Trust Agreement...............................................10
Underlying Trustee.......................................................10
Underwriter's PTE........................................................78
Underwriting Agreements..................................................82
United States Person.....................................................59
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered securities (the
"Global securities") will be available only in book-entry form. Unless otherwise
specified in the related prospectus supplement, investors in the Global
securities may hold Global securities through any of The Depository Trust
company ("DTC"), Clearstream, Luxembourg or Euroclear. Unless otherwise
specified in the related prospectus supplement, Global securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Unless otherwise specified in the related prospectus supplement,
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC Participants holding securities will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear, in this capacity, and as DTC
Participants.
Non-U.S. holders of Global securities will be subject to U.S. withholding
taxes unless the holders meet particular requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global securities will be held in book-entry form by The Depository
Trust Company ("DTC") in the name of Cede & Co. ("Cede") as nominee of DTC.
Securityholders' interests in the Global securities will be represented through
financial institutions acting on their behalf as direct and indirect
Participants in DTC. As a result, Clearstream, Luxembourg and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold these positions in accounts as DTC
Participants.
Securityholders electing to hold their Global securities through DTC will
follow the settlement practices applicable to U.S. corporate debt obligations.
Securityholder securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Securityholders electing to hold their Global securities through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Global
securities will be credited to the securities custody accounts on the settlement
date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Clearstream,
Luxembourg Participant or a Euroclear Participant, the purchaser will send
instructions to Clearstream, Luxembourg or Euroclear through a Clearstream,
Luxembourg Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream, Luxembourg or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global securities against
payment. Payment will include interest accrued on the Global securities from and
including the last coupon payment date to and excluding the settlement date.
Payment will then be made by the respective Depositary to the DTC Participant's
account against delivery of the Global securities. After settlement has been
completed, the Global securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream, Luxembourg Participant's or Euroclear Participant's account.
The Global securities credit will appear the next day (European time) and the
cash debit will be back-valued to, and the interest on the Global securities
will accrue from, the value date, which would be the preceding day when
settlement occurred in New York. If settlement is not completed on the intended
value date (i.e., the trade fails), the Clearstream, Luxembourg or Euroclear
cash debit will be valued instead as of the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg Participants or Euroclear
Participants can elect not to pre-position funds and allow that credit line to
be drawn upon the finance settlement. Under this procedure, Clearstream,
Luxembourg Participants or Euroclear Participants purchasing Global securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global securities were credited to their accounts. However, interest on
the Global securities would accrue from the value date. Therefore, in many cases
the investment income on the Global securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global securities to
the respective Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participant a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases, Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global securities from and including the
last coupon payment date to and excluding the settlement date. The payment will
then be reflected in the account of the Clearstream, Luxembourg Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
be back-valued to the value date, which would be the preceding day, when
settlement occurred in New York. Should the Clearstream, Luxembourg Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date. Finally, day traders that
use Clearstream, Luxembourg or Euroclear and that purchase Global securities
from DTC Participants for delivery to Clearstream, Luxembourg Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one
day, until the purchase side of the day trade is reflected in
their Clearstream, Luxembourg or Euroclear accounts, in
accordance with the clearing system's customary procedures;
(b) borrowing the Global securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Global securities sufficient time to be reflected
in their Clearstream, Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Clearstream, Luxembourg Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC if the holder has an
address outside the U.S., will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest, including original issue discount, on
registered debt issued by U.S. Persons, unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of securities
that are non-U.S. Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8 (Certificate of Foreign Status). If the
information shown on Form W-8 changes, a new Form W-8 must be filed within 30
days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are beneficial owners of securities residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate, depending on the treaty terms, by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Securityholder
or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security or in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds,
the clearing agency, in the case of persons holding directly on the books of the
clearing agency. Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means;
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or
(3) an estate or trust the income of which is includible in gross income
for United States tax purposes, regardless of its source.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Securityholders are advised to consult their own tax advisers for specific tax
advice concerning their holding and disposing of the Global securities.
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES
[ ]
ORIGINATOR AND SERVICER
-----------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
-----------------------------------------------------------------------------
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
-----------------------------------------------------------------------------
The certificates will represent interests in the trust fund only and will
not represent interests in or obligations of any other entity.
-----------------------------------------------------------------------------
This prospectus supplement may be used to offer and sell the certificates
only if accompanied by the prospectus.
-----------------------------------------------------------------------------
The trust fund will issue certificates including the following:
CLASS INTEREST
CLASS PRINCIPAL AMOUNT(1) RATE
----- ------------------- ----------
[ ].................. $[ ] [ ]
[ ].................. [ ] [ ]
[ ].................. [ ] [ ]
___________________
(1) These amounts are approximate, as described in this prospectus
suppleme DEUTSCHE BANC ALEX. BROWN
(2) Interest will accrue on the Class [ ] and [ ] Certificates The date of
this prospectus supplement is [ ] [described as applicable].
This prospectus supplement and the accompanying prospectus relate only to
the offering of the certificates listed in the table above and not to the other
classes of certificates that will be issued by the trust fund as described in
this prospectus supplement.
[Describe assets of trust fund.]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
On or about [ ], delivery of the certificates offered by this
prospectus supplement will be made through the book-entry facilities of [ ].
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms.............................................................S-
The Offered Certificates..................................................S-
The Mortgage Loans........................................................S-
Servicing of the Mortgage Loans...........................................S-
Optional Purchase of Mortgage Loans.......................................S-
Tax Status................................................................S-
ERISA Considerations......................................................S-
Legal Investment Considerations...........................................S-
Ratings of the Certificates...............................................S-
Risk Factors.................................................................S-
[Some of the loans in the mortgage pool are
more likely to default than others, and higher than
expected defaults on these loans could reduce the
yield on your certificates................................................S-
[Mortgage Loan Interest Rates May Limit
Interest Rates on the Certificates........................................S-
[Potential Inadequacy of Credit
Enhancement for the Class [ ] Certificates................................S-
[Special Risks for the Class [ ] Certificates...........................S-
[Effect of Lack of Primary Mortgage Insurance on the Class
[ ] Certificates..........................................................S-
Unpredictability and Effect of Prepayments................................S-
Geographic Concentration of Mortgage Loans................................S-
Real Estate Market May
Affect Performance of Mortgage Loans......................................S-
[Early Principal Payment From Cash
Remaining in Pre-Funding Account........................................S-15
You will not receive physical
certificates, which can cause delays in
distributions and hamper your ability
to pledge or resell your certificates.....................................S-
Potential Disruption of Computer
Systems...................................................................S-
Limited Ability to Resell Certificates....................................S-
Description of the Certificates..............................................S-
General...................................................................S-
[Pre-Funding Account......................................................S-
Book-Entry Registration...................................................S-
Distributions of Interest...............................................S-20
[Determination of Index.................................................S-21
Distributions of Principal..............................................S-21
Credit Enhancement......................................................S-22
[The Reserve Fund.........................................................S-
Final Scheduled Distribution Date.........................................S-
Reports to Certificateholders.............................................S-
Optional Purchase of Mortgage Loans;
Termination of the Trust Fund.............................................S-
The Trustee...............................................................S-
[The Insurance Policy........................................................S-
The Insurer...............................................................S-
Insurer Financial Information.............................................S-
Where You Can Obtain Additional
Information About the Insurer............................................S-
Year 2000 Readiness Disclosure............................................S-
Financial Strength Ratings of the Insurer.................................S-
The Insurance Policy......................................................S-
Description of the Mortgage Pool.............................................S-
General...................................................................S-
Adjustable Rate Mortgage Loans............................................S-
[The Index................................................................S-
The Mortgage Loans........................................................S-
[Subsequent Mortgage Loans................................................S-
Additional Information.......................................................S-
[Originator/Servicer.........................................................S-
General...................................................................S-
Lending Activities and Loan Sales.........................................S-
Loan Servicing............................................................S-
Underwriting Guidelines...................................................S-
Servicing Practices and Experience........................................S-
The Pooling and Servicing Agreement..........................................S-
General...................................................................S-
Assignment of Mortgage Loans..............................................S-
Voting Rights.............................................................S-
General Servicing Provisions..............................................S-
Prepayment Interest Shortfalls............................................S-
Advances..................................................................S-
Servicing Advances........................................................S-
Collection of Taxes and Insurance Premiums................................S-
Insurance Coverage........................................................S-
Purchases of Defaulted Mortgage Loans...................................S-41
Evidence as to Compliance.................................................S-
Servicing Compensation and Payment of Expenses............................S-
Subservicing..............................................................S-
Resignation or Removal of the Servicer....................................S-
Yield Considerations.........................................................S-
General...................................................................S-
Overcollateralization.....................................................S-
[Subordination of the Class [ ] Certificates............................S-
Weighted Average Life...................................................S-45
Material Federal Income Tax Considerations...................................S-
General...................................................................S-
Taxation of Offered Certificates..........................................S-
State Income Tax Considerations..............................................S-
Legal Investment Considerations..............................................S-
Use of Proceeds..............................................................S-
Underwriting.................................................................S-
ERISA Considerations.........................................................S-
Experts......................................................................S-
Legal Matters................................................................S-
Ratings......................................................................S-
Glossary of Defined Terms....................................................S-
Annex I......................................................................S-
<PAGE>
PROSPECTUS
PAGE
Description of the Trust Funds..............................................
Assets...................................................................
Mortgage Loans...........................................................
Contracts................................................................
Agency Securities........................................................
Mortgage Securities......................................................
FHA Loans and VA Loans...................................................
Pre-Funding Accounts.....................................................
Accounts.................................................................
Credit Support...........................................................
Cash Flow Agreements.....................................................
Use of Proceeds.............................................................
Yield Considerations........................................................
General..................................................................
Interest Rate............................................................
Timing of Payment of Interest............................................
Payments of Principal; Prepayments.......................................
Prepayments--Maturity and Weighted Average Life..........................
Other Factors Affecting Weighted Average Life...........................
The Depositor...............................................................
Description of the Securities...............................................
General..................................................................
Distributions............................................................
Available Distribution Amount............................................
Distributions of Interest on the
Securities...........................................................27
Distributions of Principal of the
Securities.............................................................
Components...............................................................
Distributions on the Securities of Prepayment Premiums
Allocation of Losses and Shortfalls......................................
Advances in Respect of Delinquencies.....................................
Reports to Securityholders...............................................
Termination..............................................................
Optional Purchases.......................................................
Book-Entry Registration and Definitive Securities........................
Description of the Agreements...............................................
Agreements Applicable to a Series........................................
Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements
Material Terms of the Indenture..........................................
Description of Credit Support...............................................
General..................................................................
Subordinate Securities...................................................
Cross-Support Provisions.................................................
Limited Guarantee........................................................
Financial Guaranty Insurance Policy or
Surety Bond Letter of Credit............................................
Pool Insurance Policies..................................................
Special Hazard Insurance Policies........................................
Borrower Bankruptcy Bond.................................................
Reserve Funds............................................................
Overcollateralization....................................................
Certain Legal Aspects of Mortgage Loans.....................................
General..................................................................
Types of Mortgage Instruments............................................
Interest in Real Property................................................
Cooperative Loans........................................................
Land Sale Contracts......................................................
Foreclosure..............................................................
Junior Mortgages.........................................................
Anti-Deficiency
Legislation and Other Limitations on Lenders
Environmental Considerations.............................................
Due-on-Sale Clauses......................................................
Prepayment Charges.......................................................
Subordinate Financing....................................................
Applicability of Usury Laws..............................................
Alternative Mortgage Instruments.........................................
Soldiers' and Sailors' Civil Relief Act of 1940..........................
Forfeitures in Drug and RICO Proceedings.................................
Certain Legal Aspects of the Contracts......................................
General..................................................................
Security Interests in the Manufactured Homes.............................
Enforcement of Security Interests in Manufactured Homes
Soldiers' and Sailors' Civil Relief Act of 1940..........................
Consumer Protection Laws.................................................
Transfers of Manufactured Homes;
Enforceability of "Due-on-Sale" Clauses
Applicability of Usury Laws..............................................
Material Federal Income Tax Considerations..................................
General..................................................................
REMICs...................................................................
FASITs...................................................................
Grantor Trust Funds......................................................
Standard Securities......................................................
Stripped Securities......................................................
Partnership Trust Funds..................................................
Consequences for Particular Investors....................................
State and Other Tax Considerations..........................................
ERISA Considerations........................................................
General..................................................................
Pre-Funding Accounts.....................................................
Legal Investment............................................................
Methods of Distribution.....................................................
Additional Information......................................................
Incorporation of Certain Documents by Reference.............................
Legal Matters...............................................................
Financial Information.......................................................
Rating......................................................................
<PAGE>
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
O WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
o [WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST FUND OR IN ANY POOL, THAT PERCENTAGE HAS BEEN CALCULATED ON THE
BASIS OF THE TOTAL PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF [ ],
UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER
"DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF PRINCIPAL" HOW THE
PRINCIPAL BALANCE OF A MORTGAGE LOAN IS DETERMINED. WHENEVER WE REFER IN
THIS SUMMARY OF TERMS OR IN THE RISK FACTORS SECTION OF THIS PROSPECTUS
SUPPLEMENT TO THE TOTAL PRINCIPAL BALANCE OF ANY MORTGAGE LOANS, WE MEAN
THE TOTAL OF THEIR PRINCIPAL BALANCES, UNLESS WE SPECIFY OTHERWISE.]
<PAGE>
THE OFFERED CERTIFICATES
ACE Securities Corp.'s [ ] Pass-Through Certificates consist of the
following classes: [ ]. Only the [ ] Certificates are being offered by this
prospectus supplement. These certificates will be issued in book-entry form.
SEE "DESCRIPTION OF THE CERTIFICATES -- GENERAL" IN THIS PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF THE MINIMUM DENOMINATIONS AND THE INCREMENTAL
DENOMINATIONS OF EACH CLASS OF CERTIFICATES.
The certificates represent ownership interests in a trust fund, the assets
of which consist primarily of [describe assets of trust fund.]
The certificates will have an approximate total initial principal amount of
$[ ]. Any difference between the total principal amount of the certificates on
the date they are issued and the approximate total principal amount of the
certificates on the date of this prospectus supplement will not exceed 5%.
PAYMENTS ON THE CERTIFICATES
Principal and interest on the certificates will be payable on the [25th]
day of each month, beginning in [ ]. However, if the [25th] day is not a
business day, distributions will be made on the next business day after the
[25th] day of the month.
INTEREST PAYMENTS
Interest will accrue on each class of certificates, [other than the Class
[ ] Certificate], at the applicable annual rates described in this prospectus
supplement.
SEE "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF INTEREST" IN THIS
PROSPECTUS SUPPLEMENT.
PRINCIPAL PAYMENTS
The amount of principal payable on the certificates, [other than the Class
[ ] Certificate], will be determined by (1) funds actually received on the
mortgage loans in [each] pool that are available to make payments on the
certificates, (2) the amount of interest received or advanced on the mortgage
loans that is used to pay principal on the certificates, calculated as described
in this prospectus supplement, (3) [formulas that allocate a portion of
principal payments received on the mortgage loans to each class of certificates,
as described in this prospectus supplement,] and (4) [ ]. Funds actually
received on the mortgage loans may consist of expected, scheduled payments, and
unexpected payments resulting from prepayments or defaults by borrowers,
liquidation of defaulted mortgage loans, or repurchases of mortgage loans under
the circumstances described in this prospectus supplement.
WE EXPLAIN HOW PRINCIPAL IS PAID ON THE CERTIFICATES UNDER "DESCRIPTION OF
THE CERTIFICATES -- DISTRIBUTIONS OF PRINCIPAL" IN THIS PROSPECTUS SUPPLEMENT.
[PREPAYMENT PENALTIES ON THE MORTGAGE LOANS
The holder of the Class [ ] Certificate will be entitled to receive any
prepayment penalties received on the mortgage loans. These amounts will not be
available to make payments on other classes of certificates.
SEE "DESCRIPTION OF THE CERTIFICATES" AND "DESCRIPTION OF THE MORTGAGE
POOLS -- GENERAL" IN THIS PROSPECTUS SUPPLEMENT.]
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the certificates will be the assets of the trust fund. The trust fund will
have no other source of cash and no entity other than the trust fund will be
required or expected to make any payments on the certificates.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE CERTIFICATES
[DESCRIBE ANY APPLICABLE FINANCIAL GUARANTY INSURANCE POLICY OR GUARANTEE.]
[SUBORDINATION OF PAYMENTS
The [ ] certificates will have a payment priority as a group over the Class
[ ] Certificates both for payments of interest and payments of principal. No
amounts will be paid to the Holder of the Class [ ] Certificate on any
distribution date until all amounts due to the senior certificates and the Class
[ ] Certificates on that date have been paid and overcollateralization has
reached the required level.]
[OVERCOLLATERALIZATION
On the closing date, the total principal balance of the mortgage loans is
expected to [approximately equal the total principal amount of the
certificates]. Any interest received on the mortgage loans in excess of the
amount needed to pay interest on the certificates and some of the expenses and
fees of the trust fund will be used to reduce the total principal amount of the
certificates to a level set by the rating agencies until the mortgage loans have
a total principal balance that exceeds the total outstanding principal amount of
the certificates by the amount required by the rating agencies. This condition
is referred to as "overcollateralization." We cannot assure you that sufficient
interest will be generated by the mortgage loans to create
overcollateralization, to increase overcollateralization to the level required
by the rating agencies, or to maintain it at that level.
SEE "RISK FACTORS-- POTENTIAL INADEQUACY OF Credit ENHANCEMENT FOR THE
CLASS [ ] CERTIFICATES" AND "DESCRIPTION OF THE CERTIFICATES-- CREDIT
ENHANCEMENT-- SUBORDINATION" AND "-- OVERCOLLATERALIZATION" IN THIS PROSPECTUS
SUPPLEMENT.]
[ALLOCATION OF LOSSES
As described in this prospectus supplement, amounts representing losses on
the mortgage loans in excess of overcollateralization will be applied to reduce
the principal amount of the Class [ ] Certificates until their principal amount
has been reduced to zero.
o If a loss has been allocated to reduce the principal amount of your Class [
] Certificate, you will receive no payment in respect of that reduction at
that time.
o After overcollateralization has been created and has been increased to the
required level, you will receive the amount of that loss if there are
sufficient funds to pay you, as described in this prospectus supplement,
but you will not receive any interest on that amount.
After the principal amount of the Class [ ] Certificates has been reduced
to zero, amounts representing losses on the mortgage loans will be paid to
holders of the senior certificates by [ ], to the extent funds available are
insufficient to cover these losses.
SEE "DESCRIPTION OF THE CERTIFICATES -- CREDIT ENHANCEMENT -- ALLOCATION OF
LOSSES" AND "THE INSURANCE POLICY" IN THIS PROSPECTUS SUPPLEMENT.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the assets of
the trust fund will consist of [two] pools of mortgage loans with a total
principal balance of approximately $[ ]. The mortgage loans will be secured by
mortgages, deeds of trust, or other security instruments, all of which are
referred to in this prospectus supplement as mortgages.
[Description of mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
[The mortgage loans in the trust fund will not be insured or guaranteed by
any government agency.]
SEE "DESCRIPTION OF THE MORTGAGE POOLS" IN THIS PROSPECTUS SUPPLEMENT FOR A
GENERAL DESCRIPTION OF THE MORTGAGE LOANS AND "[ORIGINATOR/SERVICER]" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF THE UNDERWRITING GUIDELINES APPLIED
IN ORIGINATING THE MORTGAGE LOANS.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust fund by the depositor from time to time, from [
] until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE CERTIFICATES --PRE-FUNDING ACCOUNT" IN THIS
PROSPECTUS SUPPLEMENT.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
SEE "[ORIGINATOR/SERVICER]" AND "THE POOLING AND SERVICING AGREEMENT" IN
THIS PROSPECTUS SUPPLEMENT.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other property of the trust fund, [other than the insurance policy], after the
total principal balance of the mortgage loans declines to less than [ ]% of
their initial total principal balance; if [ ] does not exercise that option, [ ]
may purchase the Mortgage Loans and other property of the trust fund.
If the mortgage loans and other assets are purchased, the
certificateholders will be paid accrued interest and principal equal to the
outstanding principal amount of the certificates.
SEE "DESCRIPTION OF THE CERTIFICATES -- OPTIONAL PURCHASE OF MORTGAGE
LOANS; TERMINATION OF THE TRUST FUND" IN THIS PROSPECTUS SUPPLEMENT FOR A
DESCRIPTION OF THE PURCHASE PRICE TO BE PAID FOR THE MORTGAGE LOANS.
TAX STATUS
[REMIC, grantor trust or FASIT status to be described as applicable.]
SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS FOR ADDITIONAL INFORMATION
CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS TO THE CERTIFICATES.
ERISA CONSIDERATIONS
[To be provided as applicable.]
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR A MORE COMPLETE DISCUSSION OF THESE ISSUES.
LEGAL INVESTMENT CONSIDERATIONS
[Only the Class [ ] Certificates] will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
There are other restrictions on the ability of some types of investors to
purchase the certificates that prospective investors should consider.
SEE "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN
THE PROSPECTUS.
RATINGS OF THE CERTIFICATES
The certificates will initially have the following ratings from [ ]:
[Rating [Rating
CLASS AGENCY] AGENCY]
----- ------ ------
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
These ratings are not recommendations to buy, sell or hold these certificates. A
rating may be changed or withdrawn at any time by the assigning rating agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your certificates may be
lower than anticipated.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR A MORE COMPLETE DISCUSSION
OF THE CERTIFICATE RATINGS.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
[SOME OF THE LOANS IN THE MORTGAGE
POOL ARE MORE LIKELY TO DEFAULT THAN
OTHERS, ANDHIGHER THAN EXPECTED
DEFAULTS ON THESE LOANS COULD
REDUCE THE YIELD ON YOUR CERTIFICATES The payment schedules for most
of the mortgage loans in the pool
require the borrower to pay off the
principal balance of the loan gradually
over the life of the loan. Some of the
mortgage loans in the pool, however,
have payment schedules under which the
borrowers makes relatively small
payments of principal over the life of
the loan, and then must make a large
final payment at maturity that pays off
the entire principal balance
outstanding. This final payment is
usually much larger than the previous
monthly payments. Because the borrower's
ability to make this final payment
usually depends on the ability to
refinance the loan or sell the
underlying property, the risk of default
is greater than on other types of loans.
High rates of default on these types of
loans in the pool will result in greater
losses on your certificates.
The ability of a borrower to
refinance the type of loan described
above or sell the mortgaged property
will depend upon a number of factors,
including:
o the level of mortgage interest
rates;
o the borrower's equity in the
mortgage property;
o general economic conditions; and
o the availability of credit.
We cannot predict how these factors will
affect the default rate of these
mortgage loans in the pool. You
should refer to "Description of the
Mortgage Pool" for information on the
percentage of loans in the mortgage loan
pool that consists of these loans.]
[MORTGAGE LOAN INTEREST RATES
MAY LIMIT INTEREST RATES
ON THE CERTIFICATES [LIBOR may increase or
decrease at different times and in
different amounts than the index
applicable to the adjustable rate
mortgage loans.]
[The trust fund will include a
reserve fund whose primary asset will be
[describe as applicable]].
SEE "DESCRIPTION OF THE
CERTIFICATES -- THE RESERVE FUND" IN
THIS PROSPECTUS SUPPLEMENT. FOR DETAILED
INFORMATION ON THE INTEREST RATES OF THE
MORTGAGE LOANS, SEE "DESCRIPTION OF THE
MORTGAGE POOLS" IN THIS PROSPECTUS
SUPPLEMENT.]
[POTENTIAL INADEQUACY OF
CREDIT ENHANCEMENT The Class [ ]
FOR THE CLASS [ ] CERTIFICATES Certificates are not insured
by any financial guaranty insurance
policy. The overcollateralization
feature described in this prospectus
supplement is intended to enhance the
likelihood that holders of Class [ ]
Certificates will receive regular
payments of interest and principal, but
is limited in nature and may be
insufficient to cover all losses on the
mortgage loans or shortfalls in interest
payments on the mortgage loans.
In order to create, increase
and maintain overcollateralization, it
will be necessary that the mortgage
loans generate more interest than is
needed to pay interest on the
certificates as well as fees and
expenses of the trust fund and other
amounts that are described in this
prospectus supplement. We expect that
the mortgage loans will generate more
interest than is needed to pay those
amounts, at least during some periods,
because the weighted average of the
interest rates on the mortgage loans
will be higher, at the time the
certificates are issued, than the
weighted average of the interest rates
on the certificates. We cannot assure
you, however, that enough excess
interest will be generated to reach the
overcollateralization levels required by
the rating agencies. The following
factors will affect the amount of excess
interest that the mortgage loans will
generate:
o PREPAYMENTS. Every time a mortgage
loan with an interest rate higher
than the weighted average of the
interest rates on the certificates
is prepaid, total excess interest
after the date of prepayment will
be reduced because that mortgage
loan will no longer be outstanding
and generating interest. The effect
on your certificates of this
reduction will be influenced by the
amount of prepaid loans and the
characteristics of the prepaid
loans. Prepayment of a
disproportionately high number of
high interest rate mortgage loans
would have a greater negative
effect on future excess interest.
o DEFAULTS. The rate of defaults on
the mortgage loans may turn out to
be higher than expected. Defaulted
mortgage loans may be liquidated,
and liquidated mortgage loans will
no longer be outstanding and
generating interest.
o LEVEL OF LIBOR. If LIBOR increases,
more money will be needed to pay
interest to certificateholders, so
less money will be available as
excess interest.]
[SPECIAL RISKS FOR THE CLASS [ ]
CERTIFICATES The rights of holders of Class
[ ] Certificates to receive payments of
interest are subordinate to the rights
of holders of senior certificates to
receive payments of interest, and the
rights of holders of Class [ ]
Certificates to receive payments of
principal are subordinate to the rights
of holders of senior certificates to
receive payments of principal.
In addition, you should consider the
following:
o If you buy a Class [ ] Certificate
and losses on the mortgage loans
exceed excess interest and any
overcollateralization that has been
created, the principal amount of
your certificate will be reduced
proportionately with the principal
amounts of the other Class [ ]
Certificates by the amount of that
excess;
o If, after overcollateralization is
created in the required amount, the
mortgage loans generate interest in
excess of the amount needed to pay
interest and principal on the
certificates and fees and expenses
of the trust fund, the excess
interest will be used to pay you
and other holders of Class [ ]
Certificates the amount of any
reduction in the principal balances
of the Class [ ] Certificates
caused by application of losses.
o We cannot assure you, however, that
any excess interest will be
generated and, in any event, no
interest will be paid to you on the
amount by which your principal
balance was reduced because of the
application of losses.
SEE "DESCRIPTION OF THE CERTIFICATES --
CREDIT ENHANCEMENT -- SUBORDINATION" AND
"-- ALLOCATION OF LOSSES" IN THIS
PROSPECTUS SUPPLEMENT.]
[EFFECT OF LACK OF PRIMARY MORTGAGE Approximately [ ]% of the mortgage loans
INSURANCE ON THE CLASS [ ] have loan-to-value ratios greater than
CERTIFICATES 80%. None of the mortgage loans are
covered by a primary mortgage insurance
policy. If borrowers default on their
mortgage loans, there is a greater
likelihood of losses than if the loans
were insured. We cannot assure you that
the applicable credit enhancement will
be adequate to cover those losses. SEE
"DESCRIPTION OF THE CERTIFICATES --
CREDIT ENHANCEMENT -- SUBORDINATION" AND
"-- ALLOCATION OF LOSSES" IN THIS
PROSPECTUS SUPPLEMENT.]
UNPREDICTABILITY AND EFFECT OF Borrowers may prepay their mortgage
PREPAYMENTS loans in whole or in part at any time;
[however, approximately [ ]% of the
mortgage loans require the payment of a
prepayment penalty in connection with
some voluntary prepayments, which may
discourage these borrowers from
prepaying their mortgage loans].
Prepayments of principal may also be
caused by liquidations of or insurance
payments on the mortgage loans. A
prepayment of a mortgage loan will
usually result in a prepayment on the
certificates.
The prepayment experience on the
mortgage loans may affect the average
life of the certificates. The rate of
principal payments on the mortgage loans
is from time to time influenced by a
variety of economic, demographic,
geographic, social, tax, legal and other
factors. There can be no assurance as to
the rate of prepayment on the mortgage
loans or that the rate of payments will
conform to the model described in this
prospectus supplement.
If prevailing interest rates fall
significantly below the interest rates
on the mortgage loans, principal
prepayments are likely to be higher than
if prevailing rates remain at or above
the interest rates on the mortgage
loans. As a result, the actual maturity
of the certificates could occur
significantly earlier than expected.
Conversely, if prevailing interest rates
rise significantly above the interest
rates on the mortgage loans, principal
prepayments are likely to be lower than
if prevailing rates remain at or below
the interest rates on the mortgage loans
and the maturity of the certificates
could occur significantly later than
expected. In addition, some prepayments
may result in the collection of less
interest than would otherwise be the
case in the month of prepayment.
o If you purchase your certificates
at a discount and principal is
repaid more slowly than you
anticipate, then your yield may be
lower than you anticipate.
o If you purchase your certificates
at a premium and principal is
repaid faster than you anticipate,
then your yield may be lower than
you anticipate.
SEE "YIELD CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION
OF FACTORS THAT MAY INFLUENCE THE RATE
AND TIMING OF PREPAYMENTS ON THE
MORTGAGE LOANS.
GEOGRAPHIC CONCENTRATION Approximately [ ]% of the mortgage loans
OF MORTGAGE LOANS expected to be in the pool on the
closing date are secured by properties
in [California]. Delinquencies, defaults
and losses on the mortgage loans may be
higher than if fewer of the mortgage
loans were concentrated in one state
because the following conditions in
[California] will have a
disproportionate impact on the mortgage
loans in general:
o Declines in the [California]
residential real estate market may
reduce the values of properties
located in that state, which would
result in an increase in the
loan-to-value ratios.
o Properties in [California] may be
more susceptible than homes located
in other parts of the country to
some types of uninsured hazards,
such as earthquakes, as well as
floods, wildfires, mudslides and
other natural disasters.
Natural disasters affect regions of the
United States from time to time, and may
result in increased losses on mortgage
loans in those regions, or in insurance
payments that will constitute
prepayments of those mortgage loans.
FOR ADDITIONAL INFORMATION REGARDING THE
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE
LOANS IN EACH POOL, SEE THE APPLICABLE
TABLE UNDER "DESCRIPTION OF THE MORTGAGE
POOLS" IN THIS PROSPECTUS SUPPLEMENT.
REAL ESTATE MARKET MAY AFFECT A decline in the real estate values or
PERFORMANCE OF MORTGAGE LOANS in economic conditions generally could
increase the rates of delinquencies,
foreclosures and losses on the mortgage
loans to a level that is significantly
higher than those experienced currently;
and no assurance can be given that
values of the properties securing the
mortgage loans will not decline since
the date of origination of the mortgage
loan. If the credit enhancement
described in this prospectus supplement
is not enough to protect your
certificates from these losses, the
yield on your certificates may be
reduced.
[EARLY PRINCIPAL PAYMENT If the cash in the pre-funding account
FROM CASH REMAINING on the closing date is not used to
IN PRE-FUNDING ACCOUNT acquire additional mortgage loans by
[ ], then that cash will be [paid to you
on a proportionate basis with the other
certificateholders in reduction of the
principal balance of your certificates.]
If the amount of that cash is
substantial, you will receive a
significant unexpected early payment of
principal in (or before) [ ]. We cannot
assure you that you will be able to
reinvest that money in another
investment with a comparable yield.]
YOU WILL NOT RECEIVE PHYSICAL Unless you are the purchaser of the
CERTIFICATES, WHICH CAN residual certificates, your ownership of
CAUSE DELAYS IN DISTRIBUTIONS AND the certificates will be registered
HAMPER YOUR ABILITY TO PLEDGE OR electronically with DTC. The lack of
RESELL YOUR CERTIFICATES physical certificates could:
o result in payment delays on the
certificates because the trustee
will be sending distributions on
the certificates to DTC instead of
directly to you;
o make it difficult for you to pledge
your certificates if physical
certificates are required by the
party demanding the pledge; and
o could hinder your ability to resell
the certificates because some
investors may be unwilling to buy
certificates that are not in
physical form.
SEE "DESCRIPTION OF THE CERTIFICATES --
BOOK-ENTRY REGISTRATION" IN THIS
PROSPECTUS SUPPLEMENT.
POTENTIAL DISRUPTION OF The transition from the year 1999 to the
COMPUTER SYSTEMS year 2000 may interfere with the ability
of computer systems used by the
servicer, the trustee, The Depository
Trust Company and other parties to
process information, unless
modifications to those systems are
completed in time. This could disrupt
collection of payments on the mortgage
loans and calculation and distribution
of payments on the certificates.
LIMITED ABILITY TO RESELL The underwriter is not required to
CERTIFICATES assist in resales of the certificates,
although it may do so. A secondary
market for any class of certificates may
not develop. If a secondary market does
develop, it might not continue or it
might not be sufficiently liquid to
allow you to resell any of your
certificates. The certificates will not
be listed on any securities exchange.
[Additional risk factors to be provided as applicable.]
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The [ ] Pass-Through Certificates will consist of the following
Classes: [ ] (together, the "Certificates").
The [ ] Certificates are referred to in this prospectus supplement as
the "Senior Certificates." Only the Class [ ] Certificates (the "Offered
Certificates") are offered by this prospectus supplement. The Class [ ]
Certificates are referred to in this prospectus supplement as the "LIBOR
Certificates." The Class [ ] Certificates are referred to in this prospectus
supplement as the "Subordinate Certificates." The Class R Certificate is also
referred to as the "Residual Certificate."
The Class [ ] Certificate will be issued as a single Certificate in
fully registered, certificated form.
The Certificates represent beneficial ownership interests in a trust
fund (the "Trust Fund"), the assets of which consist primarily of (1) [describe
mortgage loans] mortgage loans (the "Mortgage Loans"), (2) the assets that from
time to time are identified as deposited in respect of the Mortgage Loans in the
Collection Account and the Certificate Account (each as defined in this
prospectus supplement), (3) property acquired by foreclosure of Mortgage Loans
or deed in lieu of foreclosure, (4) any applicable insurance policies and all
proceeds of these insurance policies, and (5) [describe other assets, as
applicable].
Each Class of Offered Certificates will be issued in the respective
approximate initial total principal amount set forth or described on the cover
page of this prospectus supplement. The total principal amount of each Class of
Offered Certificates is referred to in this prospectus supplement as the "Class
Principal Amount" for that Class. The Class [ ] Certificate will be issued
without a principal amount or interest rate, and will be entitled only to the
amounts that are described in this prospectus supplement. The total Certificate
Principal Amount (as defined in this prospectus supplement) of the Certificates
and the initial Class Principal Amount of each Class of Offered Certificates may
be increased or decreased by up to 5% to the extent that the Cut-off Date
Balance (as defined in this prospectus supplement) of the Mortgage Loans is
increased or decreased as described under "Description of the Mortgage Pools" in
this prospectus supplement.
Distributions on the Certificates will be made on the [25th] day of
each month or, if the [25th] day is not a Business Day, on the next succeeding
Business Day, commencing in [ ] (each, a "Distribution Date"), to
Certificateholders of record on the applicable Record Date. The "Record Date"
for each Distribution Date will be the close of business on the last Business
Day of the calendar month immediately preceding the month in which that
Distribution Date occurs.
o A "Business Day" is generally any day other than a Saturday or
Sunday or a day on which banks in New York or [California] are
closed.
Distributions on the Offered Certificates will be made to each
registered holder entitled to the distributions, either (1) by check mailed to
the Certificateholder's address as it appears on the books of the Trustee (as
defined in this prospectus supplement), or (2) at the request, submitted to the
Trustee in writing at least five Business Days prior to the related Record Date,
of any holder of an Offered Certificate (at the holder's expense) in immediately
available funds; provided, that the final distribution in respect of any
Certificate will be made only upon presentation and surrender of the Certificate
at the Corporate Trust Office (as defined in this prospectus supplement) of the
Trustee. See "-- The Trustee" in this prospectus supplement.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will
be deposited in an account (the "Pre-Funding Account") maintained by [ ], which
account shall be part of the trust fund. During the period (the "Pre-Funding
Period") from [ ] until [ ], the Pre-Funding Amount will be maintained in the
Pre-Funding Account. The Pre-Funded Amount will be reduced during the
Pre-Funding Period by the amount of Subsequent Mortgage Loans (as defined in
this prospectus supplement) deposited in the trust fund in accordance with the
Pooling and Servicing Agreement. During the Pre-Funding Period, the Pre-Funded
Amount will be used only to purchase Subsequent Mortgage Loans. Immediately
following the Pre-Funding Period, any Pre-Funded Amount remaining will be
distributed to [to be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to
be provided as applicable] and all investment earnings on amounts on deposit in
the Pre-Funding Account will be distributed to [to be provided as applicable]
following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Offered Certificates (the "Book-Entry Certificates") will
be issued, maintained and transferred on the book-entry records of The
Depository Trust Company ("DTC") in the United States [, or through Clearstream
Luxembourg, societe anonyme ("Clearstream Luxembourg") or the Euroclear System
("Euroclear") in Europe] and through [its/their] participating organizations
(each, a "Participant"). The Book-Entry Certificates will be issued in minimum
denominations in principal amount of $25,000 and integral multiples of $1 in
excess of $25,000.
Each Class of Book-Entry Certificates will be represented by one or
more certificates registered in the name of the nominee of DTC. ACE Securities
Corp. (the "Depositor") has been informed by DTC that DTC's nominee will be Cede
& Co. [Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC.] No person acquiring an
interest in a Book-Entry Certificate (each, a "Beneficial Owner") will be
entitled to receive a certificate representing an interest (a "Definitive
Certificate"), except as set forth below under "-- Definitive Certificates" and
in the Prospectus under "Description of the Certificates -- Book-Entry
Registration and Definitive Securities -- Definitive Securities."
Unless and until Definitive Certificates are issued, it is anticipated
that:
o the only "Certificateholder" of the Offered Certificates will be
Cede & Co., as nominee of DTC, and Beneficial Owners will not be
Certificateholders as that term is used in the Pooling and
Servicing Agreement (as defined in this prospectus supplement).
o Beneficial Owners will receive all distributions of principal of,
and interest on, the Offered Certificates from the Trustee
through DTC [, Clearstream Luxembourg or Euroclear, as
applicable,] and [its/their] Participants.
o while the Offered Certificates are outstanding, under the rules,
regulations and procedures creating and affecting DTC
[Clearstream Luxembourg and Euroclear] and [its/their]
operations, DTC [Clearstream Luxembourg and Euroclear] [is/are]
required to make book-entry transfers among Participants on whose
behalf it acts with respect to the Offered Certificates and is
required to receive and transmit distributions of principal of,
and interest on, the Offered Certificates. Participants and
indirect participants with whom Beneficial Owners have accounts
with respect to Offered Certificates are similarly required to
make book-entry transfers and receive and transmit distributions
on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess certificates, DTC
[Clearstream Luxembourg and Euroclear] [has/have] in place a
mechanism by which Beneficial Owners will receive distributions
and will be able to transfer their interest.
None of the Depositor, GACC, the Servicer or the Trustee [or
additional parties] (as those terms are defined in this prospectus supplement)
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
Some of the computer applications and systems that DTC uses for
processing dates ("Systems") based upon calendar dates, including dates before,
on, and after January 1, 2000, may encounter problems related to the Systems'
use of only two digits to calculate calendar dates ("Year 2000 Problems"). Year
2000 Problems could cause DTC's Systems, as they relate to the timely payment of
distributions (including principal and interest payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, to cease functioning
appropriately. DTC has advised the Depositor that it has developed and is
implementing a technical assessment and remediation plan (which includes a
testing phase) to deal with Year 2000 Problems. However, DTC's ability to
perform its services also depends upon other parties including, among others,
issuers and their agents, third party software and hardware vendors, and third
party service and information providers (including telecommunication and
electrical utility service providers). DTC has advised the Depositor that it is
attempting to determine the extent of the efforts of its vendors to deal with
Year 2000 Problems as they relate to the provision of these services. In
addition, DTC is in the process of developing contingency plans as it deems
appropriate.
For a more complete description of book-entry registration and
clearance and the rules and regulations governing DTC [,Clearstream Luxembourg
and Euroclear], see "Description of the Securities -- Book-Entry Registration
and Definitive Securities" in the Prospectus" [and "Global Clearance, Settlement
and Tax Documentation Procedures" in Annex I to this Prospectus Supplement].
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under "
Description of the Securities -- Book-Entry Registration and Definitive
Securities -- Definitive Securities." Upon the occurrence of an event described
in that section, the Trustee is required to direct DTC to notify Participants
who have ownership of Book-Entry Certificates as indicated on the records of DTC
of the availability of Definitive Certificates for their Book-Entry
Certificates. Upon surrender by DTC of the Definitive Certificates representing
the Book-Entry Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will re-issue the Book-Entry Certificates as
Definitive Certificates in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Trustee will recognize the holders of the
Definitive Certificates as Certificateholders under the Pooling and Servicing
Agreement.
DISTRIBUTIONS OF INTEREST
The amount of interest distributable on each Distribution Date in
respect of each Class of Certificates (other than the Class [ ] Certificate)
will equal the sum of [to be provided as applicable]. Interest will accrue on
the Offered Certificates on the basis of a 360-day year and the actual number of
days in each Accrual Period.
o The "Interest Rate" for each Class of Certificates will be the
applicable annual rate described below.
[If [ ] does not exercise its option to purchase the Mortgage Loans
when it is first entitled to do so, as described under "-- Optional Purchase of
Mortgage Loans; Termination of the Trust Fund" in this prospectus supplement,
then with respect to each succeeding Distribution Date, the [ ] will be
increased to %]. Subject to the preceding proviso, the Interest Rates for the
Class [ ] Certificates will be the applicable annual rate determined as follows:
o [To be provided as applicable].
o The "Net Mortgage Rate" for any Mortgage Loan equals the Mortgage
Rate of the Mortgage Loan MINUS the Total Expense Rate (as
defined in this prospectus supplement).
o The "Total Expense Rate" for each Distribution Date is the sum of
[the Servicing Fee Rate and the Trustee Fee Rate (each as defined
in this prospectus supplement)].
The "Certificate Principal Amount" of any Offered Certificate for any
date of determination will equal that Certificate Principal Amount on [ ] (the
"Closing Date") as reduced by all amounts previously distributed on that
Certificate in respect of principal and, in the case of a Class [ ] Certificate,
any Applied Loss Amount (as defined in this prospectus supplement) previously
allocated to that Certificate.
For each Distribution Date, the "Accrual Period" applicable to each
Class of Offered Certificates will be the period beginning on the immediately
preceding Distribution Date (or on the Closing Date, in the case of the first
Accrual Period) and ending on the day immediately preceding the related
Distribution Date.
o The "Interest Remittance Amount" for any Distribution Date will
equal the sum of [to be provided as applicable].
On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
[To be provided as applicable.]
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only to the date of the prepayment, instead of for
a full month, with a resulting reduction in interest payable for the month
during which the prepayment is made. Prepayments in part will be applied as of
the date of receipt. Full or partial prepayments (or proceeds of other
liquidations) received in any Prepayment Period will be distributed to holders
of Offered Certificates on the Distribution Date following that Prepayment
Period. To the extent that, as a result of a full or partial prepayment, a
borrower is not required to pay a full month's interest on the amount prepaid, a
shortfall (a "Prepayment Interest Shortfall") in the amount available to make
distributions of interest on the Certificates could result. A Prepayment
Interest Shortfall will result from a prepayment in full only if that prepayment
is received on or after the [16th] day of a calendar month. If a prepayment in
full is received on or prior to the [15th] day of a calendar month, there will
be an excess of interest over one month's interest for that Mortgage Loan
("Prepayment Interest Excess") available for distribution to Certificateholders
on the related Distribution Date. The Servicer is obligated to fund Prepayment
Interest Shortfalls that exceed Prepayment Interest Excess, but only in an
amount up to the total of the Servicing Fees for the applicable Distribution
Date. See "The Pooling and Servicing Agreement -- Prepayment Interest
Shortfalls" in this prospectus supplement. Any of these payments by the Servicer
is referred to in this prospectus supplement as "Compensating Interest." Any
Prepayment Interest Shortfalls not funded by the Servicer ("Net Prepayment
Interest Shortfalls") will reduce the Interest Remittance Amount available for
distribution on the related Distribution Date.
[DETERMINATION OF INDEX
On the second Business Day preceding the beginning of each Accrual
Period (each date, an "Index Determination Date"), the Trustee will determine
the Index for that Accrual Period.
On each Index Determination Date, the Index for the next succeeding
Accrual Period will be established by the Trustee as follows:
[To be provided as applicable.]]
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Class [ ] Certificates will be made
primarily from [to be provided as applicable.]
o The "Principal Distribution Amount" for [each Mortgage Pool for]
any Distribution Date will be equal to the sum of [to be provided
as applicable].
o The "Principal Remittance Amount" for [each Mortgage Pool for]
any Distribution Date will be equal to the sum of [to be provided
as applicable.]
o The "Due Period" for any Distribution Date is the one-month
period beginning on [the second day of the calendar month
immediately preceding the month in which that Distribution Date
occurs and ending on the first day of the month in which that
Distribution Date occurs.]
o The "Prepayment Period" for each Distribution Date is the
one-month period beginning on the Cut-off Date, in the case of
[the first Distribution Date, and on the day immediately
following the close of the immediately preceding Prepayment
Period, in the case of each subsequent Distribution Date, and
ending on the [ ]th day (or if that day is not a Business Day,
the immediately preceding Business Day) of the month in which
that Distribution Date occurs].
On each Distribution Date, the Principal Distribution Amount will be
distributed in the following order of priority:
[To be provided as applicable].
CREDIT ENHANCEMENT
Credit enhancement for the Offered Certificates consists of [the
Insurance Policy, the subordination of the Subordinate Certificates, the
priority of application of Realized Losses (as defined in this prospectus
supplement) and overcollateralization], in each case as described in this
prospectus supplement. [The Insurance Policy is described under "The Insurance
Policy" below.]
[SUBORDINATION. The rights of holders of the Class [ ] Certificates to
receive distributions with respect to the Mortgage Loans will be subordinated,
to the extent described in this prospectus supplement, to the rights of holders
of the Senior Certificates, as described under "-- Distributions of Interest"
and "-- Distributions of Principal." This subordination is intended to enhance
the likelihood of regular receipt by holders of Senior Certificates of the full
amount of interest and principal distributable on the Senior Certificates, and
to afford holders of Senior Certificates limited protection against Realized
Losses incurred on the Mortgage Loans.
No amounts will be distributed to the holder of the Class [ ]
Certificate until all amounts due to the holders of the Class [ ] Certificates
have been distributed.
The limited protection afforded to holders of Class [ ] Certificates
by means of the subordination of Subordinate Certificates having a lower
priority of distribution will be accomplished by the preferential right of
holders of Offered Certificates to receive, prior to any distribution in respect
of interest or principal, respectively, being made on any Distribution Date in
respect of Certificates having a lower priority of distribution, the amounts of
interest due them and principal available for distribution, respectively, on
that Distribution Date.]
[ALLOCATION OF LOSSES. If a Mortgage Loan becomes a Liquidated
Mortgage Loan during any Prepayment Period, the related Net Liquidation
Proceeds, to the extent allocable to principal, may be less than the outstanding
principal balance of the Mortgage Loan. The amount of that insufficiency is a
"Realized Loss." Realized Losses on Mortgage Loans will have the effect of
reducing amounts distributable in respect of, first, the Class [ ] Certificate
(both through the application of Monthly Excess Interest to fund the deficiency
and through a reduction in the Overcollateralization Amount for the related
Distribution Date), and second, the Class [ ] Certificates, before reducing
amounts distributable in respect of the Senior Certificates.
o A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage
Loan as to which the Servicer has determined that all amounts
that it expects to recover in respect of that Mortgage Loan have
been recovered (exclusive of any possibility of a deficiency
judgment).
To the extent that Realized Losses occur, those Realized Losses will
reduce the Total Loan Balance, and thus may reduce the Overcollateralization
Amount. As described in this prospectus supplement, the Overcollateralization
Amount is created, increased and maintained by application of Monthly Excess
Cashflow to make distributions of principal on the Offered Certificates.
If on any Distribution Date after giving effect to all Realized Losses
incurred during the related Due Period and distributions of principal on that
Distribution Date, the total Certificate Principal Amount of the Certificates
exceeds the Total Loan Balance for that Distribution Date (this excess, an
"Applied Loss Amount"), the Class Principal Amount of the Class [ ] Certificates
will be reduced by that amount, until the Class Principal Amount of the Class [
] Certificates has been reduced to zero. The Class Principal Amounts of the
Senior Certificates will not be reduced by allocation of Applied Loss Amounts.
Holders of Class [ ] Certificates will not receive any distributions
in respect of Applied Loss Amounts, except to the extent of available Monthly
Excess Cashflow as described below.]
[OVERCOLLATERALIZATION. The weighted average Net Mortgage Rate of the
Mortgage Loans is generally expected to be higher than the weighted average of
the interest rates of the Certificates, thus generating excess interest
collections. To the extent described in this prospectus supplement, Monthly
Excess Interest will be applied on any Distribution Date in reduction of the
Certificate Principal Amounts of the Offered Certificates. This application of
interest collections as distributions of principal will cause the total
Certificate Principal Amount of the Certificates to amortize more rapidly than
the Total Loan Balance, creating, increasing and maintaining
overcollateralization. However, Realized Losses will reduce
overcollateralization, and could result in an Overcollateralization Deficiency.
For each Distribution Date, the Monthly Excess Interest and any Excess
Principal will be the "Monthly Excess Cashflow," which will be in the following
order of priority:
[To be provided as applicable.]]
[THE RESERVE FUND
The Reserve Fund will be an asset of the Trust Fund but not of the
REMIC. The holder of the Residual Certificate will be the owner of the Reserve
Fund, and amounts on deposit in the Reserve Fund will be invested at the
direction of the holder of the Residual Certificate as provided in the Pooling
and Servicing Agreement. The Reserve Fund will consist of [to be provided as
applicable].
Withdrawals will be made from the Reserve Fund for the benefit of the
Offered Certificates as described under "-- Overcollateralization" above.
The only asset of the Reserve Fund on the Closing Date will be [to be
provided as applicable.]
If on any Distribution Date the sum of the amount on deposit in the
Reserve Fund and the Overcollateralization Amount exceeds the Targeted
Overcollateralization Amount, the excess will be released to the Residual
Certificateholder, provided that the amount remaining in the Reserve Fund equals
or exceeds the reserve fund requirement specified in the Pooling and Servicing
Agreement.]
FINAL SCHEDULED DISTRIBUTION DATE
It is expected that scheduled distributions on the Mortgage Loans,
assuming no defaults or losses that are not covered by the limited credit
support described in this prospectus supplement, will be sufficient to make
timely distributions of interest on the Offered Certificates and to reduce the
Class Principal Amount of each Class of the Senior Certificates to zero not
later than [ ] and of the Class [ ] Certificates not later than [ ]. As to each
Class, the actual final Distribution Date may be earlier or later, and could be
substantially earlier, than the applicable Final Scheduled Distribution Date.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Trustee will make available to each
Certificateholder a statement containing the following information:
o the amount of principal distributed on that date to holders of
each Class of Offered Certificates;
o the amount of interest distributed on that date to holders of
each Class of Offered Certificates;
o the Interest Rate applicable to each Class of Offered
Certificates;
o the Class Principal Amount of each Class of Offered Certificates
after distributions on that date;
o the amount of the Servicing Fees and Trustee Fee paid with
respect to that date;
o the Total Loan Balance as of the related Distribution Date;
o the amount of any Realized Losses on the Mortgage Loans during
the immediately preceding calendar month and total Realized
Losses since the Cut-off Date;
o the number and aggregate Principal Balance of Mortgage Loans (1)
remaining outstanding, (2) delinquent by one, two, three or four
or more monthly payments, (3) in foreclosure, and (4) with
respect to REO Property;
o any amount distributed to the holder of the Residual Certificate;
and
o other information to the extent provided in the Pooling and
Servicing Agreement.
OPTIONAL PURCHASE OF MORTGAGE LOANS; TERMINATION OF THE TRUST FUND
On any Distribution Date after the date on which the Total Loan
Balance is less than [ ]% of the Cut-off Date Balance, the holder of the [ ]
will (subject to the terms of the Pooling and Servicing Agreement) have the
option to purchase the Mortgage Loans, any REO Property and any other related
property for a price equal to the sum of (1) 100% of the total outstanding
principal balance of the Mortgage Loans plus accrued interest on the Mortgage
Loans at the applicable Mortgage Rate, (2) the fair market value of all other
property being purchased, (3) any unpaid Servicing Fees and other amounts
payable to the Servicer and the Trustee and (4) [ ]; provided, that the purchase
price will not be less than the total Certificate Principal Amount of the
Offered Certificates, plus accrued interest on the Offered Certificates. If the
holder of the [ ] does not exercise that option, the [ ] will then have the same
purchase option. If either purchase option is exercised, the Trust Fund will be
terminated (this event, an "Optional Termination").
If the [ ] does not exercise its option as described above when it is
first entitled to do so, [to be provided as applicable].
THE TRUSTEE
[ ], a [ ] banking corporation, will be the Trustee under the Pooling
and Servicing Agreement (the "Trustee"). The Trustee will be paid a monthly fee
(the "Trustee Fee") calculated as a fixed percentage equal to [ ]% annually (the
"Trustee Fee Rate") on the Total Loan Balance. As additional compensation, the
Trustee will be entitled to [to be provided as applicable]. The Trustee's
"Corporate Trust Office" for purposes of presentment and surrender of the
Offered Certificates for the final distribution on the Offered Certificates and
for all other purposes is located at [ ], or any address as the Trustee may
designate from time to time by notice to the Certificateholders, the Depositor
and the Servicer.
[THE INSURANCE POLICY
The following information has been supplied by [ ] (the "Insurer") for
inclusion in this Prospectus Supplement. Accordingly, the Depositor, the
Servicer and the Underwriter do not make any representation as to the accuracy
and completeness of this information.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained in this prospectus supplement, or omitted from this prospectus
supplement, other than with respect to the accuracy of the information regarding
the Certificate Guaranty Insurance Policy (the "Insurance Policy") and the
Insurer set forth below under this heading "The Insurance Policy." Additionally,
the Insurer makes no representation regarding the Certificates or the
advisability of investing in the Certificates.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
YEAR 2000 READINESS DISCLOSURE
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] [description of
Mortgage Loans] Mortgage Loans with original terms to maturity from the first
due date of the scheduled monthly payment (a "Monthly Payment") of not more than
[30] years, having a total Principal Balance as of the Cut-off Date (after
giving effect to Monthly Payments due on that date) of approximately $[ ] (the
"Cut-off Date Balance"). The Mortgage Loans were originated or acquired by the
originators described in this prospectus supplement generally in accordance with
the underwriting guidelines described in this prospectus supplement.
Wherever reference is made in this prospectus supplement to a
percentage of some or all of the Mortgage Loans, the percentage is determined
(unless otherwise specified) on the basis of the total Principal Balance of the
related Mortgage Loans as of the Cut-off Date.
All of the Mortgage Loans are secured by mortgages or deeds of trust
or other similar security instruments creating [to be provided as applicable.]
The Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor from German American Capital Corporation ("GACC"), which acquired the
Mortgage Loans from [ ]. See "[Originator/Servicer]" and "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans" in this prospectus
supplement.
Pursuant to its terms, each Mortgage Loan, other than a loan secured
by a condominium unit, is required to be covered by a standard hazard insurance
policy in an amount generally equal to the lower of the unpaid principal amount
of the Mortgage Loan or the replacement value of the improvements on the
Mortgaged Property. Generally, a condominium association is responsible for
maintaining hazard insurance covering the entire building. See "Description of
Mortgage and Other Insurance Hazard -- Insurance on the Loans -- Standard Hazard
Insurance Policies" in the Prospectus.
[Approximately [ ]% of the Mortgage Loans have Loan-to-Value Ratios in
excess of 80%. None of those Mortgage Loans or any other Mortgage Loans are
covered by primary mortgage insurance policies. The "Loan-to-Value Ratio" of a
Mortgage Loan at any time is the ratio of the principal balance of the Mortgage
Loan at the date of determination to (a) in the case of a purchase, the lesser
of the sale price of the Mortgaged Property and its appraised value at the time
of sale, or (b) in the case of a refinance or modification, the appraised value
of the Mortgaged Property at the time of refinance or modification.]
[Approximately [ ]% of the Mortgage Loans are fully amortizing.
Approximately [ ]% of the Mortgage Loans will have original terms to maturity
that are shorter than their amortization schedules, leaving final payments
("Balloon Payments") due on their maturity dates that are significantly larger
than other monthly payments (these loans, "Balloon Loans"). The Balloon Loans
are generally expected to have original terms to maturity of [15] years. The
ability of the borrower to repay a Balloon Loan at maturity frequently will
depend on the borrower's ability to refinance the loan. Any loss on a Balloon
Loan as a result of the borrower's inability to refinance the loan will be borne
by Certificateholders, to the extent not covered by the applicable credit
enhancement. Neither the Servicer nor the Trustee will make any Advances with
respect to delinquent Balloon Payments.]
ADJUSTABLE RATE MORTGAGE LOANS
[Describe adjustment of adjustable rate Mortgage Loans, as
applicable.]
[THE INDEX
The Index applicable to the determination of the Mortgage Rates for
the Adjustable Rate Mortgage Loans will be [described as applicable].]
THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate
total characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, the Mortgage Loans may be removed from the Trust Fund as a result
of incomplete documentation or otherwise, if the Depositor deems removal
necessary or appropriate. In addition, a limited number of other mortgage loans
may be included in the Trust Fund prior to the issuance of the Offered
Certificates.
Number of Mortgage Loans...................................
Initial Pool Balance....................................... $
Mortgage Rates: %
Weighted Average......................................
Range................................................. % to %
Weighted Average Remaining Term to Maturity (in months)....
The Principal Balances of the Mortgage Loans range from approximately
$[ ] to approximately $[ ]. The Mortgage Loans have an average Principal Balance
of approximately $[ ].
The weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number,
total Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the percentages in the following tables may not equal the totals due to
rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
--------------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
The average Cut-off Date Principal Balance is approximately $ .
LOAN-TO-VALUE RATIOS
RANGE OF ORIGINAL NUMBER OF TOTAL PERCENTAGE OF
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
------------------------ --------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
The weighted average original Loan-to-Value Ratio is approximately %.
MORTGAGE RATES
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
----------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
---------
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately % per annum.
LOAN TYPES
LOAN TYPE NUMBER OF TOTAL PERCENTAGE OF
--------- MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............ $ 100.00%
ORIGINAL TERMS TO MATURITY
RANGE OF MATURITIES (MONTHS) NUMBER OF TOTAL PERCENTAGE OF
------------------------- MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
The weighted average original term to maturity is approximately months.
REMAINING TERMS TO MATURITY
REMAINING TERM TO NUMBER OF TOTAL PERCENTAGE OF
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
------------------ -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
The weighted average remaining term to maturity of the fully amortizing
Mortgage Loans is approximately months.
GEOGRAPHIC DISTRIBUTION
STATE NUMBER OF TOTAL PERCENTAGE OF
----- MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
------------- ---------------- -------------
Total............ $ 100.00%
<PAGE>
PROPERTY TYPES
PROPERTY TYPE NUMBER OF TOTAL PERCENTAGE OF
------------- MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- --------------- -------------
Total............. $ 100.00%
LOAN PURPOSES
LOAN PURPOSE NUMBER OF TOTAL PERCENTAGE OF
------------ MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
----------------
$ %
------------- ---------------- -------------
Total............. $ 100.00%
OCCUPANCY STATUS
OCCUPANCY STATUS NUMBER OF TOTAL PERCENTAGE OF
---------------- MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
DOCUMENTATION TYPES
DOCUMENTATION TYPE NUMBER OF TOTAL PERCENTAGE OF
------------------ MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
CREDIT GRADES
CREDIT GRADE NUMBER OF TOTAL PERCENTAGE OF
------------ MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
PREPAYMENT PENALTIES
PREPAYMENT PENALTY NUMBER OF TOTAL PERCENTAGE OF
------------------ MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
MAXIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
---------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............ $ 100.00%
The weighted average Maximum Rate of the Adjustable Rate Mortgage Loans
is approximately % per annum.
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
MINIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
----------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............ $ 100.00%
The weighted average Minimum Rate of the Adjustable Rate Mortgage Loans
is approximately % per annum.
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
RANGE OF GROSS NUMBER OF TOTAL PERCENTAGE OF
MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............ $ 100.00%
The weighted average Gross Margin of the Adjustable Rate Mortgage Loans
is approximately % per annum.
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS
NEXT ADJUSTMENT DATE NUMBER OF TOTAL PERCENTAGE OF
-------------------- MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM
OF THE ADJUSTABLE RATE MORTGAGE LOANS
INITIAL FIXED NUMBER OF TOTAL PERCENTAGE OF
TERM/SUBSEQUENT MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
ADJUSTABLE RATE TERM -------------- ----------------- BY TOTAL
-------------------- PRINCIPAL BALANCE
-----------------
$ %
----------- ---------------- -------------
Total............ $ 100.00%
PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERIODIC CAP (%) NUMBER OF TOTAL PERCENTAGE OF
---------------- MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
-------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
----------------
$ 100.00%
----------- ---------------- -------------
Total............. $ 100.00%
INITIAL CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
INITIAL CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------- -------------- ----------------- -----------------
$ %
----------- ---------------- -------------
Total............. $ 100.00%
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust Fund to purchase additional Mortgage Loans
(the "Subsequent Mortgage Loans") on [any] date, as specified in the Pooling and
Servicing Agreement (each, a "Subsequent Transfer Date") will be subject to the
Subsequent Mortgage Loans meeting the following criteria: [to be provided as
applicable]. These criteria will be based on the characteristics of the
Subsequent Mortgage Loans on the related Subsequent Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary
significantly from time to time subject to the requirements described above, and
may bear no particular relationship to the characteristics of the initial
Mortgage Loans at any time. It is expected that a substantial portion of the
Subsequent Mortgage Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for Monthly Payments due on
or before that date. A Current Report on Form 8-K will be available to
purchasers of the Offered Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Offered Certificates. In
the event that Mortgage Loans are removed from or added to the Mortgage Pool as
set forth in this prospectus supplement under "Description of the Mortgage
Pool," the removal or addition, to the extent material, will be noted in the
Current Report on Form 8-K.
[ORIGINATOR/SERVICER
The information in this section has been provided by [servicer]. None
of the Depositor, GACC, the Trustee, the Insurer, the Underwriter or any of
their respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
GENERAL
[Description of the Originator/Servicer.]
LENDING ACTIVITIES AND LOAN SALES
[ ] originates real estate loans through its network of offices and
loan origination centers. [ ] also participates in secondary market activities
by originating and selling mortgage loans while continuing to service the
majority of the loans sold. In other cases [ ]'s whole loan sale agreements
provide for the transfer of servicing rights.
[ ]'s primary lending activity is funding loans to enable borrowers to
purchase or refinance residential real property, which loans are secured by
first or second liens on the related real property. [ ]'s single-family real
estate loans are predominantly "conventional" mortgage loans, meaning that they
are not insured by the Federal Housing Administration or partially guaranteed by
the U.S. Department of Veterans Affairs.
The following table summarizes [ ]'s one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by [ ] from other loan
originators.
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31,
--------------------- ----------------------------
---- ---- ---- ---- ---- ----- -----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
------------------------------ ---------------------------
Originated and $ $ $ $ $ $ $
purchased.....
Sales......... $ $ $ $ $ $ $
LOAN SERVICING
The Servicer services all of the mortgage loans it originates that are
retained in its portfolio and continues to service at least a majority of the
loans that have been sold to investors. Servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent borrowers, and supervising foreclosure in the event of unremedied
defaults. The Servicer's servicing activities are audited periodically by
applicable regulatory authorities. Some financial records of the Servicer
relating to its loan servicing activities are reviewed annually as part of the
audit of the Servicer's financial statements conducted by its independent
accountants.
UNDERWRITING GUIDELINES
The Mortgage Loans were originated generally in accordance with
guidelines (the "Underwriting Guidelines") established by [ ]. The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
borrower's credit standing and repayment ability. On a case-by-case basis and
only with the approval of two or more senior lending officers, [ ] may determine
that, based upon compensating factors, a prospective borrower not strictly
qualifying under the underwriting risk category guidelines described below
warrants an underwriting exception. Compensating factors may include, but are
not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit
history, stable employment and time in residence at the applicant's current
address. It is expected that a substantial number of the Mortgage Loans will
have been originated under underwriting exceptions.
[Describe originator's underwriting guidelines.]
SERVICING PRACTICES AND EXPERIENCE
In general, when a borrower fails to make a required payment on a
residential mortgage loan, [ ] attempts to cause the deficiency to be cured by
corresponding with the borrower. In most cases deficiencies are cured promptly.
Pursuant to [ ]'s customary procedures for residential mortgage loans serviced
by it for its own account, [ ] generally mails a notice of intent to foreclose
to the borrower after the loan has become 31 days past due (two payments due but
not received) and, within one month thereafter, if the loan remains delinquent,
typically institutes appropriate legal action to foreclose on the property
securing the loan. If foreclosed, the property is sold at public or private sale
and may be purchased by [ ]. In California, real estate lenders are generally
unable as a practical matter to obtain a deficiency judgment against the
borrower on a loan secured by single-family real estate.
The following table sets forth the delinquency and loss experience at
the dates indicated for residential (one- to four-family and multifamily) first
lien mortgage loans serviced by the Servicer that were originated or purchased
by the Servicer:
[To be provided as applicable.]
There can be no assurance that the delinquency and loss experience of
the Mortgage Loans will correspond to the loss experience of the Servicer's
mortgage portfolio set forth in the table above. The statistics shown above
represent the delinquency and loss experience for the Servicer's total servicing
portfolio only for the periods presented, whereas the total delinquency and loss
experience on the Mortgage Loans will depend on the results over the life of the
Trust Fund. The Servicer's portfolio includes mortgage loans with payment and
other characteristics that are not representative of the payment and other
characteristics of the Mortgage Loans. A substantial number of the Mortgage
Loans may also have been originated based on Underwriting Guidelines that are
less stringent than those generally applicable to the servicing portfolio
reflected in the table. If the residential real estate market experiences an
overall decline in property values, the actual rates of delinquencies,
foreclosures and losses could be higher than those previously experienced by the
Servicer. 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 Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on to the Mortgage
Loans.]
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of [ ] among the
Depositor, the Servicer and the Trustee. Reference is made to the Prospectus for
important information in addition to that set forth in this Prospectus
Supplement regarding the terms and conditions of the Pooling and Servicing
Agreement and the Offered Certificates. Offered Certificates in certificated
form will be transferable and exchangeable at the Corporate Trust Office of the
Trustee. [ ] serve as Certificate Registrar and Paying Agent.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will assign the Mortgage Loans to the Trustee, together
with all principal and interest received with respect to the Mortgage Loans on
and after the Cut-off Date, other than Monthly Payments due on or before that
date. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Pooling and Servicing Agreement that will specify with respect to
each Mortgage Loan, among other things, the original principal balance and the
Principal Balance as of the close of business on the Cut-off Date, the Mortgage
Rate, the Monthly Payment and the maturity date.
The Trustee will, concurrently with the assignment to it of the
property constituting the Trust Fund, authenticate and deliver the Certificates.
[As to each Mortgage Loan, the following documents are generally
required to be delivered to the Trustee or its custodian (the "Custodian") in
accordance with the Pooling and Servicing Agreement:
o the related original Mortgage Note endorsed without recourse to
the Trustee or in blank;
o the original Mortgage with evidence of recording indicated on the
original Mortgage (or, if the original recorded Mortgage has not
yet been returned by the recording office, a copy certified to be
a true and complete copy of the Mortgage sent for recording), the
original security agreement and related documents;
o an original assignment of the Mortgage to the Trustee or in blank
in recordable form and originals of all intervening assignments,
if any, showing a complete chain of title from origination to the
Trustee;
o the policies of title insurance issued with respect to each
Mortgage Loan; and
o the originals of any assumption, modification, extension or
guaranty agreements.
Where necessary to protect the interest of the Trustee in the Mortgage Loans,
the assignments of each Mortgage to the Trustee are required to be submitted for
recording promptly after the Closing Date.]
Under the terms of the agreements (the "Mortgage Loan Purchase
Agreements") pursuant to which GACC purchased the Mortgage Loans from [the
Originator] and the Depositor purchased the Mortgage Loans from GACC, the
Custodian [has conducted an initial review of the mortgage loan documents and
has notified] the Depositor, GACC and [the Originator] as to each mortgage loan
document that either has not yet been delivered to the Depositor as required or
appears to be not properly executed, not in conformity with the description of
the Mortgage Loan on the Mortgage Loan schedule or otherwise defective. If any
Mortgage Loan document is not delivered or any material defect in a document is
not cured within the time period specified in the Mortgage Loan Purchase
Agreements, [the Originator] will be required to repurchase the affected
Mortgage Loan for a price equal to the unpaid principal balance of the Mortgage
Loan plus accrued interest on the Mortgage Loan (the "Repurchase Price") or, in
some circumstances, to substitute another mortgage loan.
[[The Originator] has made to GACC and the Depositor under the
Mortgage Loan Purchase Agreements representations and warranties that include
representations and warranties similar to those summarized in the Prospectus
under the heading "Description of the Agreements -- Material Terms of the
Pooling and Servicing Agreements and Underlying Servicing Agreements --
Representations and Warranties; Repurchases." GACC's and the Depositor's rights
under these representations and warranties will be assigned to the Trustee for
the benefit of Certificateholders. In the event of a breach of any of these
representations or warranties that materially and adversely affects the value of
any Mortgage Loan or the interests of Certificateholders or the Insurer, [the
Originator] will be obligated, within 60 days following its discovery of a
breach or receipt of notice of a breach to cure the breach or purchase the
affected Mortgage Loan from the Trust Fund for the Repurchase Price or, in some
circumstances, to substitute another mortgage loan.]
To the extent that any Mortgage Loan as to which a representation or
warranty has been breached is not repurchased by [the Originator] and a Realized
Loss occurs on the Mortgage Loan, holders of Offered Certificates, in particular
the Class [ ]Certificates, may incur a loss if the applicable credit enhancement
is not sufficient to cover that loss.
VOTING RIGHTS
Voting rights of Certificateholders under the Pooling and Servicing
Agreement will be allocated among the Classes of Certificates and among the
Certificates of each Class as provided in the Pooling and Servicing Agreement.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance with
the provisions of the Pooling and Servicing Agreement.
[The Servicer will be required to use reasonable efforts to collect
all amounts due under each Mortgage Loan and to administer the Mortgage Loans in
accordance with generally accepted servicing practices. See
"[Originator/Servicer] -- Servicing Practices and Experience." The Servicer will
be required to deposit all amounts collected and recovered with respect to the
Mortgage Loans within three Business Days of receipt of those amounts in a
separate account in the name of the Trustee (the "Collection Account"); on the [
] day of each month, or if that date is not a Business Day, on the immediately
following Business Day, the Servicer will be required to transfer the Interest
Remittance Amount and the Principal Remittance Amount to a separate account
maintained by the Trustee for the benefit of the Certificateholders (the
"Certificate Account").
The Servicer will be prohibited under the Pooling and Servicing
Agreement from making any material modification to the terms of a Mortgage Loan,
including a change in the Mortgage Rate other than as provided in the Mortgage
Note, deferral or forgiveness of a Monthly Payment or extension of the maturity
date, unless the Mortgage Loan is in default or default is, in the judgment of
the Servicer, reasonably foreseeable.
The Servicer will also be prohibited from waiving any prepayment
premium except in the case of a default or imminent default, and then may waive
the prepayment premium only if the waiver would maximize amounts collected under
the Mortgage Loan.]
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between
Monthly Payment dates, the borrower pays interest on the amount prepaid only
from the last Monthly Payment date to the date of prepayment, with a resulting
reduction in interest payable for the month during which the prepayment is made.
[Any Prepayment Interest Shortfall resulting from a prepayment in full or in
part is required to be paid by the Servicer, but only to the extent that the
shortfall does not exceed the total of the Servicing Fees for the applicable
Distribution Date.]
ADVANCES
[The Servicer will be obligated to make advances ("Advances") with
respect to delinquent payments of principal of and interest on the Mortgage
Loans (other than Balloon Payments), adjusted to the related Mortgage Rate less
the Servicing Fee Rate, to the extent that those Advances, in its judgment, are
recoverable from future payments and collections, insurance payments or proceeds
of liquidation of a Mortgage Loan. The Trustee will be obligated to make any
required Advance if the Servicer fails in its obligation to do so, to the extent
provided in the Pooling and Servicing Agreement. The Servicer or the Trustee, as
applicable, will be entitled to recover any Advances made by it with respect to
a Mortgage Loan out of late payments on the Mortgage Loan or out of related
liquidation proceeds and insurance proceeds or, if the Servicer determines that
those Advances are not recoverable from those sources, then from collections on
other Mortgage Loans. These reimbursements may result in Realized Losses.
The purpose of making Advances is to maintain a regular cash flow to
Certificateholders, rather than to guarantee or insure against losses. No party
will be required to make any Advances with respect to reductions in the amount
of the Monthly Payments on Mortgage Loans due to reductions made by a bankruptcy
court in the amount of a Monthly Payment owed by a borrower or a reduction of
the applicable Mortgage Rate by application of the Relief Act.]
SERVICING ADVANCES
The Servicer will be required to advance its own funds for particular
purposes, including preserving and restoring Mortgaged Properties, payment of
delinquent taxes and insurance premiums, managing and disposing of REO
Properties, and legal proceedings. Advances for these and similar purposes are
referred to as "Servicing Advances." The Servicer will be reimbursed for
Servicing Advances made with respect to a Mortgage Loan out of late payments on
the Mortgage Loan, to the extent provided in the Pooling and Servicing
Agreement, or out of related liquidation proceeds and insurance proceeds, if the
Servicer determines that Servicing Advances are not recoverable from those
sources, then from collections and other recoveries on other Mortgage Loans. The
Pooling and Servicing Agreement will require that the Servicer not make a
Servicing Advance that is not expected to be recoverable from proceeds of the
related Mortgage Loan unless, in the Servicer's judgment, making that Servicing
Advance is in the best interests of the Certificateholders.
COLLECTION OF TAXES AND INSURANCE PREMIUMS
The Servicer will, to the extent required by the related loan
documents, maintain escrow accounts for the collection of hazard insurance
premiums as well as real estate taxes and similar items with respect to the
Mortgage Loans, and will make Servicing Advances with respect to delinquencies
in required escrow payments by the related borrowers.
INSURANCE COVERAGE
The Servicer is required to obtain and thereafter maintain in effect a
bond or similar form of insurance coverage (which may provide blanket coverage)
insuring against loss occasioned by the errors and omissions of their respective
officers and employees.
PURCHASES OF DEFAULTED MORTGAGE LOANS
The Servicer may, but will not be obligated to, purchase any Mortgage
Loan that becomes three months or more delinquent in payment or as to which the
Servicer has started foreclosure proceedings, for a price equal to the unpaid
principal balance plus interest accrued and unpaid.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that each year a firm
of independent accountants will furnish a statement to the Trustee to the effect
that the firm has examined the necessary documents and records relating to the
servicing of mortgage loans by the Servicer and that, on the basis of that
examination, the firm is of the opinion that the servicing has been conducted in
accordance with applicable accounting standards, except for those exceptions as
the firm believes to be immaterial and those exceptions set forth in the
statement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee (the "Servicing Fee") with
respect to each Mortgage Loan calculated as [ ]% annually (the "Servicing Fee
Rate") on the outstanding principal balance of each Mortgage Loan. The Servicer
will also be entitled to receive, to the extent provided in the Pooling and
Servicing Agreement, additional compensation, in the form of any interest or
other income earned on funds it has deposited in the Collection Account pending
remittance to the Trustee, as well as customary fees and charges paid by
borrowers (other than prepayment premiums).
[The Servicing Fee is subject to reduction as described above under
"-- Prepayment Interest Shortfalls."]
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage Loans, except as permitted by the Pooling and Servicing
Agreement, but it may employ one or more subservicers. If the Servicer chooses
to employ subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Pooling and Servicing Agreement, and will be considered to
have itself received any payment received by a subservicer whether or not the
subservicer actually remits that payment.
RESIGNATION OR REMOVAL OF THE SERVICER
The Servicer will agree in the Pooling and Servicing Agreement not to
resign except with the consent of the Trustee, unless the Servicer delivers to
the Trustee an opinion of legal counsel to the effect that the Servicer is no
longer permitted under applicable law to perform the duties of the Servicer
under the Pooling and Servicing Agreement.
If the Servicer is in default under the Pooling and Servicing
Agreement, or the Trustee or Certificateholders having a majority of Voting
Rights may remove the Servicer. [Events of default include:
o failure by the Servicer to remit any required payment, including
any Advance, to the Trustee for one Business Day after receipt of
written notice that the payment has not been made;
o failure by the Servicer to make a required Servicing Advance for
60 days after receipt of written notice that the Servicing
Advance has not been made;
o failure by the Servicer to fulfill any other material requirement
under the Pooling and Servicing Agreement within the applicable
time period;
o failure by the Servicer to be qualified to service mortgage loans
for either Fannie Mae or Freddie Mac;
o insolvency of the Servicer; and
o other events specified in the Pooling and Servicing Agreement.]
[If the Servicer is removed, the Trustee will immediately assume the
role of Servicer under the Pooling and Servicing Agreement unless another
Servicer is appointed pursuant to the Pooling and Servicing Agreement. The
Trustee will solicit bids from prospective successor Servicers as provided in
the Pooling and Servicing Agreement. If a qualifying bid is not received, the
Trustee will continue to service the Mortgage Loans if it is legally qualified
to do so until the Trustee appoints a successor Servicer as provided in the
Pooling and Servicing Agreement. If the servicing rights are sold, any proceeds
of the sale after deduction of expenses will be paid to the predecessor
Servicer.]
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Offered
Certificates will be affected by the rate of principal payments on the Mortgage
Loans (including prepayments, which may include amounts received by virtue of
purchase, condemnation, insurance or foreclosure) on the Mortgage Loans. Yields
will also be affected by the extent to which Mortgage Loans bearing higher
Mortgage Rates prepay at a more rapid rate than Mortgage Loans with lower
Mortgage Rates, the amount and timing of borrower delinquencies and defaults
resulting in Realized Losses, the application of Monthly Excess Cashflow, the
purchase price paid for the Offered Certificates and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on the Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include factors such as
changes in borrowers' housing needs, job transfers, unemployment, borrowers' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates and servicing decisions. The Mortgage
Loans generally have due-on-sale clauses.
[Approximately [ ]% of the Mortgage Loans are subject to prepayment
premiums during intervals ranging from one to five years following origination,
as described under "Description of the Mortgage Pools" in this prospectus
supplement. The prepayment premiums may have the effect of reducing the amount
or the likelihood of prepayment of these Mortgage Loans during intervals when a
prepayment premium would be payable.]
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments by the borrowers, liquidations of defaulted Mortgage
Loans, repurchases of Mortgage Loans due to breaches of representations and
warranties or defective documentation and exercise by the holder of the Residual
Certificate of its right to purchase all of the Mortgage Loans as described in
this prospectus supplement. The timing of changes in the rate of prepayments,
liquidations and purchases of the related Mortgage Loans may significantly
affect the yield to an investor, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation. Because the
rate and timing of principal payments on the Mortgage Loans will depend on
future events and on a variety of factors (as described more fully in this
prospectus supplement and in the Prospectus under "Yield Considerations") no
assurance can be given as to the rate or the timing of principal payments on the
Offered Certificates. In general, the earlier a prepayment of principal of the
related Mortgage Loans, the greater the effect on an investor's yield. The
effect on an investor's yield of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires or other natural disasters. [The
Originator] will represent and warrant that as of the Closing Date each
Mortgaged Property was free of material damage. In the event of an uncured
breach of this representation and warranty that materially and adversely affects
the value of a Mortgage Loan, [the Originator] will be required to repurchase
the affected Mortgage Loan or, under some circumstances, substitute another
mortgage loan. If any damage caused by earthquakes, flooding, storms, wildfires,
or landslides (or other cause) occurs after the Closing Date, [the Originator]
will not have any repurchase obligation. In addition, the standard hazard
policies covering the Mortgaged Properties generally do not cover damage caused
by earthquakes, flooding and landslides, and earthquake, flood or landslide
insurance may not have been obtained with respect to the affected Mortgaged
Properties. As a consequence, Realized Losses could result. To the extent that
the insurance proceeds received with respect to any damaged Mortgage Properties
are not applied to the restoration of those Mortgage Properties, the proceeds
will be used to prepay the related Mortgage Loans in whole or in part. Any
repurchases or repayments of the Mortgage Loans may reduce the weighted average
lives of the Offered Certificates and will reduce the yields on the Offered
Certificates to the extent they are purchased at a premium.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the related Certificates of principal
amounts that would otherwise be distributed over the remaining terms of those
Mortgage Loans. The rate of defaults on the Mortgage Loans will also affect the
rate and timing of principal payments on the Mortgage Loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in their
early years.
The yields on the Class [ ] Certificates may be adversely affected by
Net Prepayment Interest Shortfalls on the Mortgage Loans.
The yields to investors in the Offered Certificates may be affected by
the purchase of defaulted Mortgage Loans by the Servicer and by the exercise by
[ ] of its right to purchase the Mortgage Loans, as described under "Description
of the Certificates -- Optional Purchase of Mortgage Loans; Termination of the
Trust Fund" in this prospectus supplement, or the failure of [ ] to exercise
that right.
If the purchaser of an Offered Certificate offered at a discount from
its initial principal amount calculates its anticipated yield to maturity (or
early termination) based on an assumed rate of payment of principal that is
faster than that actually experienced on the related Mortgage Loans, the actual
yield may be lower than that so calculated. Conversely, if the purchaser of a
Certificate offered at a premium calculates its anticipated yield based on an
assumed rate of payment of principal that is slower than that actually
experienced on the related Mortgage Loans, the actual yield may be lower than
that so calculated.
[The Interest Rates applicable to the Offered Certificates will be
affected by the level of [ ] from time to time, and by the Mortgage Rates of the
Mortgage Loans from time to time as described under "Risk Factors-- Mortgage
Loan Interest Rates May Limit Interest Rates on the Certificates."]
OVERCOLLATERALIZATION
[Describe as applicable.]
[SUBORDINATION OF THE CLASS [ ] CERTIFICATES
As described in this prospectus supplement, the Senior Certificates
are senior to the Class [ ]Certificates, and the Senior Certificates will have a
preferential right to receive amounts in respect of interest to the extent of
the Interest Remittance Amount and amounts in respect of principal to the extent
of the Principal Distribution Amount for the related Mortgage Pool. As a result,
the yield on the Class [ ]Certificates will be particularly sensitive to
delinquencies and losses on the Mortgage Loans.]
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in net reduction of principal of the
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a [ ]
prepayment standard or model. The model used in this Prospectus Supplement
represents [ ]. [ ] does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the Mortgage
Loans to be included in the Trust Fund.
[The following tables were prepared based on the following
assumptions, among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amounts are as set forth on the cover
of this Prospectus Supplement, and the Interest Rates are as
described in this prospectus supplement;
o each Monthly Payment of principal and interest is timely received
on the first day of each month starting in [ ];
o principal prepayments are received in full on the first day of
each month starting in [ ] and there are no Net Prepayment
Interest Shortfalls;
o prepayments are received on the Mortgage Loans at the [ ] rate;
o there are no defaults or delinquencies on the Mortgage Loans;
o Distribution Dates occur on the [ ]th day of each month, starting
in [ ];
o there are no re-purchases or substitutions of the Mortgage Loans;
o [the Mortgage Rates of the Adjustable Rate Mortgage Loans adjust
semi-annually;]
o [the value of the Index is [ ]%;]
o [the value of LIBOR is %;]
o the Certificates are issued on [ ];
o the sum of the Trustee Fee Rate and the Servicing Fee Rate is [
]%; and
o the Mortgage Loans were aggregated into assumed mortgage loans
having the following characteristics:]
ASSUMED MORTGAGE LOAN CHARACTERISTICS
LOAN TYPE PRINCIPAL GROSS ORIGINAL REMAINING LOAN GROSS
--------- BALANCE($) COUPON TERM TO TERM TO AGE MARGIN(%)
---------- RATE(%) MATURITY MATURITY (MONTHS) --------
------- (MONTHS) (MONTHS) -------
--------- ---------
The actual characteristics of the Mortgage Loans may, and the
performance of the Mortgage Loans will, differ from the assumptions used in
constructing the tables set forth below, which are hypothetical in nature and
are provided only to give a general sense of how the principal cash flows might
behave under varying prepayment scenarios. For example, it is not expected that
the Mortgage Loans will prepay at a constant rate until maturity, that all of
the Mortgage Loans will prepay at the same rate or that there will be no
defaults or delinquencies on the Mortgage Loans. Moreover, the diverse remaining
terms to maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated, even if the weighted average remaining term to
maturity of the Mortgage Loans is as assumed. Any difference between those
assumptions and the actual characteristics and performance of the Mortgage Loans
or actual prepayment or loss experience will cause the percentages of initial
Class Principal Amounts outstanding over time and the weighted average lives of
the Offered Certificates to differ (which difference could be material) from the
corresponding [assumed prepayment rates].
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Offered Certificates and set
forth the percentages of the initial Class Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at the indicated [assumed prepayment rates].
The weighted average life of an Offered Certificate is determined by
(1) multiplying the net reduction, if any, of the applicable Class Principal
Amount by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (2) adding the results and (3)
dividing the sum by the total of the net reductions of Class Principal Amount
described in (1) above.
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE
CLASS [ ] CERTIFICATES OUTSTANDING UNDER THE FOLLOWING [PREPAYMENT RATES]
DISTRIBUTION DATE [ ] [ ] [ ] [ ] [ ] [ ]
----------------- --- --- --- --- --- ---
Initial Percentage...... 100 100 100 100 100 100
Weighted Average
Life in Years
With Optional Termination..........
Without Optional Termination.......
---------
* Based upon the assumption that [ ] exercises its option to repurchase the
Mortgage Loans as described under "Description of the Certificates --
Optional Purchase of Mortgage Loans; Termination of the Trust Fund" in this
prospectus supplement, except in the case of the "Weighted Average Life
With Optional Termination."
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
[The Trust Agreement provides that the Trustee will elect to treat the
Trust Fund as a REMIC. Upon the issuance of the Offered Certificates, Brown &
Wood LLP ("Tax Counsel") will deliver its opinion to the effect that, assuming
compliance with the Pooling and Servicing Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC within the meaning of Section
860D of the Internal Revenue Code of 1986, as amended (the "Code"), and that the
Offered Certificates will represent the ownership of regular interests in the
REMIC.]
TAXATION OF OFFERED CERTIFICATES
[To be provided as applicable.]
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax matters described under
"Material Federal Income Tax Considerations" above, prospective investors should
consider the state income tax consequences of the acquisition, ownership and
disposition of the Offered Certificates. 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, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Offered
Certificates.
LEGAL INVESTMENT CONSIDERATIONS
[The [Senior Certificates] will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"), for so long as they are rated in one of the two
highest rating categories by one or more nationally recognized rating agencies,
and, as such, are legal investments for some entities to the extent provided in
SMMEA.] These investments, however, will be subject to general regulatory
considerations governing investment practices under state and federal laws.
Institutions whose investment activities are subject to review by
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by the regulatory authorities, on the investment by
those institutions in some mortgage related securities. In addition, several
states have adopted or may adopt regulations that prohibit some state-chartered
institutions from purchasing or holding similar types of securities.
Accordingly, investors should consult their own legal advisors to
determine whether and to what extent the Offered Certificates may be purchased
by them.
See "Legal Investment Considerations" in the Prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be applied by
the Depositor, or an affiliate of the Depositor, toward the purchase of the
Mortgage Loans. The Mortgage Loans will be acquired by the Depositor from GACC
in a privately negotiated transaction.
UNDERWRITING
[Subject to the terms and conditions provided in the underwriting
agreement and in a terms agreement (collectively, the "Underwriting Agreement")
among the Depositor, GACC and the Underwriter, the Depositor and GACC have
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Depositor, all of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will
be effected in each case 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 sale. The Underwriter may effect these transactions by selling the
Certificates to or through dealers, and dealers may receive from the
Underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be an underwriter, and any discounts, commissions
or concessions received by them, and any profit on the resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act"). The
Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against some civil liabilities, including liabilities under the
Act.]
Expenses incurred by the Depositor in connection with this offering
are expected to be approximately $[ ].
The Underwriter is an affiliate of the Depositor and GACC.
ERISA CONSIDERATIONS
[Employee benefit plans ("Plans") that are subject to the Employee
Retirement Income Security Act off 1974, as amended ("ERISA"), and any person
utilizing the assets of a Plan, may not purchase the Class [ ] Certificates,
except that any insurance company may purchase the Class [ ] Certificates with
assets of its general account if the exemptive relief granted by the Department
of Labor for transactions involving insurance company general accounts in
Prohibited Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) is
available with respect to the investment. The Pooling and Servicing Agreement
will include restrictions on the transfer of the Offered Certificates.]
See "ERISA Considerations" in the accompanying Prospectus.
EXPERTS
[Describe as applicable.]
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor and for the Underwriter by Brown & Wood LLP, Washington,
D.C.
RATINGS
It is a condition to the issuance of the [ ] Certificates that they be
rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency] (the "Rating
Agencies "). It is a condition to the issuance of the Class [ ] Certificates
that they be rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency].
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. A securities rating addresses the likelihood of
the receipt by holders of Offered Certificates of distributions in the amount of
scheduled payments on the Mortgage Loans. The rating takes into consideration
the characteristics of the Mortgage Loans and the structural, legal and tax
aspects associated with the Offered Certificates. The ratings on the Offered
Certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that holders
of Offered Certificates might suffer a lower than anticipated yield due to
prepayments.
The security ratings assigned to the Offered Certificates 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 either Rating Agency.
The Depositor has not requested a rating of the Offered Certificates
by any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by the other rating
agency. The rating assigned by the other rating agency to the Offered
Certificates could be lower than the ratings assigned by the Rating Agencies.
<PAGE>
GLOSSARY OF DEFINED TERMS
[To be provided.]
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered ACE
Securities Corp. [ ] Pass-Through Certificates (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of DTC, Clearstream Luxembourg or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those holders meet specific
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold the positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last interest
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the accrual period and a year assumed to consist of 360
days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (that would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended
a line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although this
result will depend on each Clearstream Luxembourg Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last interest payment to and excluding the settlement date on the
basis of either the actual number of days in the accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (that is, the trade
fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
o borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with
the clearing system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which
would give the Global Securities sufficient time to be reflected
in their Clearstream Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Clearstream Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear (or through DTC if the holder has an address
outside the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons that are Beneficial Owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner or
his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), (3) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (4) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities.
<PAGE>
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES,
[ ,]
ORIGINATOR AND SERVICER
-----------------------------
PROSPECTUS SUPPLEMENT
------------------------------
DEUTSCHE BANC ALEX. BROWN
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each trust fund will generally consist of one or
more of the following:
o mortgage loans secured by one- to four-family residential properties;
o mortgage loans secured by multi-family residential properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed by
mortgage loans secured by residential properties or participations in
those types of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
THE SECURITIES:
Ace Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is [ ] , 2000.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some or
all of the following types of assets:
o single family and/or multifamily mortgage loans, which may include
Home Equity Loans, home improvement contracts and Land Sale Contracts
(each as defined in this prospectus);
o home improvement installment sales contracts or installment loans that
are unsecured called unsecured home improvement Loans;
o manufactured housing installment sale contracts or installment loan
agreements referred to as contracts;
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively, "Agency Securities");
o previously issued asset-backed certificates, collateralized mortgage
obligations or participation certificates (each, and collectively,
"Mortgage Securities") evidencing interests in, or collateralized by,
mortgage loans or Agency Securities; or
o a combination of mortgage loans, unsecured home improvement loans,
contracts, Agency Securities and/or Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or insured
by a governmental agency or instrumentality or other person only if and to the
extent expressly provided in the prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of interest,
and full repayment of principal, in level monthly payments with a
fixed rate of interest computed on their declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic adjustments
to their rates of interest to equal the sum of a fixed margin and an
index;
o "Buy Down Assets," which are Assets for which funds have been provided
by someone other than the related borrowers to reduce the borrowers'
monthly payments during the early period after origination of those
Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time reduction
of the interest rate payable on these Assets;
o "GEM Assets," which provide for (1) monthly payments during the first
year after origination that are at least sufficient to pay interest
due on these Assets, and (2) an increase in those monthly payments in
later years at a predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of those Assets;
o "GPM Assets," which allow for payments during a portion of their terms
which are or may be less than the amount of interest due on their
unpaid principal balances, and this unpaid interest will be added to
the principal balances of those Assets and will be paid, together with
interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that increase
over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to limitations, the related
borrowers may exercise an option to convert the adjustable interest
rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by borrowers
on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the prospectus supplement from the date of origination, after
which the monthly payment is fixed at a level-payment amount so as to fully
amortize the Asset over its remaining term to maturity. The scheduled monthly
payment for an Increasing Payment Asset is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower's initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate some number of percentage points below the
Asset Rate of that Increasing Payment Asset. The borrower's monthly payments on
each Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Securities (as defined in this prospectus) will be entitled to payment
only from the assets of the related trust fund and will not be entitled to
payments from the assets of any other trust fund established by the depositor.
The assets of a trust fund may consist of certificates representing beneficial
ownership interests in, or indebtedness of, another trust fund that contains the
Assets, if specified in the prospectus supplement.
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on (1) a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property") or (2) a primarily residential property that consists of five or more
residential dwelling units, referred to as a multifamily property, which may
include limited retail, office or other commercial space. Single Family
Properties are sometimes referred to in this prospectus as "Mortgaged
Properties." The mortgage loans will be secured by first and/or junior mortgages
or deeds of trust or other similar security instruments creating a first or
junior lien on Mortgaged Property.
The Mortgaged Properties may also include:
o Apartments owned by cooperative housing corporations ("Cooperatives");
and
o Leasehold interests in properties, the title to which is held by third
party lessors. The term of these leaseholds will exceed the term of
the related mortgage note by at least five years or some other time
period specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of these
home equity loans ("Home Equity Loans");
o Secured home improvement installment sales contracts and secured
installment loan agreements, known as home improvement contracts; and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for the
sale of properties pursuant to which the borrower promises to pay the
amount due on the mortgage loans to the holder of the Land Sale
Contract with fee title to the related property held by that holder
until the borrower has made all of the payments required pursuant to
that Land Sale Contract, at which time fee title is conveyed to the
borrower.
The originator of each mortgage loan will have been a person other than the
depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the mortgage loan to the Value of the related Mortgaged Property. The "Value" of
a Mortgaged Property, other than for Refinance Loans, is generally the lesser of
(a) the appraised value determined in an appraisal obtained by the originator at
origination of that loan and (b) the sales price for that property. "Refinance
Loans" are loans made to refinance existing loans. Unless otherwise specified in
the prospectus supplement, the Value of the Mortgaged Property securing a
Refinance Loan is the appraised value of the Mortgaged Property determined in an
appraisal obtained at the time of origination of the Refinance Loan. The value
of a Mortgaged Property as of the date of initial issuance of the related series
may be less than the Value at origination and will fluctuate from time to time
based upon changes in economic conditions and the real estate market.
MORTGAGE LOAN INFORMATION IN THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the mortgage loans as of,
unless otherwise specified in that prospectus supplement, the close of
business on the first day of the month of formation of the related
trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the mortgage
loans;
o the mortgage rates or range of mortgage rates and the weighted average
mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"), the
index, the frequency of the adjustment dates, the range of margins
added to the index, and the maximum mortgage rate or monthly payment
variation at the time of any adjustment of and over the life of the
ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number of
days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report that will be
available to purchasers of the related Securities at or before the initial
issuance of that Security and will be filed as part of a Current Report on Form
8-K with the Securities and Exchange Commission (the "Commission") within
fifteen days after that initial issuance. The characteristics of the mortgage
loans included in a trust fund will not vary by more than five percent (by total
principal balance as of the Cut-off Date) from the characteristics of the
mortgage loans that are described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans include
(1) Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property and/or (2) home improvement
contracts originated by a home improvement contractor and secured by a mortgage
on the related mortgaged property that is junior to other liens on the mortgaged
property. The home improvements purchased with the home improvement contracts
typically include replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The prospectus supplement will
specify whether the home improvement contracts are FHA loans and, if so, the
limitations on any FHA insurance. In addition, the prospectus supplement will
specify whether the mortgage loans contain some mortgage loans evidenced by Land
Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the mortgage loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at some
other interval as is specified in the prospectus supplement or for payments in
another manner described in the prospectus supplement. Each mortgage loan may
provide for no accrual of interest or for accrual of interest on the mortgage
loan at a mortgage rate that is fixed over its term or that adjusts from time to
time, or that may be converted from an adjustable to a fixed mortgage rate or a
different adjustable mortgage rate, or from a fixed to an adjustable mortgage
rate, from time to time pursuant to an election or as otherwise specified in the
related mortgage note, in each case as described in the prospectus supplement.
Each mortgage loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the mortgage rate or to
reflect the occurrence of particular events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the prospectus supplement. Each
mortgage loan may be fully amortizing or require a balloon payment due on its
stated maturity date, in each case as described in the prospectus supplement.
Each mortgage loan may contain prohibitions on prepayment (a "Lock-out Period"
and, the date of expiration thereof, a "Lock-out Date") or require payment of a
premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the prospectus supplement. If
the holders of any class or classes of Offered Securities are entitled to all or
a portion of any Prepayment Premiums collected from the mortgage loans, the
prospectus supplement will specify the method or methods by which any of these
amounts will be allocated. See "--Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the prospectus supplement, the mortgage loans
may consist, in whole or in part, of revolving Home Equity Loans or balances of
these Home Equity Loans ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving Credit
Line Loan, principal amounts on that Revolving Credit Line Loan may be drawn
down (up to a maximum amount as set forth in the prospectus supplement) or
repaid. If specified in the prospectus supplement, new draws by borrowers under
the Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the trust fund and principal payments are applied to
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some circumstances,
under a Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest that accrues on the loan during the
billing cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The unsecured home improvement loans may consist of conventional unsecured
home improvement loans, unsecured installment loans and unsecured home
improvement loans that are FHA loans. Except as otherwise described in the
prospectus supplement, the unsecured home improvement loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any unsecured home
improvement loans, including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the unsecured home
improvement loans as of the applicable cut-off date;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the unsecured home improvement loans;
o the earliest and latest origination date and maturity date of the
unsecured home improvements loans;
o the interest rates or range of interest rates and the weighted average
interest rates borne by the unsecured home improvement loans;
o the state or states in which most of the unsecured home improvement
loans were originated.
o information regarding the prepayment provisions, if any, of the
unsecured home improvement loans;
o with respect to the unsecured home improvement loans with adjustable
interest rates, called ARM unsecured home improvement loans, the
index, the frequency of the adjustment dates, the rage of margins
added to the index, and the maximum interest rate or monthly payment
variation at the time of any adjustment thereof and over the life of
the ARM unsecured home improvement loan;
o information regarding the payment characteristics of the unsecured
home improvement loans;
o the number of unsecured home improvement loans that are delinquent and
the number of days or ranges of the number of days that unsecured home
improvement loans are delinquent; and
o the material underwriting standards used for the unsecured home
improvement loans.
If specific information respecting the unsecured home improvement loans is
unknown to the depositor at the time securities are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement, and specific information will be set forth in a report
that will be available to purchasers of the related securities at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Commission within fifteen days after the related initial issuance.
The characteristics of the unsecured home improvement loans included in a trust
fund will not vary by more than five percent, by total principal balance as of
the cut-off date, from the characteristics thereof that are described in the
prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the prospectus supplement, each contract will be
secured by a security interest in a new or used manufactured home, called a
Manufactured Home. The contracts may include contracts that are FHA loans. The
method of computing the Loan-to-Value Ratio of a contract will be described in
the prospectus supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement relating to a trust fund whose assets include a
substantial proportion of contracts will contain certain information, as of the
dates specified in that prospectus supplement and to the extent then applicable
and specifically known to the depositor, with respect to any contracts,
including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the contracts as of the
applicable cut-off date;
o whether the manufactured homes were new or used as of the origination
of the related contracts;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the contracts;
o the range of maturity dates of the contracts;
o the range of the Loan-to-Value Ratios at origination of the contracts;
o the annual percentage rate on each contract, called a contract rate,
or range of contract rates and the weighted average contract rate
borne by the contracts;
o the state or states in which most of the manufactured homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
contracts;
o for contracts with adjustable contract rates, referred to as ARM
contracts, the index, the frequency of the adjustment dates, and the
maximum contract rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM contract;
o the number of contracts that are delinquent and the number of days or
ranges of the number of days those contracts are delinquent;
o information regarding the payment characteristics of the contracts;
and
o the material underwriting standards used for the contracts.
If specific information respecting the contracts is unknown to the
depositor at the time the securities are initially offered, more general
information of the nature described above will be provided i the prospectus
supplement, and specific information will be set forth in a report that will be
available to purchasers of the related securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Commission within fifteen days after the related initial issuance. The
characteristics of the contracts included in a trust fund will not vary by more
than five percent (by total principal balance as of the cut-off date) from the
characteristics thereof that are described in the prospectus supplement.
The information described above regarding the contrac6ts in a trust fund
may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
PAYMENT PROVISIONS OF THE CONTRACTS
All of the contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at some other interval as is specified
in the prospectus supplement or form payments in another manner described in the
prospectus supplement. Each contract may provide for no accrual of interest or
for accrual of interest thereon at a contract rate that is fixed over its term
or that adjusts from time to time, or as otherwise specified in the prospectus
supplement. Each contract may provide for scheduled payments to maturity or
payments that adjust from time to time to accommodate changes in the contract
rate as otherwise described in the prospectus supplement.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
GINNIE MAE
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
III of the Housing Act authorizes Ginnie Mae to guarantee the timely payment of
the principal of and interest on certificates that are based on and backed by a
pool of FHA loans, VA loans or by pools of other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
GINNIE MAE CERTIFICATES
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as described
below with respect to Stripped Agency Securities, each Ginnie Mae certificate
will provide for the payment, by or on behalf of the issuer, to the registered
holder of that Ginnie Mae certificate of monthly payments of principal and
interest equal to the holder's proportionate interest in the total amount of the
monthly principal and interest payments on each related FHA loan or VA loan,
minus servicing and guaranty fees totaling the excess of the interest on that
FHA loan or VA loan over the Ginnie Mae certificates' interest rate. In
addition, each payment to a holder of a Ginnie Mae certificate will include
proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or evidence
any recourse against, the issuer of the Ginnie Mae certificates, the depositor
or any affiliates of the depositor, and the only recourse of a registered holder
(for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee, as
registered holder of the Ginnie Mae certificates included in a trust fund, is
entitled to proceed directly against Ginnie Mae under the terms of the guaranty
agreement or contract relating to the Ginnie Mae certificates for any amounts
that are unpaid when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
FANNIE MAE
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thus expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
FANNIE MAE CERTIFICATES
Fannie Mae certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus that is periodically revised by Fannie
Mae. Fannie Mae certificates represent fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program. Mortgage
loans underlying Fannie Mae certificates included in a trust fund will consist
of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations solely
of Fannie Mae and are not backed by, nor entitled to, the full faith and credit
of the United States. If Fannie Mae were unable to satisfy those obligations,
distributions to the holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying loans and, accordingly, monthly
distributions to the holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
FREDDIE MAC
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests in mortgage loans which
it deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of these
mortgage loans must meet the applicable standards set forth in the Freddie Mac
Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the trust
fund includes Freddie Mac certificates, your prospectus supplement will include
any material additional information regarding the Freddie Mac guaranty program,
the characteristics of the pool underlying that Freddie Mac certificate, the
servicing of the related pool, payment of principal and interest on the Freddie
Mac certificate and any other relevant matters about the Freddie Mac
certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely payment
of scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event no
later than one year after demand has been made upon the borrower for
accelerated payment of principal.
In taking actions regarding the collection of principal after default on
the mortgage loans underlying Freddie Mac certificates, including the timing of
demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy those obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Securities. The Freddie Mac certificates
and underlying mortgage loans will be described in the prospectus supplement.
STRIPPED AGENCY SECURITIES
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying securities
backing the Stripped Agency Securities or to the extent described above for a
Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the prospectus supplement. If the trust fund includes Stripped
Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans of the
type that would otherwise be eligible to be mortgage loans, unsecured home
improvement loans, contract or Agency Securities, or collateralized obligations
secured by mortgage loans, unsecured home improvement loans, contract or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its affiliates;
(2) acquired in bona fide secondary market transactions from persons
other than the issuer of the Mortgage Securities or its affiliates; and
(3) (a) offered and distributed to the public pursuant to an effective
registration statement or (b) purchased in a transaction not involving any
public offering from a person who is not an affiliate of the issuer of
those securities at the time of sale (nor an affiliate of the issuer at any
time during the preceding three months); provided a period of two years
elapsed since the later of the date the securities were acquired from the
issuer.
Although individual Underlying Loans may be insured or guaranteed by the
United States or an agency or instrumentality of the United States, they need
not be, and Mortgage Securities themselves will not be so insured or guaranteed.
Except as otherwise set forth in the prospectus supplement, Mortgage Securities
will generally be similar to Securities offered under this prospectus.
The prospectus supplement for Securities of each series evidencing
interests in a trust fund including Mortgage Securities will include a
description of the Mortgage Securities and any related credit enhancement, and
the related mortgage loans, unsecured home improvement loans, contracts, or
Agency Securities will be described together with any other mortgage loans or
Agency Securities included in the trust fund of that series. As used in this
prospectus, the terms "mortgage loans," unsecured home improvement loans,
contracts, include the mortgage loans, unsecured home improvement loans,
contracts, as applicable, underlying the Mortgage Securities in your trust fund.
References in this prospectus to advances to be made and other actions to be
taken by the master servicer in connection with the Assets may include any
advances made and other actions taken pursuant to the terms of the applicable
Mortgage Securities.
FHA LOANS AND VA LOANS
FHA loans will be insured by the FHA as authorized under the Housing Act,
and the United States Housing Act of 1937, as amended. One- to four-family FHA
loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans, unsecured home improvement loans, contracts, that are FHA
loans are insured by the FHA (as described in the prospectus supplement, up to
an amount equal to 90% of the sum of the unpaid principal of the FHA loan, a
portion of the unpaid interest and other liquidation costs) pursuant to Title I
of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure multifamily loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of those loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of this type
of multifamily loan may be up to 40 years and the ratio of the loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans
made for the purchase or refinancing of existing apartment projects that are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project and a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan-to-value ratio refinancing of a project.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the trustee (a "Pre-Funding Account"). In that case, the
depositor will be obligated to sell at a predetermined price - and the trust
fund for the related series of Securities will be obligated to purchase -
additional Assets (the "Subsequent Assets") from time to time, and as frequently
as daily, within the period (not to exceed three months) specified in the
prospectus supplement (the "Pre-Funding Period") after the issuance of the
Securities having a total principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the "Pre-Funded Amount") for that series on
the date of its issuance. The Pre-Funded Amount for a series will be specified
in the prospectus supplement, and will not in any case exceed 50% of the total
initial Security Balance of the related Securities. Any Subsequent Assets will
be required to satisfy specific eligibility criteria more fully set forth in the
prospectus supplement, which criteria will be consistent with the eligibility
criteria of the Assets initially included in the trust fund, subject to those
exceptions that are expressly stated in the prospectus supplement. In addition,
specific conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations--Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount will
be used only to purchase Subsequent Assets. Any portion of the Pre-Funded Amount
remaining in the Pre-Funding Account at the end of the Pre-Funding Period will
be used to prepay one or more classes of Securities in the amounts and in the
manner specified in the prospectus supplement. In addition, if specified in the
prospectus supplement, the depositor may be required to deposit cash into an
account maintained by the trustee (the "Capitalized Interest Account") for the
purpose of assuring the availability of funds to pay interest on the Securities
during the Pre-Funding Period. Any amount remaining in the Capitalized Interest
Account at the end of the Pre-Funding Period will be remitted as specified in
the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts will
be permitted to be invested, pending application, only in eligible investments
authorized by each applicable rating agency.
ACCOUNTS
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the trust
fund. This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as cash
or invested in some short-term, investment grade obligations, in each case as
described in the prospectus supplement. See "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related trust fund may be
provided to one or more classes of Securities in the related series in the form
of subordination of one or more other classes of Securities in that series or by
one or more other types of credit support, for example, a letter of credit,
insurance policy, guarantee, reserve fund or another type of credit support, or
a combination of these (any of these types of coverage for the Securities of any
series, is referred to generally as "credit support"). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information for each type of credit support, if any,
will be described in the prospectus supplement for a series of Securities. See
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the prospectus supplement, the trust fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The trust fund may also include other agreements, for example, interest
rate swap agreements, interest rate cap or floor agreements, currency swap
agreements or similar agreements provided to reduce the effects of interest rate
or currency exchange rate fluctuations on the Assets or on one or more classes
of Securities. (Currency swap agreements might be included in the trust fund if
some or all of the Assets were denominated in a non-United States currency.) The
principal terms of any related guaranteed investment contract or other agreement
(any of these types of agreement, a "Cash Flow Agreement"), including provisions
relating to the timing, manner and amount of payments under these documents and
provisions relating to the termination of these documents, will be described in
the prospectus supplement for the related series. In addition, the prospectus
supplement will provide information with respect to the borrower under any Cash
Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the depositor to the purchase of Assets, or the repayment of the
financing incurred in that purchase, and to pay for some of the expenses
incurred in connection with that purchase of Assets and sale of Securities. The
depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors, including
the volume of Assets acquired by the depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Interest Rates, which may or may not be based upon the interest rates
borne by the Assets in the related trust fund. The prospectus supplement for any
series will specify the Interest Rate for each class of Securities or, in the
case of a variable or adjustable Interest Rate, the method of determining the
Interest Rate; the effect, if any, of the prepayment of any Asset on the
Interest Rate of one or more classes of Securities; and whether the
distributions of interest on the Securities of any class will be dependent, in
whole or in part, on the performance of any borrower under a Cash Flow
Agreement.
If specified in the prospectus supplement, the effective yield to maturity
to each holder of Securities entitled to payments of interest will be below that
otherwise produced by the applicable Interest Rate and purchase price of that
Security because, while interest may accrue on each Asset during a period (each,
an "Accrual Period"), the distribution of that interest will be made on a day
that may be several days, weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities entitled to distributions of
interest (or addition to the Security Balance of a class of Accrual Securities)
will be made by or on behalf of the trustee each month on the date specified in
the related prospectus supplement (each date, a "Distribution Date"), and will
include interest accrued during the Accrual Period for that Distribution Date.
As indicated above under "--Interest Rate," if the Accrual Period ends on a date
other than the day before a Distribution Date for the related series, the yield
realized by the holders of those Securities may be lower than the yield that
would result if the Accrual Period ended on the day before the Distribution
Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), including principal prepayments resulting from both
voluntary prepayments by the borrowers and involuntary liquidations. The rate at
which principal prepayments occur will be affected by a variety of factors,
including the terms of the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the level of prevailing interest rates, the availability of
mortgage credit and economic, demographic, geographic, tax, legal and other
factors.
In general, however, if prevailing interest rates fall significantly below
the interest rates on the Assets in a particular trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), those assets are likely to be the
subject of higher principal prepayments than if prevailing rates remain at or
above the rates borne by those assets. However, you should note that some Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may consist of
loans with different interest rates. The rate of principal payment on Mortgage
Securities will also be affected by the allocation of principal payments on the
underlying assets among the Mortgage Securities or Agency Securities and other
Mortgage Securities or Agency Securities of the same series. The rate of
principal payments on the Assets in the related trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities) is likely to be affected by the
existence of any Lock-out Periods and Prepayment Premium provisions of the
mortgage loans underlying or comprising those Assets, and by the extent to which
the servicer of any of these mortgage loans is able to enforce these provisions.
Mortgage loans with a Lock-out Period or a Prepayment Premium provision, to the
extent enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical mortgage loans without those
provisions, with shorter Lock-out Periods or with lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal amounts
of manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly small effect on the amount of
the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and some of the other factors mentioned above may play a
larger role in the prepayment behavior of manufactured housing contracts than
they do in the prepayment behavior of loans secured by mortgages on site-built
homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for a
series of Securities, the effect on yield on one or more classes of the
Securities of that series of prepayments of the Assets in the related trust fund
may be mitigated or exacerbated by any provisions for sequential or selective
distribution of principal to those classes.
When a full prepayment is made on a mortgage loan or a contract, the
borrower is charged interest on the principal amount of the mortgage loan or a
contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the prospectus
supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Securities entitled
to payments of interest because interest on the principal amount of any mortgage
loan or a contract so prepaid will be paid only to the date of prepayment rather
than for a full month. A partial prepayment of principal is applied so as to
reduce the outstanding principal balance of the related mortgage loan or a
contract as of its due date in the month in which the partial prepayment is
received or some other date as is specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets (or,
in the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities) may significantly
affect an investor's actual yield to maturity, even if the average rate of
distributions of principal is consistent with an investor's expectation. In
general, the earlier a principal payment is received on the mortgage loans and
distributed on a Security, the greater the effect on that investor's yield to
maturity. The effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during a
particular period may not be offset by a similar decrease (or increase) in the
rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a trust fund and the rate at which payments are made from any
credit support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of that
series. Prepayments on the mortgage loans or contracts comprising or underlying
the Assets in a particular trust fund will generally accelerate the rate at
which principal is paid on some or all of the classes of the Securities of the
related series.
If so provided in the prospectus supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or before which the Security Balance of the class of
Securities is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. 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 that security will be repaid to the investor.
The weighted average life of a class of Securities of a series will be
influenced by the rate at which principal on the Assets is paid to that class,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments, in whole or in part, and
liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Assets in a trust fund. If any Assets in a
particular trust fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of these Securities may be fully paid
before their respective final scheduled Distribution Dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the Assets will, to
some extent, be a function of the mix of mortgage rates or contract rates and
maturities of the mortgage loans or contracts comprising or underlying those
Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents a
constant assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans for the life of those loans. SPA represents
an assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans. A prepayment assumption of 100% of SPA
assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of those loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Starting in the thirtieth month and in each month thereafter during the life of
the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the mortgage
loans or contracts underlying or comprising the Assets.
The prospectus supplement for each series of Securities may contain tables,
if applicable, setting forth the projected weighted average life of each class
of Offered Securities of that series and the percentage of the initial Security
Balance of each class that would be outstanding on specified Distribution Dates
based on the assumptions stated in the prospectus supplement, including
assumptions that prepayments on the mortgage loans comprising or underlying the
related Assets are made at rates corresponding to various percentages of CPR,
SPA or some other standard specified in the prospectus supplement. These tables
and assumptions are intended to illustrate the sensitivity of the weighted
average life of the Securities to various prepayment rates and will not be
intended to predict or to provide information that will enable investors to
predict the actual weighted average life of the Securities. It is unlikely that
prepayment of any mortgage loans or contracts comprising or underlying the
Assets for any series will conform to any particular level of CPR, SPA or any
other rate specified in the prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans may
have balloon payments due at maturity (which, based on the amortization schedule
of those mortgage loans, may be a substantial amount), and because the ability
of a borrower to make a balloon payment typically will depend on its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Balloon Payment Assets may default at maturity. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Securities
and may thus lengthen the period of time elapsed from the date of issuance of a
Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. For some contracts,
the contract rate may be stepped up during its terms or may otherwise vary or be
adjusted. Under the applicable underwriting standards, the borrower under each
mortgage loan or contract generally will be qualified on the basis of the
mortgage rate or contract rate or contract rate in effect at origination. The
repayment of any of these mortgage loans or contracts may therefore be dependent
on the ability of the borrower to make larger level monthly payments following
the adjustment of the mortgage rate or contract rate. In addition, some mortgage
loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the borrower during the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan (the "Buydown Period"). The periodic increase in the amount
paid by the borrower of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
borrower, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default for the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance of
any related class or classes of Securities will lengthen the weighted average
life of those Securities and may adversely affect yield to holders of those
Securities, depending on the price at which those Securities were purchased. In
addition, for some ARM Loans subject to negative amortization, during a period
of declining interest rates, it might be expected that each minimum scheduled
monthly payment on this type of mortgage loan would exceed the amount of
scheduled principal and accrued interest on the principal balance of that
mortgage loan, and since that excess will be applied to reduce the principal
balance of the related class or classes of Securities, the weighted average life
of those Securities will be reduced and may adversely affect yield to holders of
those Securities, depending on the price at which those Securities were
purchased.
As may be described in the prospectus supplement, the related Agreement may
provide that all or a portion of the principal collected on or with respect to
the related mortgage loans may be applied by the related trustee to the
acquisition of additional mortgage loans during a specified period (rather than
used to fund payments of principal to securityholders during that period) with
the result that the related Securities possess an interest-only period, also
commonly referred to as a revolving period, which will be followed by an
amortization period. Any of these interest-only or revolving periods may, upon
the occurrence of particular events to be described in the prospectus
supplement, terminate before the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of this
principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related mortgage loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time the Securities are issued. Any similar feature
applicable to any Securities may end on the occurrence of events to be described
in the prospectus supplement, resulting in the current funding of principal
payments to the related securityholders and an acceleration of the amortization
of these Securities.
TERMINATION
If specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the repurchase of the Assets in
the related trust fund by the party specified in the prospectus supplement, on
any date on which the total Security Balance of the Securities of that series
declines to a percentage specified in the prospectus supplement (generally not
to exceed 10%) of the Initial Security Balance, under the circumstances and in
the manner set forth therein. In addition, if so provided in the prospectus
supplement, some classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities--Termination."
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on mortgage loans
that are refinance or limited documentation mortgage loans, and on mortgage
loans with high Loan-to-Value Ratios, may be higher than for other types of
mortgage loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the mortgage loans or contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or manufactured homes are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of the
mortgage loans or contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
mortgage loans or contracts that are repaid in accordance with their terms will
affect the weighted average life of the mortgage loans or contracts comprising
or underlying the Assets and that of the related series of Securities.
REFINANCING
At the request of a borrower, the servicer may allow the refinancing of a
mortgage loan or contract in any trust fund by accepting prepayments on the
mortgage loan and permitting a new loan secured by a mortgage on the same
property. In the event of that refinancing, the new loan would not be included
in the related trust fund and, therefore, that refinancing would have the same
effect as a prepayment in full of the related mortgage loan or contract. A
servicer may, from time to time, implement programs designed to encourage
refinancing. These programs may include modifications of existing loans, general
or targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
servicers may encourage the refinancing of mortgage loans or contracts,
including defaulted mortgage loans or contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of those mortgage loans or
contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of transfers of underlying
Mortgaged Property is another factor affecting prepayment rates that may not be
reflected in the prepayment standards or models used in the relevant prospectus
supplement. A number of the mortgage loans comprising or underlying the Assets,
other than FHA loans and VA loans, may include "due-on-sale clauses" that allow
the holder of the mortgage loans to demand payment in full of the remaining
principal balance of the mortgage loans upon sale, transfer or conveyance of the
related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus supplement,
the servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the servicer will not take any action in relation to the enforcement of any
due-on-sale provision that would adversely affect or jeopardize coverage under
any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Due-on-Sale Provisions."
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. It is expected that the servicer will permit
most transfers of manufactured homes and not accelerate the maturity of the
related contracts. In some cases, the transfer may be made by a delinquent
borrower to avoid a repossession of the manufactured home. In the case of a
transfer of a manufactured home after which the servicer desires to accelerate
the maturity of related contract, the servicer's ability to do so will depend on
the enforceability under state law of the due-on-sale clause.
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own and
sell mortgage loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in mortgage
loans and other financial assets, collections on the mortgage loans and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. If a series of Securities includes
Asset-backed notes (the "Notes," and together with the Certificates, the
"Securities"), the Notes will represent indebtedness of the related trust fund
and will be issued and secured pursuant to an indenture. Each series of
Securities will consist of one or more classes of Securities that may:
o provide for the accrual of interest on the series of Securities based
on fixed, variable or adjustable rates;
o be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other classes
of Securities in respect of distributions on the Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest on the series of
Securities which begin only following the occurrence of specific
events, that as the retirement of one or more other classes of
Securities of that series (collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described in
the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of the Securities with one or more of the characteristics
described in this paragraph including a Strip Security component.
If specified in the prospectus supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Assets in the related trust fund (each portion of the
Assets, an "Asset Group"). Any of these classes may include classes of Offered
Securities.
Each class of Securities offered by this prospectus and the related
prospectus supplement (the "Offered Securities") will be issued in minimum
denominations corresponding to the Security Balances or, in the case of some
classes of Strip Securities, notional amounts or percentage interests specified
in the prospectus supplement. The transfer of any Offered Securities may be
registered and those Securities may be exchanged without the payment of any
service charge payable in connection with that registration of transfer or
exchange, but the depositor or the trustee or any agent of the depositor or the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Securities of a series may be issued
in fully registered, certificated form ("Definitive Securities") or in
book-entry form ("Book-Entry Securities"), as provided in the prospectus
supplement. See "Description of the Securities--Book-Entry Registration and
Definitive Securities." Definitive Securities will be exchangeable for other
Securities of the same class and series of a similar total Security Balance,
notional amount or percentage interest but of different authorized
denominations.
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the trustee on each Distribution Date as specified in the prospectus
supplement from the Available Distribution Amount for that series and that
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the prospectus supplement,
the last business day of the month preceding the month in which the Distribution
Date occurs (the "Record Date"), and the amount of each distribution will be
determined as of the close of business on the date specified in the prospectus
supplement (the "Determination Date"). All distributions for each class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding securityholders in that class or by random selection or as described
in the prospectus supplement. Payments will be made either by wire transfer in
immediately available funds to the account of a securityholder at a bank or
other entity having appropriate facilities for these payments, if that
securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Securities in the
requisite amount specified in the prospectus supplement), or by check mailed to
the address of the person entitled to the payment as it appears on the Security
Register; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the location specified in the notice to securityholders of that final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below,
subject to the terms described in the prospectus supplement. Generally, the
"Available Distribution Amount" for each Distribution Date equals the sum of the
following amounts:
(1) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive, unless
otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest collected
but due on a date after the related Due Period (unless a different
period is specified in the prospectus supplement, a "Due Period " for
any Distribution Date will begin on the second day of the month in
which the immediately preceding Distribution Date occurs, or the
Cut-off Date in the case of the first Due Period, and will end on the
first day of the month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of any
FHA insurance, VA Guaranty Policy or insurance policies to be
maintained for each Asset (to the extent that proceeds are not applied
to the restoration of the Asset or released in accordance with the
normal servicing procedures of a servicer, subject to the terms and
conditions applicable to the related Asset) (collectively, "Insurance
Proceeds"), all other amounts received and retained in connection with
the liquidation of Assets in default in the trust fund ("Liquidation
Proceeds"), and other unscheduled recoveries received after the
related Due Period, or other period specified in the prospectus
supplement,
(c) all amounts in the Collection Account that are due or
reimbursable to the depositor, the trustee, an Asset Seller, a
servicer, the master servicer or any other entity as specified in the
prospectus supplement or that are payable in respect of particular
expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset from the
trust fund for defective documentation or a breach of representation
or warranty received after the related Due Period, or other period
specified in the prospectus supplement;
(2) if the prospectus supplement so provides, interest or investment
income on amounts on deposit in the Collection Account, including any net
amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or any
other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and (5) to the extent not
on deposit in the related Collection Account as of the corresponding
Determination Date, any amounts collected under, from or in respect of any
credit support for that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Securities (including any Securities not offered by this prospectus)
on each Distribution Date, and accordingly will be released from the trust fund
and will not be available for any future distributions.
The prospectus supplement for a series of Securities will describe any
variation in the calculation or distribution of the Available Distribution
Amount for that series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Strip Securities which have
no Interest Rate) may have a different Interest Rate, which will be a fixed,
variable or adjustable rate at which interest will accrue on that class or a
component of that class (the "Interest Rate" in the case of Certificates). The
prospectus supplement will specify the Interest Rate for each class or component
or, in the case of a variable or adjustable Interest Rate, the method for
determining the Interest Rate. Interest on the Securities will be calculated on
the basis of a 360-day year consisting of twelve 30-day months unless the
prospectus supplement specifies a different basis.
Distributions of interest on the Securities of any class will be made on
each Distribution Date (other than any class of Accrual Securities, which will
be entitled to distributions of accrued interest starting only on the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that class
and that Distribution Date, subject to the sufficiency of the portion of the
Available Distribution Amount allocable to that class on that Distribution Date.
Before any interest is distributed on any class of Accrual Securities, the
amount of Accrued Security Interest otherwise distributable on that class will
instead be added to the Security Balance of that class on each Distribution
Date.
For each class of Securities and each Distribution Date (other than some
classes of Strip Securities), "Accrued Security Interest" will be equal to
interest accrued during the related Accrual Period on the outstanding Security
Balance of the class of Securities immediately before the Distribution Date, at
the applicable Interest Rate, reduced as described below. Accrued Security
Interest on some classes of Strip Securities will be equal to interest accrued
during the related Accrual Period on the outstanding notional amount of the
Strip Security immediately before each Distribution Date, at the applicable
Interest Rate, reduced as described below, or interest accrual in the manner
described in the prospectus supplement. The method of determining the notional
amount for a particular class of Strip Securities will be described in the
prospectus supplement. Reference to notional amount is solely for convenience in
some of the calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the prospectus
supplement, the Accrued Security Interest on a series of Securities will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full accrual period resulting from prepayments
before the due date in that accrual period on the mortgage loans or contracts
comprising or underlying the Assets in the trust fund for that series. The
particular manner in which these shortfalls are to be allocated among some or
all of the classes of Securities of that series will be specified in the
prospectus supplement. The prospectus supplement will also describe the extent
to which the amount of Accrued Security Interest that is otherwise distributable
on (or, in the case of Accrual Securities, that may otherwise be added to the
Security Balance of) a class of Offered Securities may be reduced as a result of
any other contingencies, including delinquencies, losses and deferred interest
on the mortgage loans or contracts comprising or underlying the Assets in the
related trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Securities by reason of the allocation to that class of a portion of
any deferred interest on the mortgage loans or contracts comprising or
underlying the Assets in the related trust fund will result in a corresponding
increase in the Security Balance of that class. See "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than some classes of Strip Securities,
will have a "Security Balance" which, at any time, will equal the then maximum
amount that the holder will be entitled to receive on principal out of the
future cash flow on the Assets and other assets included in the related trust
fund. The outstanding Security Balance of a Security will be reduced:
o to the extent of distributions of principal on that Security from time
to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Securities of a series will be greater than the
outstanding total principal balance of the related Assets as of the applicable
Cut-off Date. The initial total Security Balance of a series and each class of
the series will be specified in the prospectus supplement. Distributions of
principal will be made on each Distribution Date to the class or classes of
Securities in the amounts and in accordance with the priorities specified in the
prospectus supplement. Some classes of Strip Securities with no Security Balance
are not entitled to any distributions of principal.
If specified in the related prospectus supplement, the trust fund may issue
securities from time to time and use proceeds of this issuance to make principal
payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion of
the principal collections may be applied by the trustee to the acquisition of
subsequent mortgage loans or asset-backed or mortgage backed securities during a
specified period rather than used to distribute payments of principal to
securityholders during that period. These securities would then possess an
interest only period, also commonly referred to as a "Revolving Period", which
will be followed by an "Amortization Period", during which principal will be
paid. Any interest only revolving period may terminate prior to the end of the
specified period and result in the earlier than expected principal repayment of
the securities.
COMPONENTS
To the extent specified in the prospectus supplement, distribution on a
class of Securities may be based on a combination of two or more different
components as described under "--General" above. To that extent, the
descriptions set forth under "--Distributions of Interest on the Securities" and
"--Distributions of Principal of the Securities" above also relate to components
of the component class of Securities. References in those sections to Security
Balance may refer to the principal balance, if any, of these components and
reference to the Interest Rate may refer to the Interest Rate, if any, on these
components.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the prospectus supplement, Prepayment Premiums that are
collected on the mortgage loans in the related trust fund will be distributed on
each Distribution Date to the class or classes of Securities entitled to the
distribution as described in the prospectus supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in the prospectus supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
trust fund against losses and shortfalls on Assets comprising that trust fund.
The prospectus supplement for a series of Securities will describe the
entitlement, if any, of a class of Securities whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Securities has been reduced to zero as the result of principal distributions,
the allocation of losses on the Assets, an optional termination or an optional
purchase or redemption, that class will no longer be entitled to receive
principal distributions from amounts received on the assets of the related trust
fund, including distributions in respect of principal losses previously
allocated to that class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the prospectus supplement, the servicer or another entity
described in the prospectus supplement will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal to
the total of payments of (1) principal (other than any balloon payments) and (2)
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in that trust fund during the related Due Period and were delinquent
on the related Determination Date, subject to a good faith determination that
the advances will be reimbursable from Related Proceeds (as defined below). In
the case of a series of Securities that includes one or more classes of
Subordinate Securities and if so provided in the prospectus supplement, the
servicer's (or another entity's) advance obligation may be limited only to the
portion of those delinquencies necessary to make the required distributions on
one or more classes of Senior Securities and/or may be subject to a good faith
determination that advances will be reimbursable not only from Related Proceeds
but also from collections on other Assets otherwise distributable on one or more
classes of those Subordinate Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Securities entitled to
the payments, rather than to guarantee or insure against losses. Advances of the
servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of credit
support) respecting which those advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the prospectus supplement,
including out of any amounts otherwise distributable on one or more classes of
Subordinate Securities of that series; provided, however, that any advance will
be reimbursable from any amounts in the related Collection Account before any
distributions being made on the Securities to the extent that the servicer (or
some other entity) determines in good faith that that advance (a "Nonrecoverable
Advance") is not ultimately recoverable from Related Proceeds or, if applicable,
from collections on other Assets otherwise distributable on the Subordinate
Securities. If advances have been made by the servicer from excess funds in the
related Collection Account, the servicer is required to replace these funds in
that Collection Account on any future Distribution Date to the extent that funds
in that Collection Account on that Distribution Date are less than payments
required to be made to securityholders on that date. If specified in the
prospectus supplement, the obligations of the servicer (or another entity) to
make advances may be secured by a cash advance reserve fund, a surety bond, a
letter of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of and the identity of any borrower on any surety
bond will be set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the servicer
(or another entity) will be entitled to receive interest at the rate specified
in the prospectus supplement on its outstanding advances and will be entitled to
pay itself this interest periodically from general collections on the Assets
before any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific conditions
described in the prospectus supplement, in the event of a servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Securities of a series,
the servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will forward or cause to be forwarded to each holder, to the
depositor and to any other parties as may be specified in the related Agreement,
a statement containing the information specified in the prospectus supplement,
or if no information is specified in the prospectus supplement, generally
setting forth, in each case to the extent applicable and available:
(1) the amount of that distribution to holders of Securities of that
class applied to reduce the Security Balance of the Securities;
(2) the amount of that distribution to holders of Securities of that
class allocable to Accrued Security Interest;
(3) the amount of that distribution allocable to Prepayment Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to prepare
their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of business on that
Distribution Date;
(6) the total principal balance of the Assets at the close of business
on that Distribution Date;
(7) the number and total principal balance of mortgage loans in
respect of which
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have begun;
(8) for any mortgage loan or contract liquidated during the related
Due Period, (a) the portion of the related liquidation proceeds payable or
reimbursable to a servicer (or any other entity) in respect of that
mortgage loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage loan or
contract and included in the trust fund as of the end of the related Due
Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan or contract and
included in the trust fund as of the end of the related Due Period,
(a) the book value,
(b) the principal balance of the related mortgage loan or
contract immediately following that Distribution Date
(calculated as if that mortgage loan or contract were still
outstanding taking into account limited modifications to the
terms of the mortgage loan specified in the Agreement),
(c) the total amount of unreimbursed servicing expenses and
unreimbursed advances in respect of the REO Property and
(d) if applicable, the total amount of interest accrued and
payable on related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable or reimbursable
to the master servicer in respect of that REO Property or
the related mortgage loan or contract and
(c) the amount of any loss to securityholders in respect of the
related mortgage loan;
(12) the total Security Balance or notional amount, as the case may
be, of each class of Securities (including any class of Securities not
offered by this prospectus) at the close of business on that Distribution
Date, separately identifying any reduction in that Security Balance due to
the allocation of any loss and increase in the Security Balance of a class
of Accrual Securities if any Accrued Security Interest has been added to
that balance;
(13) the total amount of principal prepayments made during the related
Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the close
of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each class
of Securities at the close of business on that Distribution Date;
(17) in the case of Securities with a variable Interest Rate, the
Interest Rate applicable to that Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in accordance with
the method specified in the prospectus supplement;
(18) in the case of Securities with an adjustable Interest Rate, for
statements to be distributed in any month in which an adjustment date
occurs, the adjustable Interest Rate applicable to that Distribution Date,
if available, and the immediately succeeding Distribution Date as
calculated in accordance with the method specified in the prospectus
supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included as of the close of
business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent Assets
since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of
(a) default interest,
(b) late charges and
(c) assumption and modification fees collected during the
related Due Period.
Within a reasonable period of time after the end of each calendar year, the
servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year the information required by the Code and applicable regulations
under the Code to enable securityholders to prepare their tax returns. See
"Description of the Securities--Book-Entry Registration and Definitive
Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Securities will terminate upon the payment to securityholders of that series of
all amounts held in the Collection Accounts or by a servicer, the master
servicer, if any, or the trustee and required to be paid to them pursuant to
that Agreement following the earlier of (1) the final payment or other
liquidation of the last Asset subject to the related Agreement or the
disposition of all property acquired upon foreclosure of any mortgage loan or
contract subject to the Agreement and (2) the purchase of all of the assets of
the trust fund by the party entitled to effect that termination, under the
circumstances and in the manner set forth in the prospectus supplement. In no
event, however, will the trust fund continue beyond the date specified in the
prospectus supplement. Written notice of termination of the Agreement will be
given to each securityholder, and the final distribution will be made only upon
presentation and surrender of the Securities at the location to be specified in
the notice of termination.
If specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the purchase of the Assets in the
related trust fund by the party specified in the prospectus supplement, under
the circumstances and in the manner set forth in the prospectus supplement. If
so provided in the prospectus supplement, upon the reduction of the Security
Balance of a specified class or classes of Securities by a specified percentage,
the party specified in the prospectus supplement will solicit bids for the
purchase of all assets of the trust fund, or of a sufficient portion of those
assets to retire that class or classes or purchase that class or classes at a
price set forth in the prospectus supplement, in each case, under the
circumstances and in the manner set forth in the prospectus supplement. That
price will at least equal the outstanding Security Balances and any accrued and
unpaid interest on the Security Balances (including any unpaid interest
shortfalls for prior Distribution Dates). Any sale of the Assets of the trust
fund will be without recourse to the trust fund or the securityholders. Any
purchase or solicitation of bids may be made only when the total Security
Balance of that class or classes declines to a percentage of the Initial
Security Balance of those Securities (not to exceed 10%) specified in the
prospectus supplement. In addition, if so provided in the prospectus supplement,
some classes of Securities may be purchased or redeemed in the manner set forth
in the prospectus supplement at a price at least equal to the outstanding
Security Balance of each class so purchased or redeemed and any accrued and
unpaid interest on the Security Balance (including any unpaid interest
shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the depositor, the
servicer or any other party specified in the prospectus supplement may, at that
party's option, repurchase any mortgage loan that is in default or as to which
default is reasonably foreseeable if, in the depositor's, the servicer's or any
other party's judgment, the related default is not likely to be cured by the
borrower or default is not likely to be averted, at a price equal to the unpaid
principal balance of the mortgage loan plus accrued interest on the mortgage
loan and under the conditions set forth in the prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of the
Offered Securities of any series will be issued as Book-Entry Securities, and
each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Clearstream Luxembourg, societe anonyme ("Clearstream Luxembourg") or
the Euroclear System ("Euroclear"). Each class of Book-Entry Securities will be
issued in one or more certificates or notes, as the case may be, that equal the
initial principal amount of the related class of Offered Securities and will
initially be registered in the name of Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "--Definitive Securities." Unless and until Definitive
Securities are issued for the Book-Entry Securities under the limited
circumstances described in the applicable prospectus supplement or this
prospectus, all references to actions by securityholders with respect to the
Book-Entry Securities will refer to actions taken by DTC, Clearstream Luxembourg
or Euroclear upon instructions from their Participants (as defined below), and
all references in this prospectus to distributions, notices, reports and
statements to securityholders with respect to the Book-Entry Securities will
refer to distributions, notices, reports and statements to DTC, Clearstream
Luxembourg or Euroclear, as applicable, for distribution to Beneficial Owners by
DTC in accordance with the procedures of DTC and if applicable, Clearstream
Luxembourg and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in the
United States, or, if the Offered Securities are offered for sale globally,
through Clearstream Luxembourg or Euroclear in Europe if they are participating
organizations ("Participants") of those systems. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include some other organizations. Indirect access to the DTC, Clearstream
Luxembourg and Euroclear systems also is available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Securities,
whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Securities will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
CLEARSTREAM LUXEMBOURG
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thus eliminating the need for
physical movement of securities 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 Corporation"). 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 Corporation. The Cooperative Corporation establishes policy
for Euroclear on behalf of its 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 Participant of Euroclear, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of its
Participants, and has no record of or relationship with persons holding through
Participants of Euroclear.
Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf
of their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective depositaries
which in turn will hold positions in customers' securities accounts in the
depositaries names on the books of DTC. Citibank will act as depositary for
Clearstream Luxembourg and The Chase Manhattan Bank will act as depositary for
Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to receive
a physical certificate representing a Certificate, or note representing a Note.
Unless and until Definitive Securities are issued, it is anticipated that the
only "securityholder" of the Offered Securities will be Cede & Co., as nominee
of DTC. Beneficial Owners will not be "Certificateholders" as that term is used
in any Agreement, nor "Noteholders" as that term is used in any indenture.
Beneficial Owners are only permitted to exercise their rights indirectly through
Participants, DTC, Clearstream Luxembourg or Euroclear, as applicable.
The Beneficial 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 that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered 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 Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have accounts
with respect to Offered Securities are similarly required to make book-entry
transfers and receive and transmit distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates or notes, the Rules provide a mechanism by which Beneficial Owners
will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Securities,
except under the limited circumstances described below. Unless and until
Definitive Securities are issued, Beneficial Owners who are not Participants may
transfer ownership of Offered Securities only through Participants and Indirect
Participants by instructing the Participants and Indirect Participants to
transfer Offered Securities, by book-entry transfer, through DTC for the account
of the purchasers of the Offered Securities, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfer of ownership of Book-Entry 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 Beneficial Owners.
Because of time zone differences, any credits of securities received in
Clearstream Luxembourg 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. These credits or any
transactions in securities settled during this processing will be reported to
the relevant Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg or
Euroclear to a Participant of DTC will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Securities, see "Material Federal Income Tax Considerations -- Tax Treatment of
Foreign Investors" in this prospectus and, if the Book-Entry Securities are
globally offered and the prospectus supplement so provides, see "Global
Clearance, Settlement and Tax Documentation Procedures -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
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 Participants of
Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that 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. Participants of
Clearstream Luxembourg or Euroclear may not deliver instructions directly to the
European Depositaries.
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 each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC will
be responsible for disbursing the distribution to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, because the
distributions will be forwarded by the Trustee to Cede & Co. Any distributions
on Securities held through Clearstream Luxembourg or Euroclear will be credited
to the cash accounts of Participants of Clearstream Luxembourg or Euroclear in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Considerations -- REMICs -- Taxation of Certain
Foreign Investors" in this prospectus. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial 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 Book-Entry Securities, may be
limited due to the lack of physical securities for the Book-Entry Securities. In
addition, issuance of the Book-Entry Securities in book-entry form may reduce
the liquidity of the securities in the secondary market since potential
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial 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 Beneficial Owners are credited.
Generally, DTC will advise the applicable 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 or indenture, as
applicable, only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Securities are credited, to the extent that
actions are taken on behalf of Financial Intermediaries whose holdings include
the Book-Entry Securities. If the Book-Entry Securities are globally offered,
Clearstream Luxembourg or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a securityholder under the Agreement
or indenture, as applicable, on behalf of a Participant of Clearstream
Luxembourg or Euroclear only in accordance with its relevant rules and
procedures and subject to the ability of the Relevant Depositary to effect those
actions on its behalf through DTC. DTC may take actions, at the direction of the
related Participants, with respect to some Offered Securities that conflict with
actions taken with respect to other Offered Securities.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Securities
among Participants of DTC, Clearstream Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform these procedures and the
procedures may be discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee, any
securities registrar or paying agent or any of their affiliates 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 or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
DEFINITIVE SECURITIES
Securities initially issued in book-entry form will be issued as Definitive
Securities to Beneficial Owners or their nominees, rather than to DTC or its
nominee only
(1) if the depositor advises the trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as
depository for the Securities and the depositor is unable to locate a
qualified successor,
(2) if the depositor, at its option, elects to end the book-entry system
through DTC or
(3) in accordance with any other provisions described in the prospectus
supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Beneficial Owners.
Upon surrender by DTC of the security or securities representing the Book-Entry
Securities, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Securities to which they are entitled, and
thereafter the trustee will recognize the holders of those Definitive Securities
as securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT SECURITIES, GRANTOR TRUST SECURITIES
Securities representing interests in a trust fund, or a portion of a trust
fund, that the trustee will elect to have treated as a real estate mortgage
investment conduit under Sections 860A through 860G of the Code ("REMIC
Securities"), FASIT Securities (as defined in this prospectus), or Grantor Trust
Securities (as defined in this prospectus) will be issued, and the related trust
fund will be created, pursuant to a pooling and servicing agreement or trust
agreement (in either case, generally referred to in this prospectus as the
"pooling and servicing agreement") among the depositor, the trustee and the sole
servicer or master servicer, as applicable. The Assets of that trust fund will
be transferred to the trust fund and thereafter serviced in accordance with the
terms of the pooling and servicing agreement. In the event there are multiple
servicers of the Assets of that trust fund, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant to
a related underlying servicing agreement.
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Securities that are partnership interests for tax purposes will be issued,
and the related trust fund will be created, pursuant to the pooling and
servicing agreement or trust agreement.
A series of Notes issued by a trust fund will be issued pursuant to an
indenture between the related trust fund and an indenture trustee named in the
prospectus supplement. The trust fund will be established either as a statutory
business trust under the law of the State of Delaware or as a common law trust
under the law of the State of New York pursuant to a trust agreement between the
depositor and an owner trustee specified in the prospectus supplement relating
to that series of Notes. The Assets securing payment on the Notes will be
serviced in accordance with a sale and servicing agreement or servicing
agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may appear in
each pooling and servicing agreement, sale and servicing agreement or servicing
agreement (each an "Agreement"). The prospectus supplement for a series of
Securities will describe any provision of the Agreement relating to that series
that materially differs from the description of those provisions contained in
this prospectus. The summaries do not purport to be complete and are subject to,
and are qualified by reference to, all of the provisions of the Agreement for
each trust fund and the description of those provisions in the prospectus
supplement. The provisions of each Agreement will vary depending on the nature
of the Securities to be issued under the Agreement and the nature of the related
trust fund. As used in this prospectus for any series, the term "Security"
refers to all of the Securities of that series, whether or not offered by this
prospectus and by the prospectus supplement, unless the context otherwise
requires. A form of a pooling and servicing agreement has been filed as an
exhibit to the Registration Statement of which this prospectus is a part. The
depositor will provide a copy of the pooling and servicing agreement (without
exhibits) relating to any series of Securities without charge upon written
request of a securityholder of that series addressed to ACE Securities Corp.,
6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention:
Elizabeth S. Eldridge.
The servicer or master servicer and the trustee for any series of
Securities will be named in the prospectus supplement. In the event there are
multiple servicers for the Assets in a trust fund, a master servicer will
perform some of the administration, calculation and reporting functions for that
trust fund and will supervise the related servicers pursuant to a pooling and
servicing agreement. For a series involving a master servicer, references in
this prospectus to the servicer will apply to the master servicer where
non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the depositor will
assign (or cause to be assigned) to the designated trustee the Assets to be
included in the related trust fund, together with all principal and interest to
be received on or with respect to those Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The trustee will, concurrently with that assignment, deliver
the Securities to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged Property and
type of that property, the mortgage rate and, if applicable, the applicable
index, margin, adjustment date and any rate cap information, the original
and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Loan-to-Value Ratio as of the date
indicated and payment and prepayment provisions, if applicable, and
(2) in respect of each Contract included in the related trust fund,
including the outstanding principal amount and the Contract Rate; and
(3) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest rate on
the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) particular loan documents, which
will generally include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original Mortgage (or a certified copy
of the original Mortgage) with evidence of recording indicated on the original
Mortgage and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers to the trustee or
the custodian a copy or a duplicate original of the mortgage note, together with
an affidavit certifying that the original of the mortgage note has been lost or
destroyed. For those mortgage loans, the trustee (or its nominee) may not be
able to enforce the mortgage note against the related borrower. The Asset Seller
or other entity specified in the prospectus supplement will be required to agree
to repurchase, or substitute for, each of these mortgage loans that is
subsequently in default if the enforcement thereof or of the related Mortgage is
materially adversely affected by the absence of the original mortgage note. The
related Agreement will generally require the depositor or another party
specified in the prospectus supplement to promptly cause each of these
assignments of Mortgage to be recorded in the appropriate public office for real
property records, except in the State of California or in other states where, in
the opinion of counsel acceptable to the trustee, recording is not required to
protect the trustee's interest in the related mortgage loan against the claim of
any subsequent transferee or any successor to or creditor of the depositor, the
servicer, the relevant Asset Seller or any other prior holder of the mortgage
loan.
The trustee (or a custodian) will review the mortgage loan documents within
a specified period of days after receipt of the mortgage loan documents, and the
trustee (or a custodian) will hold those documents in trust for the benefit of
the securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new mortgage loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the servicer nor the depositor will be obligated to
repurchase or substitute for that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans, home improvement contracts and unsecured home improvements loans
will be delivered to the trustee (or a custodian) only to the extent specified
in the prospectus supplement. Generally these documents will be retained by the
servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the trustee will be recorded only to the extent specified
in the prospectus supplement.
For each contract, the servicer, which may also be the asset seller,
generally will maintain custody of the original contract and copies of documents
and instruments related to each contract and the security interest in the
manufactured home securing each contract. To give notice of the right, title and
interest of the trustee in the contracts, the depositor will cause UCC-1
financing statements to be executed by the related asset seller identifying the
depositor as secured party and by the depositor identifying the trustee as the
secured party and, in each case, identifying all contracts as collateral. The
contracts will be stamped or otherwise marked to reflect their assignment from
the depositor to the trust fund only to the extent specified in the prospectus
supplement. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of that assignment, the interest of the trustee in the contracts could be
defeated.
While the contract documents will not be reviewed by the trustee or the
servicer, if the servicer finds that any document is missing or defective in any
material respect, the servicer will be required to immediately notify the
depositor and the relevant asset seller or other entity specified in the
prospectus supplement. If the asset seller or some other entity cannot cure the
omission or defect within a specified number of days after receipt of this
notice, then the asset seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
contract from the trustee at the purchase price or substitute for that contract.
There can be no assurance that an asset seller or any other entity will fulfill
this repurchase or substitution obligation, and neither the servicer nor the
depositor will be obligated to repurchase or substitute for that contract if the
asset seller or any other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
securityholders or the trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the prospectus supplement, in
lieu of curing any omission or defect in the asset or repurchasing or
substituting for that asset, the asset seller may agree to cover any losses
suffered by the trust fund as a result of that breach or defect.
Mortgage Securities and Agency Securities will be registered in the name of
the trustee or its nominee on the books of the issuer or guarantor or its agent
or, in the case of Mortgage Securities and Agency Securities issued only in
book-entry form, through the depository with respect to the Mortgage Securities
and Agency Securities, in accordance with the procedures established by the
issuer or guarantor for registration of those certificates, and distributions on
those securities to which the trust fund is entitled will be made directly to
the trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the prospectus supplement the depositor will, for
each Asset, assign representations and warranties, as of a specified date (the
person making those representations and warranties, the "Warranting Party")
covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan and, in the case of a
contract, that the contract creates a valid first security interest in
or lien on the related manufactured home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary provisions
in the related mortgage note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the
Mortgage; and
o the existence of hazard and extended perils insurance coverage on the
Mortgaged Property or manufactured home.
Any Warranting Party shall be an Asset Seller or an affiliate of the Asset
Seller or any other person acceptable to the depositor and will be identified in
the prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of the
related series of Securities evidencing an interest in that Asset. In the event
of a breach of any of these representations or warranties, the Warranting Party
will be obligated to reimburse the trust fund for losses caused by that breach
or either cure that breach or repurchase or replace the affected Asset as
described below. Since the representations and warranties may not address events
that may occur following the date as of which they were made, the Warranting
Party will have a reimbursement, cure, repurchase or substitution obligation in
connection with a breach of that representation and warranty only if the
relevant event that causes that breach occurs before that date. That party would
have no obligations if the relevant event that causes that breach occurs after
that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of an Asset that materially and adversely affects
the value of that Asset or the interests in the prospectus supplement of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the Warranting
Party was notified of that breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of that series of
Securities, to cause the removal of that Asset from the trust fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the prospectus supplement. If so provided in the
prospectus supplement for a series, a Warranting Party, rather than repurchase
or substitute an Asset as to which a breach has occurred, will have the option
to reimburse the trust fund or the securityholders for any losses caused by that
breach. This reimbursement, repurchase or substitution obligation will
constitute the sole remedy available to securityholders or the trustee for a
breach of representation by a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make representations and warranties regarding its authority
to enter into, and its ability to perform its obligations under, the related
Agreement. A breach of any representation of the servicer that materially and
adversely affects the interests of the securityholders and which continues
unremedied for the number of days specified in the Agreement after the discovery
of the breach by the servicer or the receipt of written notice of that breach by
the servicer from the trustee, the depositor or the holders of Securities
evidencing not less than 25% of the voting rights or other percentage specified
in the related Agreement, will constitute an Event of Default under that
Agreement. See "Events of Default" and "Rights Upon Event of Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC")
(to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured so that the securityholders have a claim
with respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing those
funds that is superior to the claims of any other depositors or
general creditors of the institution with which the Collection Account
is maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Securities of that series.
Investment of amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ("Permitted Investments"). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held in the
Collection Account may be invested pending each succeeding Distribution Date in
short-term Permitted Investments. Any interest or other income earned on funds
in the Collection Account will, unless otherwise specified in the prospectus
supplement, be paid to the servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution that
is an affiliate of the servicer, if applicable, provided that that institution
meets the standards imposed by the rating agency or agencies. If permitted by
the rating agency or agencies, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the servicer or
serviced or master serviced by it on behalf of others.
DEPOSITS. A servicer or the trustee will deposit or cause to be deposited
in the Collection Account for one or more trust funds on a daily basis, or any
other period provided in the related Agreement, the following payments and
collections received, or advances made, by the servicer or the trustee or on its
behalf after the Cut-off Date (other than payments due on or before the Cut-off
Date, and exclusive of any amounts representing a Retained Interest), except as
otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion retained by a
servicer as its servicing compensation and net of any Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with the net
proceeds on a monthly basis with respect to any Assets acquired for the
benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any fund that
constitutes credit support for the related series of Securities as
described under "Description of Credit Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage loan,
property acquired in respect of the mortgage loan purchased by the
depositor, any Asset Seller or any other specified person as described
above under "--Assignment of Assets; Repurchases" and "--Representations
and Warranties; Repurchases," all proceeds of any defaulted mortgage loan
purchased as described below under "--Realization Upon Defaulted Assets,"
and all proceeds of any Asset purchased as described under "Description of
the Securities--Termination;"
(8) any amounts paid by a servicer to cover interest shortfalls
arising out of the prepayment of Assets in the trust fund as described
below under "--Retained Interest; Servicing Compensation and Payment of
Expenses;"
(9) to the extent that any of these items do not constitute additional
servicing compensation to a servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(10) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the trustee
in connection with losses realized on investments for the benefit of the
servicer or the trustee, as the case may be, of funds held in the
Collection Account; and
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the
prospectus supplement.
WITHDRAWALS. A servicer or the trustee may, from time to time as provided
in the related Agreement, make withdrawals from the Collection Account for each
trust fund for any of the following purposes, except as otherwise provided in
the Agreement:
(1) to make distributions to the securityholders on each Distribution
Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," which reimbursement is to be made out of amounts received
that were identified and applied by the servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Assets for which the advances were made or out
of amounts drawn under any form of credit support with respect to those
Assets;
(3) to reimburse a servicer for unpaid servicing fees earned and
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect of the Assets, which reimbursement is to be
made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Assets and properties, and net income
collected on the particular properties, which fees were earned or expenses
were incurred or out of amounts drawn under any form of credit support for
those Assets and properties;
(4) to reimburse a servicer for any advances described in clause (2)
above and any servicing expenses described in clause (3) above which, in
the servicer's good faith judgment, will not be recoverable from the
amounts described in those clauses, which reimbursement is to be made from
amounts collected on other Assets or, if and to the extent so provided by
the related Agreement and described in the prospectus supplement, just from
that portion of amounts collected on other Assets that is otherwise
distributable on one or more classes of Subordinate Securities, if any,
remain outstanding, and otherwise any outstanding class of Securities, of
the related series;
(5) if and to the extent described in the prospectus supplement, to
pay a servicer interest accrued on the advances described in clause (2)
above and the servicing expenses described in clause (3) above while those
advances and servicing expenses remain outstanding and unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for
expenses, costs and liabilities incurred by these parties, as and to the
extent described below under "--Certain Matters Regarding Servicers, the
Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for the
payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred by these parties, as and to the extent described below
under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(10) to pay the person so entitled any amounts deposited in the
Collection Account that were identified and applied by the servicer as
recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, which payments are to be made out of income
received on that property;
(12) if one or more elections have been made to treat the trust fund
or designated portions of the trust fund as a REMIC, to pay any federal,
state or local taxes imposed on the trust fund or its assets or
transactions, as and to the extent described under "Material Federal Income
Tax Considerations--REMICs--Taxes That May Be Imposed on the REMIC Pool" or
in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect of a mortgage
loan in connection with the liquidation of that mortgage loan or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of securityholders;
(15) to pay for the costs of recording the related Agreement if that
recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the trust fund whether by reason of purchase or
substitution as contemplated above under "--Assignment of Assets;
Repurchase" and "--Representations and Warranties; Repurchases" or
otherwise;
(17) to make any other withdrawals permitted by the related Agreement;
and
(18) to clear and terminate the Collection Account at the termination
of the trust fund.
OTHER COLLECTION ACCOUNTS. If specified in the prospectus supplement, the
Agreement for any series of Securities may provide for the establishment and
maintenance of a separate collection account into which the servicer will
deposit on a daily basis, or any other period as provided in the related
Agreement, the amounts described under "--Deposits" above for one or more series
of Securities. Any amounts on deposit in any of these collection accounts will
be withdrawn from these collection accounts and deposited into the appropriate
Collection Account by a time specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection accounts,
including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
COLLECTION AND OTHER SERVICING PROCEDURES. The servicer is required to make
reasonable efforts to collect all scheduled payments under the Assets and will
follow or cause to be followed those collection procedures that it would follow
with respect to assets that are comparable to the Assets and held for its own
account, provided that those procedures are consistent with
(1) the terms of the related Agreement and any related hazard insurance
policy or instrument of credit support, if any, included in the
related trust fund described in this prospectus or under "Description
of Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the prospectus supplement
or, if no standard is so specified, its normal servicing practices (in
either case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to waive any
late payment charge or penalty interest in respect of a late payment on an
Asset.
Each servicer will also be required to perform other customary functions of
a servicer of comparable assets, including maintaining hazard insurance policies
as described in this prospectus and in any prospectus supplement, and filing and
settling claims under these policies; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of borrowers for payment of taxes,
insurance and other items required to be paid by any borrower pursuant to the
terms of the Assets; processing assumptions or substitutions in those cases
where the servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing mortgaged properties or manufactured
homes under some circumstances; and maintaining accounting records relating to
the Assets. The servicer or any other entity specified in the prospectus
supplement will be responsible for filing and settling claims in respect of
particular Assets under any applicable instrument of credit support. See
"Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset in a
manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
its judgment, that modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment of
any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
In the case of multifamily loans, a borrower's failure to make required
mortgage loan payments may mean that operating income is insufficient to service
the mortgage loan debt, or may reflect the diversion of that income from the
servicing of the mortgage loan debt. In addition, a borrower under a multifamily
loan that is unable to make mortgage loan payments may also be unable to make
timely payment of all required taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the servicer will be required to monitor
any multifamily loan that is in default, evaluate whether the causes of the
default can be corrected over a reasonable period without significant impairment
of the value of related Mortgaged Property, initiate corrective action in
cooperation with the borrower if cure is likely, inspect the related Multifamily
Property and take those other actions as are consistent with the related
Agreement. A significant period of time may elapse before the servicer is able
to assess the success of servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually foreclose
may vary considerably depending on the particular multifamily loan, the
Multifamily Property, the borrower, the presence of an acceptable party to
assume the multifamily loan and the laws of the jurisdiction in which the
Multifamily Property is located.
REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans or
contracts may grant to the servicer and/or the holder or holders of some classes
of Securities a right of first refusal to purchase from the trust fund at a
predetermined purchase price any mortgage loan or contract as to which a
specified number of scheduled payments under the Agreement are delinquent. Any
right of first refusal granted to the holder of an Offered Security will be
described in the prospectus supplement. The prospectus supplement will also
describe any similar right granted to any person if the predetermined purchase
price is less than the Purchase Price described above under "--Representations
and Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to sell
any defaulted mortgage loan or contract described in the preceding paragraph and
not otherwise purchased by any person having a right of first refusal with
respect to that defaulted mortgage loan or contract, if and when the servicer
determines, consistent with the Servicing Standard, so that a sale would produce
a greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any offering be made in a commercially reasonable manner for a
specified period and that the servicer accept the highest cash bid received from
any person (including itself, an affiliate of the servicer or any
securityholder) that constitutes a fair price for that defaulted mortgage loan
or contract. If there is no bid that is determined to be fair, the servicer will
proceed with respect to that defaulted mortgage loan or contract as described
below. Any bid in an amount at least equal to the Purchase Price described above
under "--Representations and Warranties; Repurchases" will in all cases be
deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise and may at
any time repossess and realize upon any manufactured home, if that action is
consistent with the Servicing Standard and a default on that mortgage loan or
contract has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to which
a REMIC election has been made, the servicer, on behalf of the trust fund, will
be required to sell the Mortgaged Property within three years of acquisition,
unless (1) the Internal Revenue Service grants an extension of time to sell that
property or (2) the trustee receives an opinion of independent counsel to the
effect that the holding of the property by the trust fund longer than three
years after its acquisition will not result in the imposition of a tax on the
trust fund or cause the trust fund to fail to qualify as a REMIC under the Code
at any time that any Securities are outstanding. Subject to the foregoing, the
servicer will be required to (A) solicit bids for any Mortgaged Property so
acquired in that manner as will be reasonably likely to realize a fair price for
that property and (B) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made for the related trust fund) on
the ownership and management of any Mortgaged Property acquired on behalf of the
trust fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the servicer nevertheless will be obligated to follow
or cause to be followed those normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued on
the defaulted Asset at the applicable interest rate, plus the total amount of
expenses incurred by the servicer in connection with those proceedings and which
are reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that difference. The servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, before the distribution of those Liquidation
Proceeds to securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is not
required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it has not
received a distribution for any Mortgage Security or Agency Security by the
fifth business day after the date on which that distribution was due and payable
pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the trustee and
the securityholders, will present claims to the borrower under each instrument
of credit support, and will take those reasonable steps as are necessary to
receive payment or to permit recovery under these instruments for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits its holder to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, then the level of coverage that
is consistent with the Servicing Standard. That coverage will be in general in
an amount equal to the lesser of the principal balance owing on that mortgage
loan (but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or any other amount specified in
the prospectus supplement. The ability of the servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by borrowers. All amounts collected by
the servicer under any of these policies (except for amounts 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, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation to
cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited in the Collection Account but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the 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 mortgage 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 of the policies are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of uninsured
risks.
The hazard insurance policies covering the Mortgaged Properties securing
the mortgage loans will typically contain a coinsurance 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 to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the coinsurance clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (1) the replacement cost of the improvements less physical
depreciation and (2) that proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of those
improvements.
Each Agreement for a trust fund composed of mortgage loans will require the
servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for the related Mortgaged Property as is consistent with the
terms of the related Mortgage and the Servicing Standard, which insurance may
typically include flood insurance (if the related Mortgaged Property was located
at the time of origination in a federally designated flood area).
Any cost incurred by the servicer in maintaining any insurance policy will
be added to the amount owing under the mortgage loan where the terms of the
mortgage loan so permit; provided, however, that the addition of that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The servicer, on behalf of the trustee and
securityholders, is obligated to present or cause to be presented claims under
any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the mortgage loans. However, the ability of the servicer to
present or cause to be presented those claims is dependent upon the extent to
which information in this regard is furnished to the servicer by borrowers.
CONTRACTS. Generally, the terms of the agreement for a trust fund composed
of contracts will require the servicer to maintain for each contract one or more
hazard insurance policies that provide, at a minimum, the same coverage as a
standard form fire and extended coverage insurance policy that is customary for
manufactured housing, issued by a company authorized to issue those policies in
the state in which the manufactured home is located, and in an amount that is
not less than the maximum insurable value of that manufactured home or the
principal balance due from the borrower on the related contract, whichever is
less; provided, however, that the amount of coverage provided by each hazard
insurance policy must be sufficient to avoid the application of any co-insurance
clause contained therein. When a manufactured home's location was, at the time
of origination of the related contract, within a federally designated special
flood hazard area, the servicer must cause flood insurance to be maintained,
which coverage must be at least equal to the minimum amount specified in the
preceding sentence or any lesser amount as may be available under the federal
flood insurance program. Each hazard insurance policy caused to be maintained by
the servicer must contain a standard loss payee clause in favor of the servicer
and its successors and assigns. If any borrower is in default in the payment of
premiums on its hazard insurance policy or policies, the servicer must pay those
premiums out of its own funds, and may add separately the premiums to the
borrower's obligation as provided by the contract, but may not add the premiums
to the remaining principal balance of the contract.
The servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained for each manufactured home, and must maintain, to the
extent that the related contract does not require the borrower to maintain a
hazard insurance policy for the related manufactured home, one or more blanket
insurance policies covering losses on the borrower's interest in the contracts
resulting from the absence or insufficiency of individual hazard insurance
policies. The servicer must pay the premium for that blanket policy on the basis
described therein and must pay any deductible amount for claims under that
policy relating to the contracts.
FHA INSURANCE AND VA GUARANTEES
FHA loans will be insured by the FHA as authorized under the Housing Act.
Some FHA loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units, the FHA 245 graduated payment mortgage program and the FHA Title I
Program. These programs generally limit the principal amount and interest rates
of the mortgage loans insured. The prospectus supplement for Securities of each
series evidencing interests in a trust fund including FHA loans will set forth
additional information regarding the regulations governing the applicable FHA
insurance programs. Except as otherwise specified in the prospectus supplement,
the following describes FHA insurance programs and regulations as generally in
effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved by
the Department of Housing and Urban Development ("HUD") or by the servicer and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA loan, the servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the borrower. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those circumstances is accompanied by other
criteria, HUD may provide relief by making payments to the servicer in partial
or full satisfaction of amounts due under the FHA loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of insurance
benefits generally paid by the FHA is equal to the entire unpaid principal
amount of the defaulted FHA loan adjusted to reimburse the servicer for some of
its costs and expenses and to deduct amounts received or retained by the
servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid before that date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to make
any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA
loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination of these insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the servicer. The related Agreement will allow the servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the servicer so long as the criteria set forth in the Agreement
are met.
DUE-ON-SALE CLAUSES
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable insurance
policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses. The servicer will generally permit that transfer so long as
the transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
of this Retained Interest. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A "Retained Interest" in an Asset represents a specified portion of the interest
payable on the Asset. The Retained Interest will be deducted from borrower
payments as received and will not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Securities
will come from the periodic payment to it of a portion of the interest payment
on each Asset or any other amount specified in the prospectus supplement. Since
any Retained Interest and a servicer's primary compensation are percentages of
the principal balance of each Asset, those amounts will decrease in accordance
with the amortization of the Assets. The prospectus supplement for a series of
Securities evidencing interests in a trust fund that includes mortgage loans or
contracts may provide that, as additional compensation, the servicer may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from borrowers and any interest or other income
that may be earned on funds held in the Collection Account or any account
established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement, pay
from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some other
expenses, including expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the prospectus supplement, interest on these
expenses at the rate specified in the prospectus supplement may be borne by the
trust fund.
If and to the extent provided in the prospectus supplement, the servicer
may be required to apply a portion of the servicing compensation otherwise
payable to it in respect of any Due Period to interest shortfalls resulting from
the voluntary prepayment of any Assets in the related trust fund during that
period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans or contracts,
unless otherwise provided in the prospectus supplement, will provide that on or
before a specified date in each year, beginning with the first of these dates at
least six months after the related Cut-off Date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by that firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers, the Audit
Program for Mortgages serviced for Freddie Mac or any other program used by the
servicer, the servicing by or on behalf of the servicer of mortgage loans under
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with the terms of those agreements or that program
except for any significant exceptions or errors in records that, in the opinion
of the firm, either the Audit Program for Mortgages serviced for Freddie Mac, or
paragraph 4 of the Uniform Single Attestation Program for Mortgage Bankers, or
any other program, requires it to report.
Each Agreement will also provide for delivery to the trustee, on or before
a specified date in each year, of an officer's certificate of the servicer to
the effect that the servicer has fulfilled its obligations under the Agreement
throughout the preceding calendar year or other specified twelve-month period.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE DEPOSITOR
The servicer or master servicer under each Agreement will be named in the
prospectus supplement. The entities serving as servicer or master servicer may
be affiliates of the depositor and may have other normal business relationships
with the depositor or the depositor's affiliates. If applicable, reference in
this prospectus to the servicer will also be deemed to be to the master
servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties under the
Agreement only upon a determination that its duties under the
Agreement 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 that conflict being of a type and nature carried on by the
servicer at the date of the Agreement. No resignation will become
effective until the trustee or a successor servicer has assumed the
servicer's obligations and duties under the Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under any
liability to the related trust fund or securityholders for any action
taken, or for refraining from the taking of any action, in good faith
pursuant to the Agreement; provided, however, that neither a servicer,
the depositor nor any other person will be protected against any
breach of a representation, warranty or covenant made in the related
Agreement, or against any liability specifically imposed by the
Agreement, or against any liability that would otherwise be imposed by
reason of willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under the Agreement or by reason
of reckless disregard of obligations and duties under the Agreement.
o Any servicer, the depositor and any director, officer, employee or
agent of a servicer or the depositor will be entitled to
indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities; provided,
however, that that indemnification will not extend to any loss,
liability or expense
(1) specifically imposed by that Agreement or otherwise
incidental to the performance of obligations and duties
under the Agreement, including, in the case of a servicer,
the prosecution of an enforcement action in respect of any
specific mortgage loan or mortgage loans or contract or
contracts (except as any loss, liability or expense will be
otherwise reimbursable pursuant to that Agreement);
(2) incurred in connection with any breach of a representation,
warranty or covenant made in that Agreement;
(3) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties under
the Agreement, or by reason of reckless disregard of those
obligations or duties;
(4) incurred in connection with any violation of any state or
federal securities law; or
(5) imposed by any taxing authority if that loss, liability or
expense is not specifically reimbursable pursuant to the
terms of the related Agreement.
o Neither any servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action that is not incidental
to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. Any servicer
or the depositor may, however, in its discretion undertake any action
which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties to the Agreement and the
interests of the securityholders under the Agreement. In that event,
the legal expenses and costs of that action and any liability
resulting will be expenses, costs and liabilities of the
securityholders, and the servicer or the depositor, as the case may
be, will be entitled to be reimbursed therefor and to charge the
Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be liable
for the performance of a Special servicer only if, and to the extent, set forth
in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be distributed
to securityholders, or to remit to the trustee for distribution to
securityholders, any required payment that continues after a grace
period, if any;
o any failure by the servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the Agreement
that continues unremedied for 30 days after written notice of that
failure has been given to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by
securityholders evidencing not less than 25% of the voting rights for
that series;
o any breach of a representation or warranty made by the servicer under
the Agreement that materially and adversely affects the interests of
securityholders and which continues unremedied for 30 days after
written notice of that breach has been given to the servicer by the
trustee or the depositor, or to the servicer, the depositor and the
trustee by the holders of Securities evidencing not less than 25% of
the voting rights for that series; and
o some events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and actions by or on behalf of
the servicer indicating its insolvency or inability to pay its
obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied, the
depositor or the trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or any other percentage specified in the
Agreement) of the voting rights for that series, the trustee will terminate all
of the rights and obligations of the servicer under the Agreement and in and to
the mortgage loans (other than as a securityholder or as the owner of any
Retained Interest), whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the servicer under the Agreement
(except that if the trustee is prohibited by law from obligating itself to make
advances regarding delinquent Assets, or if the prospectus supplement so
specifies, then the trustee will not be obligated to make those advances) and
will be entitled to similar compensation arrangements. If the trustee is
unwilling or unable so to act, it may or, at the written request of the holders
of Securities entitled to at least 51% (or any other percentage specified in the
Agreement) of the voting rights for that series, it must appoint, or petition a
court of competent jurisdiction for the appointment of, a loan servicing
institution acceptable to the rating agency with a net worth at the time of that
appointment of at least $15,000,000 (or any other amount specified in the
Agreement) to act as successor to the servicer under the Agreement. Pending that
appointment, the trustee is obligated to act in that capacity. The trustee and
any successor servicer may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the servicer
under the Agreement.
The holders of Securities representing at least 66 2/3% (or any other
percentage specified in the Agreement) of the voting rights allocated to the
respective classes of Securities affected by any event of default will be
entitled to waive that event of default; provided, however, that an Event of
Default involving a failure to distribute a required payment to securityholders
described in clause (1) under "Events of Default under the Agreements" may be
waived only by all of the securityholders. Upon any waiver of an event of
default, that event of default will cease to exist and will be deemed to have
been remedied for every purpose under the Agreement.
No securityholders will have the right under any Agreement to institute any
proceeding with respect to the Agreement unless that holder previously has given
to the trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or any other percentage specified in the
Agreement) of the voting rights have made written request upon the trustee to
institute that proceeding in its own name as trustee under the Agreement and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
(or any other number of days specified in the Agreement) has neglected or
refused to institute any proceeding. The trustee, however, is under no
obligation to exercise any of the trusts or powers vested in it by any Agreement
or to make any investigation of matters arising under the Agreement or to
institute, conduct or defend any litigation under the Agreement or in relation
to the Agreement at the request, order or direction of any of the
securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Securities will be specified in the Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties to it, without the
consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision in the Agreement that
may be inconsistent with any other provision in the Agreement or with the
prospectus supplement;
(3) make any other provisions with respect to matters or questions
arising under the Agreement that are not materially inconsistent with the
provisions of the Agreement; or
(4) comply with any requirements imposed by the Code; provided that,
in the case of clause (3), that amendment will not adversely affect in any
material respect the interests of any securityholders covered by the
Agreement as evidenced either by an opinion of counsel to that effect or
the delivery to the trustee of written notification from each rating agency
that provides, at the request of the depositor, a rating for the Offered
Securities of the related series to the effect that that amendment or
supplement will not cause that rating agency to lower or withdraw the then
current rating assigned to those Securities.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Securities as to which a REMIC election is to be made, the
trustee will not consent to any amendment of the Agreement unless it has first
have received an opinion of counsel to the effect that that amendment will not
result in the imposition of a tax on the related trust fund or, if applicable,
cause the related trust fund to fail to qualify as a REMIC, at any time that the
related Securities are outstanding.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any servicer of any
funds paid to the master servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the servicer. If no Event of Default has
occurred and is continuing, the trustee is required to perform only those duties
specifically required under the related Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the trustee is required to examine those documents and to
determine whether they conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the trustee
will be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the trustee's
(1) enforcing its rights and remedies and protecting the interests of the
securityholders during the continuance of an Event of Default,
(2) defending or prosecuting any legal action in respect of the related
Agreement or series of Securities,
(3) being the mortgagee of record for the mortgage loans in a trust fund
and the owner of record for any Mortgaged Property acquired in respect
thereof for the benefit of securityholders, or
(4) acting or refraining from acting in good faith at the direction of the
holders of the related series of Securities entitled to not less than
25% (or any other percentage as is specified in the related Agreement
for any particular matter) of the voting rights for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or negligence on the part of the
trustee in the performance of its obligations and duties under the Agreement, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made in the Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice of its resignation to the depositor, the
servicer, if any, each rating agency, and all securityholders. Upon receiving
that notice of resignation, the depositor is required promptly to appoint a
successor trustee acceptable to the servicer, if any. If no successor trustee
has been so appointed and has accepted appointment within 30 days after the
giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a trustee
under the related Agreement, or if at any time the trustee becomes incapable of
acting, or is adjudged bankrupt or insolvent, or a receiver of the trustee or of
its property is appointed, or any public officer takes charge or control of the
trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, or if a change in the financial condition of the
trustee has adversely affected or will adversely affect the rating on any class
of the Securities, then the depositor and/or a party specified in the related
Agreement may remove the trustee and appoint a successor trustee acceptable to
the master servicer, if any, according to the terms of the related Agreement.
Securityholders of any series entitled to at least 51% (or any other percentage
specified in the prospectus supplement) of the voting rights for that series may
at any time remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
MATERIAL TERMS OF THE INDENTURE
GENERAL
The following summary describes the material provisions that may appear in
each indenture. The prospectus supplement for a series of Notes will describe
any provision of the indenture relating to that series that materially differs
from the description of that provision contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified by
reference to, all of the provisions of the indenture for a series of Notes. A
form of an indenture has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
indenture (without exhibits) relating to any series of Notes without charge upon
written request of a securityholder of that series addressed to ACE Securities
Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211,
Attention: Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified in
the prospectus supplement) or more in the payment of any principal of
or interest on a Note of that series, to the extent specified in the
prospectus supplement;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture that continues for a period of sixty days (or
any other number of days specified in the prospectus supplement or the
indenture) after notice of the failure is given in accordance with the
procedures described in the prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any certificate or other writing delivered
pursuant to the indenture or in connection with the indenture with
respect to or affecting that series having been incorrect in a
material respect as of the time made, and that breach is not cured
within sixty days (or any other number of days specified in the
prospectus supplement) after notice of the breach is given in
accordance with the procedures described in the prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o 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, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes, the
Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of that series
as they would have become due if there had not been that declaration. In
addition, the indenture 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 that
series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that series
consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would not be
sufficient on an ongoing basis to make all payments on the Notes as those
payments would have become due if the Notes had not been declared due and
payable, and the indenture trustee obtains the consent of the holders of 66
2/3% (or any other percentage specified in the indenture) of the then total
outstanding amount of the Notes of that series.
If so specified in the prospectus supplement, only holders of particular
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with an
event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less than
would otherwise be the case. However, the indenture 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 securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the Notes
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default occurs and continues for a series
of Notes, the indenture trustee will be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the securityholders of that series, unless those holders offer to the indenture
trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities that might be incurred by it in complying with that request or
direction. Subject to those provisions for indemnification and some limitations
contained in the indenture, the holders of a majority of the then total
outstanding amount of the Notes of that series will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the indenture trustee or exercising any trust or power conferred on the
indenture trustee with respect to the Notes of that series, and the holders of a
majority of the then total outstanding amount of the Notes of that series may,
in some cases, waive any default with respect to the Notes, 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 that series affected.
DISCHARGE OF INDENTURE
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified for
the Notes of any series, the related trust fund will be discharged from any and
all obligations in respect of the Notes of that series (except for obligations
specified in the indenture including obligations relating to temporary Notes and
exchange of Notes, to register the transfer of or exchange Notes of that series,
to replace stolen, lost or mutilated Notes of that series, to maintain paying
agencies and to hold monies for payment in trust) upon the deposit with the
indenture trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect of the Notes 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 that series on the maturity date for
those Notes and any installment of interest on those Notes in accordance with
the terms of the indenture and the Notes of that series. In the event of any
defeasance and discharge of Notes of that series, holders of Notes of that
series would be able to look only to that money and/or those direct obligations
for payment of principal and interest, if any, on their Notes until maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee for each series of Notes will be required to mail
each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of indebtedness owing
by that Trust to the applicable indenture trustee in its individual capacity,
the property and funds physically held by the indenture trustee in its capacity
as indenture trustee and any action taken by it that materially affects the
Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for that series.
The bank or trust company serving as indenture trustee may have a banking
relationship with the depositor or any of its affiliates, a servicer or any of
its affiliates or the master servicer or any of its affiliates. To the extent
consistent with its fiduciary obligations as indenture trustee, the indenture
trustee may delegate its duties to one or more agents as provided in the
indenture and the Agreement.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities, credit support may be provided for one or
more classes of the series or the related Assets. Credit support may be in the
form of:
o the subordination of one or more classes of Securities;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by more
than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Securities and interest on the Security Balance. If
losses or shortfalls occur that exceed the amount covered by credit support or
that are not covered by credit support, securityholders will bear their
allocable share of deficiencies. Moreover, if a form of credit support covers
more than one series of Securities (each, a "Covered Trust"), securityholders
evidencing interests in any of those Covered Trusts will be subject to the risk
that the credit support will be exhausted by the claims of other Covered Trusts
before that Covered Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Securities of
a series, or the related Assets, the prospectus supplement will include a
description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus,
(c) the conditions (if any) under which the amount of coverage under that
credit support may be reduced and under which that credit support may
be terminated or replaced and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with respect
to the obligor under any financial guaranty insurance policy, letter of credit,
guarantee or similar instrument of credit support, including
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
(3) if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
(4) its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Securities of a series may be Subordinate Securities
if specified in the prospectus supplement. The rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to those
rights of the holders of Senior Securities. The subordination of a class may
apply only in the event of (or may be limited to) particular types of losses or
shortfalls. The prospectus supplement will set forth information concerning the
amount of subordination of a class or classes of Subordinate Securities in a
series, the circumstances in which that subordination will be applicable and the
manner, if any, in which the amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of mortgage loans before
distributions on Subordinate Securities evidencing interests in a different
group of mortgage loans within the trust fund. The prospectus supplement for a
series that includes a cross-support provision will describe the manner and
conditions for applying those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for a series of Securities,
credit enhancement may be provided in the form of a limited guarantee issued by
a guarantor named in the prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Securities may be provided by
the issuance of a letter of credit by the bank or financial institution
specified in the prospectus supplement. The coverage, amount and frequency of
any reduction in coverage provided by a letter of credit issued for a series of
Securities will be set forth in the prospectus supplement relating to that
series.
POOL INSURANCE POLICIES
If specified in the prospectus supplement relating to a series of
Securities, a pool insurance policy for the mortgage loans in the related trust
fund will be obtained. The pool insurance policy will cover any loss (subject to
the limitations described in the prospectus supplement) by reason of default to
the extent a related mortgage loan is not covered by any primary mortgage
insurance policy. The amount and principal terms of any pool insurance coverage
will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will, subject
to the limitations described in the prospectus supplement, protect against loss
by reason of damage to Mortgaged Properties caused by hazards not insured
against under the standard form of hazard insurance policy for the respective
states, in which the Mortgaged Properties are located. The amount and principal
terms of any special hazard insurance coverage will be set forth in the
prospectus supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Securities will, if
specified in the prospectus supplement, be covered under a borrower bankruptcy
bond (or any other instrument that will not result in a downgrading of the
rating of the Securities of a series by the rating agency or agencies that rate
that series). Any borrower bankruptcy bond or any other instrument will provide
for coverage in an amount meeting the criteria of the rating agency or agencies
rating the Securities of the related series, which amount will be set forth in
the prospectus supplement. The amount and principal terms of any borrower
bankruptcy coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a series of Securities,
deficiencies in amounts otherwise payable on those Securities or specific
classes of Securities will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
of these will be deposited, in the amounts so specified in the prospectus
supplement. The reserve funds for a series may also be funded over time by
depositing a specified amount of the distributions received on the related
Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the purposes,
in the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If specified in the prospectus
supplement, reserve funds may be established to provide limited protection
against only some types of losses and shortfalls. Following each Distribution
Date amounts in a reserve fund in excess of any amount required to be maintained
in the reserve fund may be released from the reserve fund under the conditions
and to the extent specified in the prospectus supplement and will not be
available for further application to the Securities.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the trust fund.
Additional information concerning any reserve fund will be set forth in the
prospectus supplement, including the initial balance of the reserve fund, the
balance required to be maintained in the reserve fund, the manner in which the
required balance will decrease over time, the manner of funding the reserve
fund, the purposes for which funds in the reserve fund may be applied to make
distributions to securityholders and use of investment earnings from the reserve
fund, if any.
OVERCOLLATERALIZATION
If specified in the prospectus supplement, subordination provisions of a
trust fund may be used to accelerate to a limited extent the amortization of one
or more classes of Securities relative to the amortization of the related
Assets. The accelerated amortization is achieved by the application of excess
interest to the payment of principal of one or more classes of Securities. This
acceleration feature creates, for the Assets or groups of Assets,
overcollateralization, which is the excess of the total principal balance of the
related Assets, or a group of related Assets, over the principal balance of the
related class or classes of Securities. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to the provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of legal aspects of loans secured by single-family or multi-family residential
properties. Because these legal aspects are governed primarily by applicable
state law (which laws may differ substantially), the summaries do not purport to
be complete nor to reflect the laws of any particular state, nor to encompass
the laws of all states in which the security for the mortgage loans is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the mortgage loans. In this regard, the
following discussion does not fully reflect federal regulations for FHA loans
and VA loans. See "Description of The Trust Funds--FHA Loans and VA Loans,"
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA Guarantees"
and "Description of the Trust Funds--Assets."
GENERAL
All of the mortgage loans are evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are in this
prospectus collectively referred to as "mortgages." Any of the foregoing types
of mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a borrower (usually the owner of the subject
property) and a mortgagee (the lender). In contrast, a deed of trust is a
three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably until
the debt is paid, in trust, generally with a power of sale as security for the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. By executing a deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until the underlying debt is repaid, generally with a power of sale as security
for the indebtedness evidenced by the related mortgage note.
In case the borrower under a mortgage is a land trust, there would be an
additional party because legal title to the property is held by a land trustee
under a land trust agreement for the benefit of the borrower. At origination of
a mortgage loan involving a land trust, the borrower executes a separate
undertaking to make payments on the mortgage note. The mortgagee's authority
under a mortgage, the trustee's authority under a deed of trust and the
grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
The mortgages that encumber multifamily properties may contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while retaining a revocable license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of that interest
before the mortgage, deed of trust, security deed or deed to secure debt is
paid. The depositor, the Asset Seller or other entity specified in the
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
in the building. The Cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property borrower, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make that final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "--Foreclosure--Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in that situation does not have to foreclose to obtain title to the
property, although in some cases a quiet title action is in order if the
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default during
the early years of a land sale contract, the courts will permit ejectment of the
buyer and a forfeiture of his or her interest in the property. However, most
state legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under land sale contracts from the harsh consequences of forfeiture.
Under those statues, a judicial contract may be reinstated upon full payment of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a contract
borrower with significant investment in the property under a land sale contract
for the sale of real estate to share the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the contract lender's procedures for
obtaining possession and clear title under a land sale contract for the sale of
real estate in a particular state are simpler and less time consuming and costly
than are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from state to
state. Two primary methods of foreclosing a mortgage are judicial foreclosure
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. There are several other foreclosure procedures available in some
states that are either infrequently used or available only in some limited
circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. 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 may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Those sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
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 and
have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
and to any other party who has recorded a request for a copy of a notice of
default and notice of sale. In addition, in some states the trustee must provide
notice to any other party having an interest of record in the real property,
including junior lienholders. A notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and vary
among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of trust,
except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to secure
debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of that property at the
time of sale, due to, among other things, redemption rights that may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses that may be recovered
by a lender. Thereafter, subject to the borrower's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make those repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending on
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgage to avoid its foreclosure. Accordingly, for those mortgage loans,
if any, that are junior mortgage loans, if the lender purchases the property the
lender's title will be subject to all senior mortgages, prior liens and specific
governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the borrower, and all persons who have an interest
in the property that is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest that is subordinate to that of the foreclosing mortgagee have
an equity of redemption and may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has begun,
the redeeming party must pay some of the costs of that action. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right that exists
before completion of the foreclosure, is not waivable by the borrower, must be
exercised before foreclosure sale and should be distinguished from the post-sale
statutory rights of redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. 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
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. For a series
of Securities for which an election is made to qualify the trust fund or a part
of the trust fund as a REMIC, the Agreement will permit foreclosed property to
be held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell the property or independent counsel
renders an opinion to the effect that holding the property for that additional
period is permissible under the REMIC Provisions.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required under the proprietary lease or occupancy agreement. Typically, the
lender and the Cooperative enter into a recognition agreement that establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest on the
Cooperative Loan.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building that was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws that apply to tenants who elected to
remain in a building so converted.
YEAR 2000 LEGISLATION
In July 1999, a new federal law was passed to limit liability for losses
due to year 2000 computer-related errors. This law will, among other things,
protect borrowers from foreclosure if their residential mortgage loans become
delinquent because an actual year 2000 failure results in inability to
accurately or timely process their mortgage payments.
This law is not intended to extinguish or otherwise affect a borrower's
payment obligations but will instead delay the enforcement of obligations on an
otherwise defaulted mortgage loan. Borrowers seeking foreclosure protection
under this law must provide timely written notice and documentation of that
failure to the servicer. Absent an extension from the lender, borrowers will
then have four weeks to make up late payments on their loans. This law will not
apply to mortgage loans for which a default occurs before December 15, 1999, or
for which an imminent default is foreseeable before that date. This law will
also not protect borrowers who deliver notice of a year 2000 failure after March
15, 2000. Mortgage loans that remain in default after the applicable grace
period will be subject to foreclosure or other enforcement.
This law could delay the ability of a servicer to foreclose on some
mortgage loans during the first quarter of the year 2000. These delays could
affect the distributions on your Securities.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds of
trust, that are subordinate to first or other senior mortgages or deeds of trust
held by other lenders. The rights of the trust fund as the holder of a junior
deed of trust or a junior mortgage are subordinate in lien and in payment to
those of the holder of the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a
mortgage by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial 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
lender from obtaining a large deficiency judgment against the former borrower as
a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the case, that affected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These 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 property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing multifamily properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
Some tax liens arising under the Code may in some circumstances provide
priority over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos-containing materials; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some states, environmental
contamination on a property may give rise to a lien on the property to ensure
the availability and/or reimbursement of cleanup costs. Generally all subsequent
liens on that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
particular types of activities that may constitute management of the mortgaged
property may become liable in some circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the total assets of the property owner.
Although some provisions of the Asset Conservation Act (as defined in this
prospectus) apply to trusts and fiduciaries, the law is somewhat unclear as to
whether and under what precise circumstances cleanup costs, or the obligation to
take remedial actions, could be imposed on a secured lender, such as the trust
fund. Under the laws of some states and under CERCLA, a lender may be liable as
an "owner or operator" for costs of addressing releases or threatened releases
of hazardous substances on a mortgaged property if that lender or its agents or
employees have "participated in the management" of the operations of the
borrower, even though the environmental damage or threat was caused by a prior
owner or current owner or operator or other third party. Excluded from CERCLA's
definition of "owner or operator" is a person "who without participating in the
management of . . . [the] facility, holds indicia of ownership primarily to
protect his security interest" (the "secured-creditor exemption"). This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of that facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property, the
lender may incur potential CERCLA liability in various circumstances, including
among others, when it holds the facility or property as an investment (including
leasing the facility or property to a third party), fails to market the property
in a timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under some circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and RCRA. The Asset Conservation Act more explicitly
defined the kinds of "participation in management" that would trigger liability
under CERCLA and specified activities that would not constitute "participation
in management" or otherwise result in a forfeiture of the secured-creditor
exemption before foreclosure or during a workout period. The Asset Conservation
Act also clarified the extent of protection against liability under CERCLA in
the event of foreclosure and authorized specific regulatory clarifications of
the scope of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the trust fund and occasion a loss to the trust fund and to securityholders in
some circumstances. The new secured creditor amendments to CERCLA, also, would
not necessarily affect the potential for liability in actions by either a state
or a private party under other federal or state laws that may impose liability
on "owners or operators" but do not incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan or
before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property with
any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
DUE-ON-SALE CLAUSES
The mortgage loans may contain due-on-sale clauses. These clauses generally
provide that the lender may accelerate the maturity of the loan if the borrower
sells, transfers or conveys the related Mortgaged Property. The enforceability
of due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, for some loans 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
limited exceptions. Due-on-sale clauses contained in mortgage loans originated
by federal savings and loan associations of federal savings banks are fully
enforceable pursuant to regulations of the United States Federal Home Loan Bank
Board, as succeeded by the Office of Thrift Supervision, which preempt state law
restrictions on the enforcement of those clauses. Similarly, "due-on-sale"
clauses in mortgage loans made by national banks and federal credit unions are
now fully enforceable pursuant to preemptive regulations of the Comptroller of
the Currency and the National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The inability to enforce a "due-on-sale" clause may result in a mortgage
that bears an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
PREPAYMENT CHARGES
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are paid
before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In addition,
if the junior loan permits recourse to the borrower (as junior loans
often do) and the senior loan does not, a borrower may be more likely
to repay sums due on the junior loan than those on the senior loan.
o Acts of the senior lender that prejudice the junior lender or impair
the junior lender's security may create a superior equity in favor of
the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate
payable on the senior loan, the senior lender may lose its priority to
the extent any existing junior lender is harmed or the borrower is
additionally burdened.
o If the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations will not apply to some types of residential first mortgage loans
originated by lenders after March 31, 1980. A similar federal statute was in
effect for mortgage loans made during the first three months of 1980. The Office
of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects application of
the federal law. 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. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of that state action will be eligible for
inclusion in a trust fund unless (1) the mortgage loan provides for the interest
rate, discount points and charges as are permitted in that state or (2) the
mortgage loan provides that its terms will be construed in accordance with the
laws of another state under which the interest rate, discount points and charges
would not be usurious and the borrower's counsel has rendered an opinion that
the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the borrower may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard and officers of the U.S. Public Health Service assigned to
duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related mortgage loan, no information can be provided as to
the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the servicer to collect full amounts of interest
on some of the mortgage loans. Any shortfalls in interest collections resulting
from the application of the Relief Act would result in a reduction of the
amounts distributable to the holders of the related series of Securities, and
would not be covered by advances. These shortfalls will be covered by the credit
support provided in connection with the Securities only to the extent provided
in the prospectus supplement. In addition, the Relief Act imposes limitations
that would impair the ability of the servicer to foreclose on an affected
mortgage loan during the borrower's period of active duty status, and, under
some circumstances, during an additional three month period thereafter. Thus, if
an affected mortgage loan goes into default, there may be delays and losses
occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the contracts. Because these legal aspects
are governed primarily by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which contracts
may be originated.
GENERAL
As a result of the assignment of the contracts to the trustee, the trustee
will succeed collectively to all of the rights including the right to receive
payment on the contracts, of the obligee under the contracts. Each contract
evidences both
(a) the obligation of the borrower to repay the loan evidenced
thereby, and
(b) the grant of a security interest in the manufactured home to
secure repayment of the loan. Aspects of both features of the contracts are
described more fully below.
The contracts generally are "chattel paper" as defined in the UCC in effect
in the states in which the manufactured homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the agreement, the
servicer will transfer physical possession of the contracts to the trustee. In
addition, the servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. The contracts will be stamped or marked otherwise to reflect
their assignment from the depositor to the trustee only if provided in the
prospectus supplement. Therefore, if, through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the trustee's interest in contracts could be
defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the contracts may be located in all 50
states, Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The asset seller may effect that
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the asset seller fails, due to clerical error, to
effect that notation or delivery, or files the security interest under the wrong
law, the asset seller may not have a first priority security interest in the
manufactured home securing a contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under some
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the home under
applicable state real estate law.
To perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a fixture filing
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the contracts contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the manufactured home. If, however, a manufactured
home is permanently attached to its site, other parties could obtain an interest
in the manufactured home that is prior to the security interest originally
retained by the asset seller and transferred to the depositor. For a series of
securities and if so described in the prospectus supplement, the servicer may be
required to perfect a security interest in the manufactured home under
applicable real estate laws. The warranting party will represent that as of the
date of the sale to the depositor it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees for substantially all of the manufactured homes securing the contracts.
The depositor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the securityholders. The depositor or
the trustee will amend the certificates of title, or file UCC-3 statements, to
identify the trustee as the new secured party, and will deliver the certificates
of title to the trustee or note thereon the interest of the trustee only if
specified in the prospectus supplement. Accordingly, the asset seller, or other
originator of the contracts, will continue to be named as the secured party on
the certificates of title relating to the manufactured homes. In some states,
that assignment is an effective conveyance of the security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to servicer's rights as the secured party. However, in
some states, in the absence of an amendment to the certificate of title and the
new secured party succeeds to servicer's rights as the secured party. However,
in some states, in the absence of an amendment to the certificate of title, or
the filing of a UCC-3 statement, the assignment of the security interest in the
manufactured home may not be held effective or the security interest in the
manufactured home may not be held effective or the security interests may not be
perfected and in the absence of that notation or delivery to the trustee, the
assignment of the security interest in the manufactured home may not be
effective against creditors of the asset seller, or any other originator of the
contracts, or a trustee in bankruptcy of the asset seller, or any other
originator.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the asset
seller, or other originator of the Contracts, on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
securityholders against the rights or subsequent purchasers of a manufactured
home or subsequent lenders who take a security interest in the manufactured
home. If there are any manufactured homes as to which the security interest
assigned to the trustee is not perfected, that security interest would be
subordinate to, among others, subsequent purchasers for value of manufactured
homes and holders of perfected security interests. There also exists a risk in
not identifying the trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter only if and after
the owner re-registers the manufactured home in that state. If the owner were to
relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the servicer must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered n states that provide for notation of lien, the asset seller, or
other originator, would receive notice of surrender if the security interest in
the manufactured home is noted on the certificate of title. Accordingly, the
trustee would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the servicer takes steps to effect re-perfection upon receipt
of notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower under a manufactured housing contract sells a
manufactured home, the servicer must surrender possession of the certificate of
title or, if it is noted as lienholder on the certificate of title, will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the Agreement, the
servicer is obligated to take those steps, at the servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority even over
a perfected security interest. The warranting party will represent in the
agreement that it has no knowledge of any of these liens for any manufactured
home securing payment on any contract. However, these liens could arise at any
time during the term of a contract. No notice will be given to the trustee or
securityholders if a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN THE MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related agreement, may take action to enforce the trustee's security interest
with respect to contracts in default by repossession and resale of the
manufactured homes securing those defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor can
repossess a manufactured home securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on that state, before beginning any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting that sale. The law in most
states also requires that the debtor be given notice of any sale before resale
of the unit so that the debtor may redeem at or before that resale. In the event
of repossession and resale of a manufactured home, the trustee would be entitled
to be paid out of the sale proceeds before the proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in mot states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and resale
of the manufactured home securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
The terms of the Relief Act apply to a borrower on a Contract as described
for a borrower on a mortgage loan under "Certain Legal Aspects of Mortgage
Loans-Soldiers' and Sailors' Civil Act of 1940."
CONSUMER PROTECTION LAWS
The so-called Holder-in-Due-Course rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
that is the seller of goods which gave rise to the transaction, and some related
lenders and assignees, to transfer the contract free of notice of claims by the
debtor thereunder. The effect of this rule is to subject the assignee of the
contract to all claims and defenses that the debtor could assert against the
seller of goods. Liability under this rule is limited to amounts paid under a
contract; however, the borrower also may be able to assert the rule to set off
remaining amounts due as a defense against a claim brought by the trustee
against the borrower. Numerous other federal and state consumer protection laws
impose requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. Generally, it is expected that the servicer
will permit most transfers of manufactured homes and not accelerate the maturity
of the related contracts. In some cases, the transfer may be made by a
delinquent borrower to avoid a repossession proceeding for a manufactured home.
In the case of a transfer of a manufactured home after which the servicer
desires to accelerate the maturity of the related contract, the servicer's
ability to do so will depend on the enforceability under state law of the
due-on-sale clauses applicable to the manufactured homes. Consequently, in some
states the servicer may be prohibited from enforcing a due-on-sale clause in
respect of some manufactured homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended (Title V), provides that, subject to the following
conditions, state usury limitations will not apply to any loan that is secured
by a first lien on certain kinds of manufactured housing. The contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period before instituting any action leading to repossession of or
foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest rates and
finance charges by adopting before April 1, 1983, a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted a similar law before the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related asset seller will represent that all of the contracts comply with
applicable usury law.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Brown & Wood LLP as to
the material federal income tax consequences of the purchase, ownership and
disposition of the Securities offered under this prospectus. This opinion
assumes compliance with all provisions of the Agreements pursuant to which the
Securities are issued. This discussion is directed solely to securityholders
that hold the Securities as capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code"), and does not purport
to discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Securities. See "State and Other Tax Considerations." The depositor recommends
that securityholders consult their own tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of the Securities offered under this prospectus.
The following discussion addresses securities of five general types:
o REMIC Securities representing interests in a trust fund, or a portion
of a trust fund, that the trustee will elect to have treated as a real
estate mortgage investment conduit ("REMIC") under Sections 860A
through 860G (the " ") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to
have treated as a financial asset securitization investment trust
("FASIT") under Sections 860H through 860L (the "FASIT Provisions") of
the Code;
o securities ("Grantor Trust Securities") representing interests in a
trust fund (a "Grantor Trust Fund") as to which no election will be
made;
o securities ("Partnership Securities") representing interests in a
trust fund (a "Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes.
The prospectus supplement for each series of Securities will indicate
which of the foregoing treatments will apply to that series and, if a REMIC
election (or elections) will be made for the related trust fund, will identify
all "regular interests" and "residual interests" in the REMIC or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interests" in the FASIT. For purposes of this tax
discussion,
(1) references to a "securityholder" or a "holder" are to the beneficial
owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof as to
which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement, references to
"mortgage loans" include Contracts. Except to the extent specified in
the prospectus supplement, no REMIC election will be made for
Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1273 and 1275 of the
Code and in the Treasury regulations issued under the Code (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
issued under the Code (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance have
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of the
holders of FASIT Securities. In addition, the OID Regulations do not adequately
address some issues relevant to, and in some instances provide that they are not
applicable to, securities such as the Securities.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT (as defined in this
prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of "real
estate mortgages,"
(2) that entity is the borrower under debt obligations with two or more
maturities, and
(3) under the terms of the debt obligations on which the entity is the
borrower, payments on those obligations bear a relationship to
payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP, the related trust fund (or each applicable portion of the
trust fund) will qualify as a REMIC and the REMIC Securities offered with
respect thereto will be considered to evidence ownership of "regular interests"
("Regular Securities") or "residual interests" ("Residual Securities") in the
REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the total adjusted
basis of the nonqualified assets is less than 1% of the total adjusted basis of
all the REMIC Pool's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimis amount of
nonqualified assets. A REMIC Pool also must provide "reasonable arrangements" to
prevent its residual interests from being held by "disqualified organizations"
or agents of "disqualified organizations" and must furnish applicable tax
information to transferors or agents that violate this requirement. The pooling
and servicing agreement for each series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests,
shares held by a tenant stockholder in a cooperative housing corporation, and
manufactured housing that qualifies as a "single family residence" under Code
Section 25(e)(10) can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month period
thereafter; or
(2) in exchange for a "defective obligation" within a two-year period
thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty made
at the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held for more than three taxable years after the taxable
year of acquisition unless extensions are granted by the Secretary of the
Treasury.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet specific requirements. All of the interests in a REMIC Pool
must be either of the following: (1) one or more classes of regular interests or
(2) a single class of residual interests on which distributions, if any, are
made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued on
the Startup Day with fixed terms, is designated as a regular interest,
and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest
payments (or other similar amounts), if any, at or before maturity
either are payable based on a fixed rate or a qualified variable rate,
or consist of a specified, nonvarying portion of the interest payments
on qualified mortgages. That specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference between
two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that
provides for interest payments consisting of a specified, nonvarying
portion of interest payments on qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is
designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even if
payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, in the opinion of Brown & Wood LLP, the Regular
Securities of a series will constitute one or more classes of regular interests,
and the Residual Securities for that series will constitute a single class of
residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for that status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for that
year and thereafter. In that event, that entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, none of these regulations
have been issued. Any relief provided, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
trust fund's income for the period in which the requirements for that status are
not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
In the opinion of Brown & Wood LLP, the REMIC Securities will be treated as
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
assets described in Section 7701(a)(19)(C) of the Code in the same proportion
that the assets of the REMIC Pool underlying these Securities would be so
treated. Moreover, if 95% or more of the assets of the REMIC Pool qualify for
either of the foregoing treatments at all times during a calendar year, the
REMIC Securities will qualify for the corresponding status in their entirety for
that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "Buydown Funds"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60% of assets test
for meeting the definition of a "domestic building and loan association."
Interest (including original issue discount) on the Regular Securities and
income allocated to the class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the Securities are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, in the opinion of Brown & Wood LLP, the Regular
Securities generally will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its Startup Day in
exchange for regular or residual interests in the REMIC.
The determination as to the percentage of the REMIC Pool's assets that
constitute assets described in the foregoing sections of the Code will be made
for each calendar quarter based on the average adjusted basis of each category
of the assets held by the REMIC Pool during that calendar quarter. The REMIC
will report those determinations to securityholders in the manner and at the
times required by applicable Treasury regulations. The Small Business Job
Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve method of bad
debts of domestic building and loan associations and mutual savings banks, and
thus has eliminated the asset category of "qualifying real property loans" in
former Code Section 593(d) for taxable years beginning after December 31, 1995.
The requirements in the SBJPA of 1996 that these institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a portion of their
assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if those loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the mortgage loans of
any series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the mortgage loans, or whether those assets (to the extent not invested in
assets described in the foregoing sections) otherwise would receive the same
treatment as the mortgage loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on mortgage loans held
pending distribution are considered part of the mortgage loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For some series of REMIC 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. Upon the issuance of any of these
series of REMIC Securities, Brown & Wood LLP will deliver its opinion that,
assuming compliance with all provisions of the related pooling and servicing
agreement, the Tiered REMICs will each qualify as a REMIC and the respective
REMIC Securities issued by each Tiered REMIC will be considered to evidence
ownership of Regular Securities or Residual Securities in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities 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 those Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
(1) General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on the "OID Regulations" and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address some of the issues
relevant to prepayable securities, such as the Regular Securities. To the extent
that those issues are not addressed in the regulations, the Seller intends to
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be provided that the Internal Revenue Service will not
take a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion in the OID Regulations and
the appropriate method for reporting interest and original issue discount for
the Regular Securities.
Each Regular Security (except to the extent described below for a Regular
Security on which principal is distributed in a single installment or by lots of
specified principal amounts upon the request of a securityholder or by random
lot (a "Non-Pro Rata Security")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that amount
from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. Likewise, it is anticipated that the trustee will treat an
interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if the original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular 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 Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income will
be capital gain if the Regular Security is held as a capital asset. Under the
OID Regulations, however, Regular Securityholders may elect to accrue all de
minimis original issue discount as well as market discount and market premium,
under the constant yield method. See "-Election to Treat All Interest Under the
Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. For each
Regular Security, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Security. The Conference Committee Report to the 1986 Act
states that the rate of accrual of original issue discount is intended to be
based on the Prepayment Assumption. The original issue discount accruing in a
full accrual period would be the excess, if any, of:
(1) the sum of:
(a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period and
(b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated
redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at the beginning
of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue date;
(2) events (including actual prepayments) that have occurred before
the end of the accrual period; and
(3) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the trustee
will determine the yield to maturity of that Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount for the entire Class, as determined in accordance with the preceding
paragraph. However, in the case of a distribution in retirement of the entire
unpaid principal balance of any Non-Pro Rata Security (or portion of the unpaid
principal balance), (a) the remaining unaccrued original issue discount
allocable to the Security (or to that portion) will accrue at the time of the
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of that Class will be adjusted by reducing the present value
of the remaining payments on that Class and the adjusted issue price of that
Class to the extent attributable to the portion of the unpaid principal balance
that was distributed. The depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but with
the rate of accrual of original issue discount determined based on the
Prepayment Assumption for the Class as a whole. Investors are advised to consult
their tax advisors as to this treatment.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (1) the issue price does not exceed the original principal balance by
more than a specified amount and (2) the interest compounds or is payable at
least annually at current values of
(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."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be subject to a fixed cap or floor, or a cap or floor
that is not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate is any rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is based
on objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. A qualified inverse floating
rate is a rate equal to a fixed rate minus a qualified floating rate that
inversely reflects contemporaneous variations in the cost of newly borrowed
funds; an inverse floating rate that is not a qualified inverse floating rate
may nevertheless be an objective rate. A Class of Regular Securities may be
issued under this prospectus that does not have a variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest" within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion that would be the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or variable rate as described in this
paragraph.
Under the REMIC Regulations, a Regular Security (1) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates, including a rate based on the average cost of funds of one
or more financial institutions), or the product of that rate and a positive or a
negative multiple (plus or minus a specified number of basis points), or that
represents a weighted average of rates on some or all of the mortgage loans,
including a rate that is subject to one or more caps or floors, or (2) bearing
one or more variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, it is
anticipated that the trustee will treat Regular Securities that qualify as
regular interests under this rule in the same manner as obligations bearing a
variable rate for original issue discount reporting purposes.
The amount of original issue discount for a Regular Security bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount," with the yield to maturity and future payments on
that Regular Security generally to be determined by assuming that interest will
be payable for the life of the Regular Security based on the initial rate (or,
if different, the value of the applicable variable rate as of the pricing date)
for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the trustee will treat that variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class or a Class bearing interest at a rate equal
to the weighted average of the net rates on the mortgage loans, which will be
treated as non-qualified stated interest includible in the stated redemption
price at maturity. Ordinary income reportable for any period will be adjusted
based on subsequent changes in the applicable interest rate index.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity of the Regular Security are received, in an amount
not exceeding that distribution. The market discount would accrue in a manner to
be provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
these regulations are issued, the market discount would accrue either (1) on the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period. The purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. The purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable on the Regular Security. The deferred portion of the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that year. Any deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero if the
market discount is less than 0.25% of the remaining stated redemption price at
maturity of the Regular Security (or, in the case of a Regular Security having
original issue discount, the adjusted issue price of that Regular Security)
multiplied by the weighted average maturity of the Regular Security (determined
as described above in the third paragraph under "--Original Issue Discount"
above) remaining after the date of purchase. It appears that de minimis market
discount would be reported in a manner similar to de minimis original issue
discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of the
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue Procedure 92-67 concerning the elections
to include market discount in income currently and to accrue market discount on
the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
this election, (1) "interest" includes stated interest, original issue discount,
de minimis original issue discount, market discount and de minimis market
discount, as adjusted by any amortizable bond premium or acquisition premium and
(2) the debt instrument is treated as if the instrument were issued on the
holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectible, the Internal Revenue Service may take the
position that original issue discount must continue to be accrued in spite of
its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. These taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as provided
in this paragraph, any gain or loss on the sale or exchange of a Regular
Security realized by an investor who holds the Regular Security as a capital
asset will be capital gain or loss and will be long-term or short-term depending
on whether the Regular Security has been held for the long-term capital gain
holding period (currently, more than one year). That gain will be treated as
ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income for any
prior disposition of property that was held as part of that transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates; or
(3) to the extent that the gain does not exceed the excess, if any, of
(a) the amount that would have been includible in the gross income of the
holder if its yield on that Regular Security were 110% of the applicable
federal rate as of the date of purchase, over (b) the amount of income
actually includible in the gross income of the holder for that Regular
Security.
In addition, gain or loss recognized from the sale of a Regular Security by
some banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income of those taxpayers (39.6%) for property held for more than one year.
Currently, the maximum tax rate for corporations is the same for both ordinary
income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in that quarter
and by allocating that daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on that day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any class of
the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and (2) the discount on the mortgage loans that is
includible in income may exceed the deduction allowed upon those distributions
on those Regular Securities on account of any unaccrued original issue discount
relating to those Regular Securities. When there is more than one Class of
Regular Securities that distribute principal sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier Classes of Regular Securities to
the extent that those Classes are not issued with substantial discount or are
issued at a premium. If taxable income attributable to that mismatching is
realized, in general, losses would be allowed in later years as distributions on
the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as
a result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of that series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate mortgage loans, interest income for any particular
mortgage loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, Residual Holders must have
sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of that mismatching or unrelated deductions against which
to offset that income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of
mismatching of income and deductions described in this paragraph, if present for
a series of Securities, may have a significant adverse effect upon a Residual
Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably in
three contexts:
(1) it may not be offset by current or net operating loss deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for that Residual Security. The adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom the loss was disallowed and may be used by the Residual Holder only
to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in some respects, the recovery of basis by
the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--Taxation
of REMIC Income," the period of time over which the issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of the residual interest
as zero rather than the negative amount for purposes of determining the REMIC
Pool's basis in its assets. The preamble to the REMIC Regulations states that
the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
mortgage loans and expenses for the Regular Securities, and different methods
could result in different timing or reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of premium will be
determined in the same manner as original issue discount income on Regular
Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of mortgage loans if, in general, the basis of the REMIC Pool in those mortgage
loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
those mortgage loans is generally the fair market value of the mortgage loans
immediately after the transfer of the mortgage loans to the REMIC Pool. The
REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of the market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "--Taxation
of Owners of Regular Securities--Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds the unpaid principal balances of the mortgage loans, the REMIC Pool will
be considered to have acquired those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage loans
is the fair market value of the mortgage loans, based on the total of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer of the mortgage loans to the REMIC Pool. In a manner analogous to
the discussion above under "--Taxation of Owners of Regular
Securities--Amortizable Premium," a person that holds a mortgage loan as a
capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an offset
to interest income on the mortgage loans, rather than as a separate deduction
item. Because substantially all of the borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely to
the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for that quarterly period of (1) 120% of the
long-term applicable federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (2) the adjusted issue price of the Residual Security at
the beginning of the quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of those daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Security before the beginning of
that quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
that income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for persons who are not U.S. Persons
(as defined below under "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors"), and the portion thereof attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax (by
treaty or otherwise). See "--Taxation of Certain Foreign Investors--Residual
Securities" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to persons who are not U.S. Persons. The SBJPA of 1996 has
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 Residual Securities that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except for Residual Securities
continuously held by a thrift institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have those rules apply only to
taxable years beginning after August 20, 1996.
(5) Tax-Related Restrictions on Transfer of Residual Securities
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. That tax
generally would be imposed on the transferor of the Residual Security, except
that where the transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. The tax also may be waived by the
Internal Revenue Service if the Disqualified Organization promptly disposes of
the Residual Security and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Security is
actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period that person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished particular affidavits by record holders of interests in the entity and
that does not know those affidavits are false, is not available to an electing
large partnership.
o "Disqualified Organization" means the United States, any state or
political subdivision of the United States, any foreign government,
any international organization, any agency or instrumentality of any
of the foregoing (provided, that the term does not include an
instrumentality if all of its activities are subject to tax and a
majority of its board of directors in not selected by any governmental
entity), any cooperative organization furnishing electric energy or
providing telephone service or persons in rural areas as described in
Code Section 1381(a)(2)(C), and any organization (other than a
farmers' cooperative described in Code Section 531) that is exempt
from taxation under the Code unless the organization is subject to the
tax on unrelated business income imposed by Code Section 511.
o "Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or
estate and corporations operating on a cooperative basis. Except as
may be provided in Treasury regulations, any person holding an
interest in a Pass-Through Entity as a nominee for another will, with
respect to that interest, be treated as a Pass-Through Entity.
The pooling and servicing agreement for a series will provide that no legal
or beneficial interest in a Residual Security may be transferred or registered
unless (1) the proposed transferee furnished to the transferor and the trustee
an affidavit providing its taxpayer identification number and stating that the
transferee is the beneficial owner of the Residual Security and is not a
Disqualified Organization and is not purchasing the Residual Security on behalf
of a Disqualified Organization (i.e., as a broker, nominee or middleman) and (2)
the transferor provides a statement in writing to the trustee that it has no
actual knowledge that the affidavit is false. Moreover, the pooling and
servicing agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest no
rights in any purported transferee. Each Residual Security for a series will
bear a legend referring to those restrictions on transfer, and each Residual
Holder will be deemed to have agreed, as a condition of ownership of the
Residual Security, to any amendments to the related pooling and servicing
agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard some
transfers of Residual Securities, in which case the transferor would continue to
be treated as the owner of the Residual Securities and thus would continue to be
subject to tax on its allocable portion of the net income of the REMIC Pool.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest" (as
defined below) to a Residual Holder (other than a Residual Holder who is not a
U.S. Person as defined below under "--Foreign Investors") is disregarded to all
federal income tax purposes if a significant purpose of the transfer is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is 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 the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that 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
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (2) the transferee represents to the transferor
that it understands that, as the holder of the non-economic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due. The pooling and servicing
agreement for each series of Certificates will require the transferee of a
Residual Security to certify to the matters in the preceding sentence as part of
the affidavit described above under the heading "--Disqualified Organizations."
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (1) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (2) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and before the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership
(except as provided in applicable Treasury regulations) or other entity treated
as a partnership or as a corporation created or organized in or under the laws
of the United States or of any state (including, for this purpose, the District
of Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect to be treated as U.S.
Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses") of the Residual Holder in the Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Holder will have taxable income to the extent that
any cash distribution to it from the REMIC Pool exceeds that adjusted basis on
that Distribution Date. That income will be treated as gain from the sale or
exchange of the Residual Holder's Residual Security, in which case, if the
Residual Holder has an adjusted basis in its Residual Security remaining when
its interest in the REMIC Pool terminates, and if it holds the Residual Security
as a capital asset under Code Section 1221, then it will recognize a capital
loss at that time in the amount of the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. In addition,
gain or loss recognized from the sale of a Residual Security by some banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash sale
rules of Code Section 1091 will apply to dispositions of Residual Securities
where the seller of the Residual Security, during the period beginning six
months before the sale or disposition of the Residual Security and ending six
months after the sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual Security.
(7) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited transactions,
will not be part of the calculation of income or loss includible in the federal
income tax returns of Residual Holders, but rather will be taxed directly to the
REMIC Pool at a 100% rate. Prohibited transactions generally include:
(1) the disposition of a qualified mortgages other than for
(a) substitution within two years of the Startup Day for a
defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup
Day;
(b) foreclosure, default, or imminent default of a qualified
mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to
sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Securities is outstanding). The REMIC Regulations indicate that the modification
of a mortgage loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
mortgage loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a borrower pursuant to the terms of a
convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for the income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those proceedings
in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser or (1) 3% of the excess, if any, of
adjusted gross income over $100,000 ($50,000 in the case of a married individual
filing a separate return) (subject to adjustment for inflation), or (2) 80% of
the amount of itemized deductions otherwise allowable for that year. In the case
of a REMIC Pool, those deductions may include deductions under Code Section 212
for the Servicing Fee and all administrative and other expenses relating to the
REMIC Pool, or any similar expenses allocated to the REMIC Pool for a regular
interest it holds in another REMIC. Those investors who hold REMIC Securities
either directly or indirectly through pass-through entities may have their pro
rata share of those expenses allocated to them as additional gross income, but
may be subject to that limitation on deductions. In addition, those expenses are
not deductible at all for purposes of computing the alternative minimum tax, and
may cause those investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. For a
REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of those expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be allocable
to the Residual Securities.
In general, the allocable portion will be determined based on the ratio
that a REMIC securityholder's income, determined on a daily basis, bears to the
income of all holders of Regular Securities and Residual Securities for a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or other pass-through entities described in the foregoing
temporary Treasury regulations) may have taxable income in excess of the
interest income at the Interest Rate on Regular Securities that are issued in a
single class or otherwise consistently with fixed investment trust status or in
excess of cash distributions for the related period on Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person provides the
trustee, or the person who would otherwise be required to withhold tax from
those distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Security is a Non-U.S. Person. If that statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by that Non-U.S. Person. In the latter case,
the Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") that would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a foreign
partnership, that (x) the certification described above be provided by the
partners rather than by the foreign partnership and (y) the partnership provide
specific information, including a United States taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets in the trust fund (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "--Taxation of Owners
of Residual Securities--Limitations on Offset or Exemption of REMIC Income"
above. If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by those Non-U.S. Persons, 30% (or lower treaty rate) withholding will
not apply. Instead, the amounts paid to those Non-U.S. Persons will be subject
to United States federal income tax at regular rates. If 30% (or lower treaty
rate) withholding is applicable, those amounts generally will be taken into
account for purposes of withholding only when paid or otherwise distributed (or
when the Residual Security is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"--Tax-Related Restrictions on Transfer of Residual Securities--Foreign
Investors" above concerning the disregard of transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning Residual
Securities.
(3) Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through brokers, may be subject to a "backup"
withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) unless the Regular Holder complies with
specific reporting and/or certification procedures, including the provision of
its taxpayer identification number to the trustee, its agent or the broker who
effected the sale of the Regular Security, or that Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability.
(4) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 for a particular series of Regular Securities. Holders
through nominees must request the information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence. Treasury
regulations require that, in addition to the foregoing requirements, information
must be furnished quarterly to Residual Holders, furnished annually, if
applicable, to holders of Regular Securities, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses (see "Limitations
on Deduction of Certain Expenses" above) allocable to those holders.
Furthermore, under these regulations, information must be furnished quarterly to
Residual Holders, furnished annually to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"--Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The Internal Revenue Service may assess a deficiency resulting from
a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code Section 6111 because it generally
will not have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Security as a nominee for another
person may be required to furnish the related REMIC Pool, in a manner to be
provided in Treasury regulations, with the name and address of that person and
other specified information.
FASITS
CLASSIFICATION OF FASITS
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP, the related trust fund (or each applicable portion of the
trust fund) will qualify as a FASIT. The trust fund will qualify under the Code
as a FASIT in which FASIT regular securities (the "FASIT Regular Securities")
and the ownership interest security (the "FASIT Ownership Security") will
constitute the "regular interests" and the "ownership interest," respectively,
if
(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the FASIT are
met on a continuing basis; and
(3) the trust fund is not a regulated investment company as defined in
Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status, substantially
all of the assets of the trust fund must consist of "permitted assets" as of the
close of the third month beginning after the closing date and at all times
thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in Section 860D of the Code
(generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) some hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the
obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to that holder. A
debt instrument is a permitted asset only if the instrument is indebtedness for
federal income tax purposes, including regular interests in a REMIC or regular
interests issued by another FASIT and it bears (1) fixed interest or (2)
variable interest of a type that relates to qualified variable rate debt (as
defined in Treasury regulations prescribed under section 860G(a)(1)(B)).
Permitted debt instruments must bear interest, if any, at a fixed or qualified
variable rate. Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees of
payment default and similar instruments to be provided in regulations, and which
are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the depositor had no
knowledge or reason to know as of the date the asset was acquired by the FASIT
that a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an Eligible
Corporation (as defined in this prospectus).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of securities will indicate
which securities of the Series will be designated as regular interests, and
which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its stated
principal amount;
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to the principal
amount.
Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interests (i.e., qualified floating rates and weighted
average rates). Interest will be considered to be based on a permissible
variable rate if generally:
(1) this interest is unconditionally payable at least annually;
(2) the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
(3) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more "qualified
floating rates," one "qualified inverse floating rate," or a combination of
"qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on the FASIT regular
interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (3), (4), or (5) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "high-yield interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (6), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
it's FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, the
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally will be
accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular Securities must report income
from these Securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. Except in
the case of FASIT Regular Securities issued with original issue discount,
interest paid or accrued on a FASIT Regular Security generally will be treated
as ordinary income to the Holder and a principal payment on the security will be
treated as a return of capital to the extent that the securityholder's basis is
allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on these Securities in the same manner described for REMIC
Regular Securities. See "--REMICs - Taxation of Owners of Regular Securities"
above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the return
on instruments issued by a FASIT yielding an equity-like return continues to
have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of this interest, and the ability of these
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire interests such as inventory.
o An "Eligible Corporation" is a taxable domestic C corporation that
does not qualify as a regulated investment company, a real estate
investment trust, a REMIC, or a cooperative.
o A "Disqualified Holder" is any holder other than (1) an Eligible
Corporation, or (2) a dealer who acquires FASIT debt for resale to
customers in the ordinary course of business.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income from
the high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to Disqualified Holders will be
disregarded for federal income tax purposes, and the transferor will continue to
be treated as the holder of the high-yield interest.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the high-yield interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT Provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Interest that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Interest and that have the same features as high-yield interests.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Security will be the same as the
character of the income to the FASIT, except that any tax-exempt interest income
taken into account by the holder of a FASIT Ownership Security is treated as
ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, a holder of a FASIT Ownership Security is subject to the same
limitations on their ability to use losses to offset income from their FASIT
Regular Securities as are holders of high-yield interest. See "--Taxation of
Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by the holder,
then Section 475 of the Code will continue to apply to these securities, except
that the amount realized under the mark-to-market rules or the securities' value
after applying special valuation rules contained in the FASIT Provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable federal rate,
compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition;
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired through
foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular interest
(i.e., a qualified liquidation);
(2) incident to the foreclosure, default (or imminent default) on an
asset of the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for another permitted
debt instrument; or
(7) in order to reduce over-collateralization where a principal
purposes of the disposition was not to avoid recognition of gain arising
from an increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Securities for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities. In addition, for purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities. See
"--REMICs" above.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
For each series of Grantor Trust Securities, assuming compliance with all
provisions of the related Agreement, in the opinion of Brown & Wood LLP, the
related Grantor Trust Fund will be classified as a grantor trust under subpart
E, part I of subchapter J of the Code and not as a partnership, an association
taxable as a corporation, or a "taxable mortgage pool" within the meaning of
Code Section 7701(i). Accordingly, each holder of a Grantor Trust Security
generally will be treated as the beneficial owner of an undivided interest in
the mortgage loans included in the Grantor Trust Fund.
STANDARD SECURITIES
GENERAL
Where there is no Retained Interest or "excess" servicing for the mortgage
loans underlying the Securities of a series, and where these Securities are not
designated as "Stripped Securities," the holder of each Security of that series
(referred to in this prospectus as "Standard Securities") will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Grantor Trust Fund represented by its Standard Security and will
be considered the beneficial owner of a pro rata undivided interest in each of
the mortgage loans, subject to the discussion below under "--Recharacterization
of Servicing Fees." Accordingly, the holder of a Standard Security of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the mortgage loans represented by
its Standard Security, including interest at the coupon rate on those mortgage
loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the servicer, in accordance with that
securityholder's method of accounting. A securityholder generally will be able
to deduct its share of the Servicing Fee and all administrative and other
expenses of the trust fund in accordance with its method of accounting, provided
that those amounts are reasonable compensation for services rendered to the
Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through pass-through entities, will be
subject to limitations for some itemized deductions described in Code Section
67, including deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses of the Grantor Trust Fund, to the extent that
those deductions, in total, do not exceed two percent of an investor's adjusted
gross income. In addition, Code Section 68 provides that itemized deductions
otherwise allowable for a taxable year of an individual taxpayer will be reduced
by the lesser of (1) 3% of the excess, if any, of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate return)
(in each case, as adjusted for post-1991 inflation), or (2) 80% of the amount of
itemized deductions otherwise allowable for that year. As a result, those
investors holding Standard Securities, directly or indirectly through a
pass-through entity, may have total taxable income in excess of the total amount
of cash received on the Standard Securities with respect to interest at the
Interest Rate or as discount income on the Standard Securities. In addition,
those expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause those investors to be subject to
significant additional tax liability. Moreover, where there is Retained Interest
for the mortgage loans underlying a series of Securities the transaction will be
subject to the application of the "stripped bond" rules of the Code as described
below under "--Stripped Securities." Where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped coupon" rules of the Code, as described below under
"--Recharacterization of Servicing Fees."
Holders of Standard Securities, particularly any class of a series that are
Subordinate Securities, may incur losses of interest or principal with respect
to the mortgage loans. Those losses would be deductible generally only as
described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that securityholders on the cash method
of accounting would not be required to report qualified stated interest as
income until actual receipt.
(1) Tax Status
For a series, in the opinion of Brown & Wood LLP, except for that portion
of a trust fund consisting of unsecured home improvement loans, a Standard
Security owned by a:
o "domestic building and loan association" within the meaning of Code
Section 7701(a)(19) will be considered to represent "loans . . .
secured by an interest in real property which is . . . residential
real property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the mortgage loans
represented by that Standard Security is of the type described in that
section of the Code.
o real estate investment trust will be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(4)(A) to the
extent that the assets of the related Grantor Trust Fund consist of
qualified assets, and interest income on those assets will be
considered "interest on obligations secured by mortgages on real
property" to that extent within the meaning of Code Section
856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including any
participation or certificate of beneficial ownership therein) which is
principally secured by an interest in real property" within the
meaning of Code Section 860G(a)(3)(A) to the extent that the assets of
the related Grantor Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraph or whether the amount qualifying for that
treatment must be reduced by the amount of the Buydown Mortgage Funds. There is
indirect authority supporting treatment of an investment in a Buydown Mortgage
Loan as entirely secured by real property if the fair market value of the real
property securing the loan exceeds the principal amount of the loan at the time
of issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, securityholders are urged to
consult their own tax advisors concerning the effects of those arrangements on
the characterization of the securityholder's investment for federal income tax
purposes.
(2) Premium and Discount
The depositor recommends that securityholders consult with their tax
advisors as to the federal income tax treatment of premium and discount arising
either upon initial acquisition of Standard Securities or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a securityholder's interest in those
mortgage loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. The rules
allowing for the amortization of premium are available for mortgage loans
originated after September 27, 1985. Under the OID Regulations, original issue
discount could arise by the charging of points by the originator of the
mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under some circumstances, by the presence of
"teaser" rates on the mortgage loans. See "--Stripped Securities" below
regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to that income. No
prepayment assumption will be assumed for purposes of that accrual except as set
forth in the prospectus supplement. However, Code Section 1272 provides for a
reduction in the amount of original issue discount includible in the income of a
holder of an obligation that acquires the obligation after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if those mortgage loans acquired by a securityholder are purchased at a price
equal to the then unpaid principal amount of those mortgage loans, no original
issue discount attributable to the difference between the issue price and the
original principal amount of those mortgage loans (i.e., points) will be
includible by that holder.
MARKET DISCOUNT. securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the mortgage loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described in that section will not
apply. Rather, the holder will accrue market discount pro rata over the life of
the mortgage loans, unless the constant yield method is elected. No prepayment
assumption will be assumed for purposes of that accrual except as set forth in
the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed reasonable
servicing compensation, the amount of that excess would represent neither income
nor a deduction to securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that the amount would exceed reasonable servicing compensation as to
some of the mortgage loans would be increased. Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the mortgage loans to be treated under the "stripped
bond" rules. That guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of those amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer who receives a servicing fee in excess of those amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
mortgage loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of those mortgage loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Securities," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder of the Standard Securities. While
securityholders would still be treated as owners of beneficial interests in a
grantor trust for federal income tax purposes, the corpus of the trust could be
viewed as excluding the portion of the mortgage loans the ownership of which is
attributed to the servicer, or as including that portion as a second class of
equitable interest. Applicable Treasury regulations treat that arrangement as a
fixed investment trust, since the multiple classes of trust interests should be
treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, that recharacterization should not have any significant
effect upon the timing or amount of income reported by a securityholder, except
that the income reported by a cash method holder may be slightly accelerated.
See "--Stripped Securities" below for a further description of the federal
income tax treatment of stripped bonds and stripped coupons.
(4) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total adjusted basis will equal the
securityholder's cost for the Standard Security, exclusive of accrued interest,
increased by the amount of any income previously reported for the Standard
Security and decreased by the amount of any losses previously reported for the
Standard Security and the amount of any distributions (other than accrued
interest) received on the Standard Security. Except as provided above with
respect to market discount on any mortgage loans, and except for financial
institutions subject to the provisions of Code Section 582(c), the gain or loss
generally would be capital gain or loss if the Standard Security was held as a
capital asset. However, gain on the sale of a Standard Security will be treated
as ordinary income (1) if a Standard Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the securityholder's net investment in the conversion
transaction at 120% of the appropriate applicable federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income for any prior disposition of property that was held
as part of that transaction or (2) in the case of a non-corporate taxpayer, to
the extent that the taxpayer has made an election under Code Section 163(d)(4)
to have net capital gains taxed as investment income at ordinary income rates.
Long-term capital gains of some non-corporate taxpayers generally are subject to
a lower maximum tax rate (20%) than ordinary income or short-term capital gains
of those taxpayers (39.6%) for property held for more than one year. The maximum
tax rate for corporations currently is the same for both ordinary income and
capital gains.
STRIPPED SECURITIES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" for principal payments and "stripped coupons" for
interest payments. For purposes of this discussion, Securities that are subject
to those rules will be referred to as "Stripped Securities." In the opinion of
Brown & Wood LLP, the Securities will be subject to those rules if:
o the depositor or any of its affiliates retains (for its own account or
for purposes of resale), in the form of Retained Interest or
otherwise, an ownership interest in a portion of the payments on the
mortgage loans;
o the depositor or any of its affiliates is treated as having an
ownership interest in the mortgage loans to the extent it is paid (or
retains) servicing compensation in an amount greater than reasonable
consideration for servicing the mortgage loans (see "--Standard
Securities--Recharacterization of Servicing Fees" above); and
o a Class of Securities are issued in two or more Classes or Subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the mortgage loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for its pro rata share
of all or a portion of the interest payments on each mortgage loan, including
the Stripped Security's allocable share of the servicing fees paid to a
servicer, to the extent that those fees represent reasonable compensation for
services rendered. See the discussion above under "--Standard
Securities--Recharacterization of Servicing Fees." Although not free from doubt,
for purposes of reporting to securityholders of Stripped Securities, the
servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"--Standard Securities--General," subject to the limitation described in that
section.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that the stripped
interest is purchased. Although the treatment of Stripped Securities for federal
income tax purposes is not clear in some respects, particularly where Stripped
Securities are issued with respect to a Mortgage Pool containing variable-rate
mortgage loans, in the opinion of Brown & Wood LLP, (1) the Grantor Trust Fund
will be treated as a grantor trust under subpart E, Part I of subchapter J of
the Code and not as an association taxable as a corporation or a "taxable
mortgage pool" within the meaning of Code Section 7701(i), and (2) each Stripped
Security should be treated as a single installment obligation for purposes of
calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code Sections
1272 through 1275, and the OID Regulations. Although it is possible that
computations for Stripped Securities could be made in one of the ways described
below under "--Possible Alternative Characterizations," the OID Regulations
state, in general, that two or more debt instruments issued by a single issuer
to a single investor in a single transaction should be treated as a single debt
instrument. Accordingly, for original issue discount purposes, all payments on
any Stripped Securities should be totaled and treated as though they were made
on a single debt instrument. The pooling and servicing agreement will require
that the trustee make and report all computations described below using the
approach described in this paragraph, unless substantial legal authority
requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under these
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of that Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of that Stripped Security will be required to account for any discount
as market discount rather than original issue discount if either (1) the initial
discount for the Stripped Security was treated as zero under the de minimis
rule, or (2) no more than 100 basis points in excess of reasonable servicing is
stripped off the related mortgage loans. That market discount would be
reportable as described above under "--REMICs--Taxation of Owners of Regular
Securities--Market Discount," without regard to the de minimis rule in that
section, assuming that a prepayment assumption is employed in that computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the mortgage loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the mortgage loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Stripped Security that is
a Subordinate Security, may deduct losses incurred for the Stripped Security as
described above under "--Standard Securities General."
STATUS OF STRIPPED SECURITIES
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the mortgage loans. Although the issue is not free from doubt, in the opinion
of Brown & Wood LLP, except for a trust fund consisting of Unsecured Home
Improvement Loans, Stripped Securities owned by applicable holders should be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(4)(A), "obligation [ s ] . . . principally secured by an interest in real
property which is . . . . residential real estate" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the mortgage loans and interest on those mortgage loans qualify for that
treatment. The application of those Code provisions to Buydown Mortgage Loans is
uncertain. See "--Standard Securities--Tax Status" above.
TAXATION OF STRIPPED SECURITIES
ORIGINAL ISSUE DISCOUNT. Except as described above under "--General," each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount for a Stripped
Security must be included in ordinary income as it accrues, in accordance with a
constant yield method that takes into account the compounding of interest, which
may be before the receipt of the cash attributable to that income. Based in part
on the issue discount required to be included in the income of a holder of a
Stripped Security in any taxable year likely will be computed generally as
described above under "--REMICs-- Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities."
However, with the apparent exception of a Stripped Security qualifying as a
market discount obligation as described above under "--General," the issue price
of a Stripped Security will be the purchase price paid by each holder of the
Stripped Security, and the stated redemption price at maturity will include the
total amount of the payments to be made on the Stripped Security to that
securityholder, presumably under the Prepayment Assumption, other than qualified
stated interest.
If the mortgage loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of that
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by that securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in the Stripped Security to recognize a
loss (which may be a capital loss) equal to that portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the mortgage loans are prepaid could lead to the interpretation that
these interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, these regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of these principles could lead to the characterization of gain on
the sale of contingent interest Stripped Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Securities.
SALE OR EXCHANGE OF STRIPPED SECURITIES. Sale or exchange of a Stripped
Security before its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the securityholder's
adjusted basis in that Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code Section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, the subsequent
purchaser will be required for federal income tax purposes to accrue and report
that excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a securityholder other than an original securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED SECURITIES. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes those Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
POSSIBLE ALTERNATIVE CHARACTERIZATION. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the securityholder may be treated
as the owner of
(1) one installment obligation consisting of the Stripped Security's
pro rata share of the payments attributable to principal on each mortgage
loan and a second installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to interest on each
mortgage loan;
(2) as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each mortgage loan; or
(3) a separate installment obligation for each mortgage loan,
representing the Stripped Security's pro rata share of payments of
principal and/or interest to be made with respect to the mortgage loan.
Alternatively, the holder of one or more Classes of Stripped Securities may be
treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that a Stripped Security, or Classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each mortgage loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Treasury regulations regarding original issue discount on stripped
obligations make the foregoing interpretations less likely to be applicable. The
preamble to these regulations states that they are premised on the assumption
that an aggregation approach is appropriate for determining whether original
issue discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The trustee will furnish, within a reasonable time after the end of each
calendar year, to each securityholder at any time during that year, information
(prepared on the basis described above) necessary to enable the securityholder
to prepare its federal income tax returns. This information will include the
amount of original issue discount accrued on Securities held by persons other
than securityholders exempted from the reporting requirements. However, the
amount required to be reported by the trustee may not be equal to the proper
amount of original issue discount required to be reported as taxable income by a
securityholder, other than an original securityholder who purchased at the issue
price. In particular, in the case of Stripped Securities, the reporting will be
based upon a representative initial offering price of each Class of Stripped
Securities except as set forth in the prospectus supplement. The trustee will
also file the original issue discount information with the Internal Revenue
Service. If a securityholder fails to supply an accurate taxpayer identification
number or if the Secretary of the Treasury determines that a securityholder has
not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "--REMICs--Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in mortgage loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or any applicable lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the securityholder on the sale or exchange
of that Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in mortgage loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and these persons will
be subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
For each series of Partnership Securities or Debt Securities, Brown & Wood
LLP will deliver its opinion that the trust fund will not be a taxable mortgage
pool or an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the assumption
that the terms of the related Agreement and related documents will be complied
with, and on counsel's opinion that the nature of the income of the trust fund
will exempt it from the rule that some publicly traded partnerships are taxable
as corporations.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP SECURITIES AND DEBT
SECURITIES
For federal income tax purposes, (1) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (2) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
TAXATION OF DEBT SECURITYHOLDERS
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Brown & Wood LLP will deliver its opinion
that the Debt Securities will be classified as indebtedness for federal income
tax purposes. The discussion below assumes this characterization of the Debt
Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
Partnership Trust, and the timing and amount of income allocable to holders of
those Debt Securities may be different than as described in the following
paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (1) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (2) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "--REMICs--Taxation of
Owners of Regular Securities" and "--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the prospectus supplement, the depositor will agree, and
the securityholders will agree by their purchase of Securities, to treat the
Partnership 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 Partnership
Trust Fund, the partners of the partnership being the securityholders (including
the depositor), and the Debt Securities (if any) being debt of the partnership.
However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Securities, the Debt Securities, and the
depositor is not clear, because there is no authority on transactions closely
comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have some features
characteristic of debt, the Partnership Securities might be considered debt of
the depositor or the Partnership Trust Fund. This characterization would not
result in materially adverse tax consequences to securityholders as compared to
the consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each securityholder will be required to separately take into
account that holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the mortgage
loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "--Grantor Trust
Funds--Standard Securities--General," and "--Premium and Discount" and any gain
upon collection or disposition of mortgage loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreement and related documents). The Agreement will provide, in general, that
the securityholders will be allocated taxable income of the Partnership Trust
Fund for each Due Period equal to the sum of:
(1) the interest that accrues on the Partnership Securities in
accordance with their terms for that Due Period, including interest
accruing at the applicable Interest Rate for that Due Period and interest
on amounts previously due on the Partnership Securities but not yet
distributed;
(2) any Partnership Trust Fund income attributable to discount on the
mortgage loans that corresponds to any excess of the principal amount of
the Partnership Securities over their initial issue price; and
(3) any other amounts of income payable to the securityholders for
that Due Period.
This allocation will be reduced by any amortization by the Partnership
Trust Fund of premium on mortgage loans that corresponds to any excess of the
issue price of Partnership Securities over their principal amount. All remaining
taxable income of the Partnership Trust Fund will be allocated to the depositor.
Based on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the Internal Revenue
Service would not require a greater amount of income to be allocated to
securityholders. Moreover, even under the foregoing method of allocation,
securityholders may be allocated income equal to the entire Interest Rate plus
the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Securities on the accrual basis and securityholders may become liable for taxes
on Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay those taxes.
Part or all of the taxable income allocated to a securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
master servicer but not interest expense) allocable to an individual, estate or
trust securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--Grantor Trust Funds--Standard
Securities--General." Accordingly, those deductions might be disallowed to the
individual in whole or in part and might result in that holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to that
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization for each mortgage loan would be
calculated in a manner similar to the description above under "--Grantor Trust
Funds--Standard Securities--General" and "--Premium and Discount."
Notwithstanding that description, it is intended that the Partnership Trust Fund
will make all tax calculations relating to income and allocations to
securityholders on a total basis for all mortgage loans held by the Partnership
Trust Fund rather than on a mortgage loan-by-mortgage loan basis. If the
Internal Revenue Service were to require that these calculations be made
separately for each mortgage loan, the Partnership Trust Fund might be required
to incur additional expense, but it is believed that there would not be a
material adverse effect on securityholders.
(3) Discount and Premium
It is not anticipated that the mortgage loans will have been issued with
original issue discount and, therefore, the Partnership Trust Fund should not
have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the mortgage loans may be greater or less than the
remaining principal balance of the mortgage loans at the time of purchase. If
so, the mortgage loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on a total basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis.)
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If that termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Those interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
specific technical requirements that might apply when the constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
tax penalties and may incur additional expenses if it is required to comply with
those requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data.
(5) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A securityholder's
tax basis in an Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includible in
income) and decreased by any distributions received with respect to that
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single total adjusted tax basis in those
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of that total tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to those special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a securityholder is required to recognize a total amount of income (not
including income attributable to disallowed itemized deductions described above)
over the life of the Partnership Securities that exceeds the total cash
distributions with respect to the Partnership Securities, that excess will
generally give rise to a capital loss upon the retirement of the Partnership
Securities.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of that Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the securityholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
(7) Section 731 Distributions
In the case of any distribution to a securityholder, no gain will be
recognized to that securityholder to the extent that the amount of any money
distributed for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a securityholder, no
loss will be recognized except upon a distribution in liquidation of a
securityholder's interest. Any gain or loss recognized by a securityholder will
be capital gain or loss.
(8) Section 754 Election
If a securityholder sells its Partnership Securities at a profit (loss),
the purchasing securityholder will have a higher (lower) basis in the
Partnership Securities than the selling securityholder had. The tax basis of the
Partnership Trust Fund's assets would not be adjusted to reflect that higher (or
lower) basis unless the Partnership Trust Fund were to file an election under
Section 754 of the Code. To avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Partnership Trust Fund will not make
that election. As a result, securityholder might be allocated a greater or
lesser amount of Partnership Trust Fund income than would be appropriate based
on their own purchase price for Partnership Securities.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. These books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The trustee will file a
partnership information return (Form 1065) with the Internal Revenue Service for
each taxable year of the Partnership Trust Fund and will report each
securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The trustee
will provide the Schedule K-1 information to nominees that fail to provide the
Partnership Trust Fund with the information statement described below and these
nominees will be required to forward that information to the beneficial owners
of the Partnership Securities. Generally, holders must file tax returns that are
consistent with the information return filed by the Partnership Trust Fund or be
subject to penalties unless the holder notifies the Internal Revenue Service of
all those inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing information on
the nominee, the beneficial owners and the Partnership Securities so held. This
information includes (1) the name, address and taxpayer identification number of
the nominee and (2) as to each beneficial owner
(a) the name, address and identification number of that person,
(b) whether that 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
(c) information on Partnership Securities that were held, bought or sold
on behalf of that person throughout the year.
In addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish that
information statement to the Partnership Trust Fund. The information referred to
above for any calendar year must be furnished to the Partnership Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Partnership Trust Fund with the information described
above may be subject to penalties.
Unless another designation is made, the depositor will be designated as the
tax matters partner in the pooling and servicing agreement and, as the tax
matters partner, will be responsible for representing the securityholders in any
dispute with the Internal Revenue Service. 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 until three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the Partnership Trust Fund by the appropriate taxing authorities could result in
an adjustment of the returns of the securityholders, and, under some
circumstances, a securityholder may be precluded from separately litigating a
proposed adjustment to the items of the Partnership Trust Fund. An adjustment
could also result in an audit of a securityholder's returns and adjustments of
items not related to the income and losses of the Partnership Trust Fund.
(10) Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership 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 Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this prospectus. Although it is not expected that the Partnership
Trust Fund would be engaged in a trade or business in the United States for
those purposes, the Partnership Trust Fund will withhold as if it were so
engaged to protect the Partnership Trust Fund from possible adverse consequences
of a failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to securityholders who are
Non-U.S. Persons pursuant to Section 1446 of the Code, as if that income were
effectively connected to a U.S. trade or business, at a rate of 35% for Non-U.S.
Persons that are taxable as corporations and 39.6% for all other foreign
holders. Amounts withheld will be deemed distributed to the Non-U.S. Person
securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Partnership Trust Fund may rely on Form W-8, Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each Non-U.S. Person holder 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 Partnership Trust Fund's income. Each Non-U.S.
Person holder must obtain a taxpayer identification number from the Internal
Revenue Service and submit that number to the Partnership Trust Fund on Form W-8
to assure appropriate crediting of the taxes withheld. A Non-U.S. Person holder
generally would be entitled to file with the Internal Revenue Service a claim
for refund for taxes withheld by the Partnership Trust Fund, taking the position
that no taxes were due because the Partnership Trust Fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
securityholder who is a Non-U.S. Person generally will be considered guaranteed
payments to the extent that those payments are determined without regard to the
income of the Partnership Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest may not be considered
"portfolio interest." As a result, securityholders who are Non-U.S. Persons may
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 that
case, a Non-U.S. Person holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld for the
guaranteed payments.
(11) Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
31% if, in general, the securityholder fails to comply with specific
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Securities and Debt
Securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Securities offered under this prospectus. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors for the various tax consequences of investments in the Securities
offered under this prospectus.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose specific requirements on employee benefit plans and on some
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which these plans, accounts or arrangements are invested, that are
subject to Title I of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries for those Plans in connection with the investment of
Plan assets. Some employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not subject
to ERISA requirements. Therefore, assets of these plans may be invested in
Securities without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal, state and local law. Any of these
plans that is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries general fiduciary requirements,
including those of investment prudence and diversification and the requirement
that a Plan's investments be made in accordance with the documents governing the
Plan. In addition, ERISA and the Code prohibit a broad range of transactions
involving assets of a Plan and persons ("Parties in Interest") who have
specified relationships to the Plan unless a statutory or administrative
exemption is available. Some Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transactions generally are set forth in Sections 406
and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the mortgage loans, contracts,
unsecured home improvement loans, Agency Securities, Mortgage Securities and
other assets included in a related trust fund to be deemed Plan assets. Section
2510.3-101 of the regulations of the United States Department of Labor ("DOL")
provides that when a Plan acquires an equity interest in an entity, the Plan's
assets include both an equity interest and an undivided interest in each of the
underlying assets of the entity, unless exceptions not applicable here apply, or
unless the equity participation in the entity by "benefit plan investors" (i.e.,
Plans and employee benefit plans not subject to ERISA) is not "significant,"
both as defined in of these regulations. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. To the extent the Securities are treated as equity
interests for purposes of DOL regulations Section 2510.3-101, equity
participation in a trust fund will be significant on any date if immediately
after the most recent acquisition of any Security, 25% or more of any class of
Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice for those assets for a fee, is a fiduciary of the investing Plan. If the
mortgage loans, contracts, unsecured home improvement loans, Agency Securities,
Mortgage Securities and other assets included in a trust fund constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets, such as the servicer or master servicer, may be deemed to be a
Plan "fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code for the investing Plan.
In addition, if the mortgage loans, contracts, unsecured home improvement loans,
Agency Securities, Mortgage Securities and other assets included in a trust fund
constitute Plan assets, the purchase of Securities by a Plan, as well as the
operation of the trust fund, may constitute or involve a prohibited transaction
under ERISA and the Code.
The DOL issued an individual exemption (the "Exemption"), to DBSI that
generally exempts from the application of the prohibited transaction provisions
of Sections 406(a) and 407 of ERISA, and the excise taxes imposed on those
prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
particular transactions, among others, relating to the servicing and operation
of mortgage pools and the purchase, sale and holding of Securities underwritten
by an underwriter, that (1) represent a beneficial ownership interest in the
assets of a trust fund and entitle the holder the pass-through payments of
principal, interest and/or other payments made with respect to the assets of the
trust fund or (2) are denominated as a debt instrument and represent an interest
in a REMIC, provided that conditions set forth in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term "underwriter"
will include
(a) DBSI,
(b) any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with DBSI, and
(c) any member of the underwriting syndicate or selling group of which a
person described in (a) or (b) is a manager or co-manager for a class
of Securities.
The Exemption sets forth six general conditions that must be satisfied for
a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief under the Exemption:
(1) The acquisition of Securities by a Plan must be on terms 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 Exemption only applies to Securities evidencing rights and
interests not subordinated to the rights and interests evidenced by the
other Securities of the same series.
(3) The Securities at the time of acquisition by the Plan must be
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating
Co. ("DCR") or Fitch IBCA, Inc. ("Fitch").
(4) The trustee cannot be an affiliate of any member of the
"Restricted Group," which consists of the underwriter, the depositor, the
trustee, the master servicer, any servicer, any insurer and any obligor on
Assets constituting more than 5% of the total unamortized principal balance
of the Assets in the related trust fund as of the date of initial issuance
of the Securities.
(5) The sum of all payments made to and retained by the underwriter(s)
must represent not more than reasonable compensation for underwriting the
Securities; the sum of all payments made to and retained by the depositor
pursuant to the assignment of the Assets to the related trust fund must
represent not more than the fair market value of those obligations; and the
sum of all payments made to and retained by the servicer must represent not
more than reasonable compensation for that person's services under the
related Agreement and reimbursement of that person's reasonable expenses in
connection with the related Agreement.
(6) The investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities Act
of 1933, as amended.
In addition, the trust fund must meet the following requirements:
(1) the assets of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
(2) securities evidencing interests in those other investment pools must
have been rated in one of the three highest generic rating categories
by S&P, Moody's, DCR, or Fitch for at least one year before the Plan's
acquisition of the securities; and
(3) securities evidencing interests in those other investment pools must
have been purchased by investors other than Plans for at least one
year before any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied for
that Security. However, to the extent Securities are subordinate, the Exemption
will not apply to an investment by a Plan. In addition, any Securities
representing a beneficial ownership interest in unsecured home improvement loans
revolving credit line loans will not satisfy the general conditions of the
Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 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, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Securities 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
Security on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of that
Excluded Plan. For purposes of the Securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If specific conditions of the Exemption are also satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(b)(1) and
(2) of ERISA and the taxes imposed by Sections 4975(a) and (b) of the Code by
reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in
the initial issuance of Securities between the depositor or an underwriter
and a Plan when the person who has discretionary authority or renders
investment advice with respect to the investment of Plan assets in the
Securities is (a) an obligor with respect to 5% or less of the fair market
value of the Assets or (b) an affiliate of that person;
(2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan; and
(3) the holding of Securities by a Plan.
Further, if specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 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. The
depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied for the Securities so that the Exemption would
provide an exemption from the restrictions imposed by Sections 406(a) and (b) of
ERISA (as well as the excise 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 Mortgage Pools, provided
that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if those restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having specified relationships to that person) solely
as a result of the Plan's ownership of Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
Securities ("Non-Equity Securities") would not cause the assets included in a
related trust fund to be deemed Plan assets. However, the depositor, the
servicer, the trustee, or underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because these parties may receive
benefits in connection with the sale of Non-Equity Securities, the purchase of
Non-Equity Securities using Plan assets over which any of these parties has
investment authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be available.
Accordingly, Non-Equity Securities may not be purchased using the assets of any
Plan if any of the depositor, the servicer, the trustee or underwriter has
investment authority for those assets.
In addition, affiliates of the depositor might be considered or might
become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to some Plans,
including but not limited to Plans sponsored by that holder. In either case, the
acquisition or holding of Non-Equity Securities by or on behalf of that Plan
could be considered to give rise to an indirect prohibited transaction within
the meaning of ERISA and the Code, unless it is subject to one or more statutory
or administrative exemptions such as Prohibited Transaction Class Exemption
("PTCE") 84-14, which exempts transactions effected on behalf of a Plan by a
"qualified professional asset manager," PTCE 90-1, which exempts transactions
involving insurance company pooled separate accounts, PTCE 91-38, which exempts
transactions involving bank collective investment funds, PTCE 95-60, which
exempts transactions involving insurance company general accounts, or PTCE
96-23, which exempts transactions effected on behalf of a Plan by "in-house"
asset managers. It should be noted, however, that even if the conditions
specified in one or more of these exemptions are met, the scope of relief
provided by these exemptions may not necessarily cover all acts that might be
construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to that investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection with the Exemption. In
particular, a Plan fiduciary that proposes to cause a Plan to purchase
Securities representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, a Plan fiduciary should consider
the applicability of PTCE 83-1, which provides exemptive relief for transactions
involving mortgage pool investment trusts. The prospectus supplement for a
series of Securities may contain additional information regarding the
application of the Exemption, PTCE 83-1 or any other exemption, with respect to
the Securities offered by the prospectus supplement. In addition, any Plan
fiduciary that proposes to cause a Plan to purchase Strip Securities should
consider the federal income tax consequences of that investment.
Any Plan fiduciary considering whether to purchase a Security 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 that investment.
The sale of Securities to a Plan is in no respect a representation by the
depositor or the underwriter that this investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
PRE-FUNDING ACCOUNTS
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which extends exemptive relief to some mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows Assets
supporting payments to securityholders, and having a value equal to no more than
25% of the total initial Security Balance of the related Securities, to be
transferred to the trust fund within the Pre-Funding Period, instead of
requiring that all the Assets be either identified or transferred on or before
the Closing Date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Securities being offered (the
"Pre-Funding Limit") must not exceed 25%.
(2) All Subsequent Assets must meet the same terms and conditions for
eligibility as the original Assets used to create the trust fund, which
terms and conditions have been approved by at least one rating agency.
(3) The transfer of the Subsequent Assets to the trust fund during the
Pre-Funding Period must not result in the Securities that are to be covered
by the Exemption receiving a lower credit rating from a rating agency upon
termination of the Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the Securities by the trust fund.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Assets 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 Assets transferred to the
trust fund on the Closing Date.
(5) In order to ensure that the characteristics of the Subsequent
Assets are substantially similar to the original Assets that were
transferred to the trust fund,
o the characteristics of the Subsequent Assets must be monitored by
an insurer or other credit support provider that is independent
of the depositor; or
o an independent accountant retained by the depositor must provide
the depositor with a letter (with copies provided to each rating
agency rating the Securities, the underwriter and the trustee)
stating whether or not the characteristics of the Subsequent
Assets conform to the characteristics described in the related
prospectus supplement and/or pooling and servicing agreement. In
preparing this letter, the independent accountant must use the
same type of procedures as were applicable to the Assets
transferred to the trust fund 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 some circumstances) if the
Pre-Funding Account falls below the minimum level specified in the pooling
and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to the Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in Permitted Investments.
(8) The prospectus or prospectus supplement must describe:
o the Pre-Funding Account and/or Capitalized Interest Account used
in connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding Limit for
the trust fund; and
o that the amounts remaining in the Pre-Funding Account at the end
of the Pre-Funding Period will be remitted to securityholders as
repayments of principal.
(9) The Agreement must prescribe the permitted investments for the
Pre-Funding Account and/or Capitalized Interest Account and, if not
disclosed in the prospectus supplement, the terms and conditions for
eligibility of Subsequent Assets.
LEGAL INVESTMENT
The prospectus supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"). Generally, only
classes of Offered Securities that (1) are rated in one of the two highest
rating categories by one or more rating agencies and (2) are part of a series
representing interests in, or secured by, a trust fund consisting of loans
secured by first liens on real property and originated by particular types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
Those classes of Offered Securities qualifying as "mortgage related
securities" will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, state chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality of the United States constitute legal investments for those
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut-off for those enactments, limiting to varying
extents the ability of some entities (in particular, insurance companies) to
invest in mortgage related securities secured by liens on residential, or mixed
residential and commercial, properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in these securities, and national
banks may purchase these securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
ss.24 (Seventh), subject in each case to regulations that the applicable federal
regulatory authority may prescribe. In this connection, the Office of the
Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. ss.1.5), some "Type IV securities,"
defined in 12 C.F.R. ss.1.2(l) to include some "residential mortgage related
securities." As so defined, "residential mortgage-related security" means, in
relevant part, "mortgage related security" within the meaning of SMMEA. The
National Credit Union Administration ("NCUA") has adopted rules, codified at 12
C.F.R. Part 703, which permit federal credit unions to invest in "mortgage
related securities" under some limited circumstances, other than stripped
mortgage related securities, residual interests in mortgage related securities,
and commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140. Thrift institutions that are subject to the
jurisdiction of the Office of Thrift Supervision (the "OTS") should consider the
OTS' Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk,
Investment Securities, and Derivatives Activities," before investing in any of
the Offered Securities.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and by the
NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Securities offered pursuant to this prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
classes under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase these Offered Securities,
may be subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Securities, as some classes or subclasses may be deemed unsuitable investments,
or may otherwise be restricted, under those rules, policies or guidelines (in
some instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Securities issued in
book-entry form, provisions that may restrict or prohibit investments in
securities that are issued in book-entry form.
Except as to the status of some classes of Offered Securities as "mortgage
related securities," no representation is made as to the proper characterization
of the Offered Securities for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Securities under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Offered Securities) may adversely affect the liquidity of the Offered
Securities.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Securities of any class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to that investor.
METHODS OF DISTRIBUTION
The Securities offered by this prospectus and by the supplements to this
prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If
specified in the prospectus supplement, the Securities will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securities Inc. ("DBSI") acting as
underwriter with other underwriters, if any, named in the underwriting
agreement. In that event, the prospectus supplement may also specify that the
underwriters will not be obligated to pay for any Securities agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The prospectus supplement
will describe any compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by DBSI acting as agent or in some cases as principal with
respect to Securities that it has previously purchased or agreed to purchase. If
DBSI acts as agent in the sale of Securities, DBSI will receive a selling
commission for each series of Securities, depending on market conditions,
expressed as a percentage of the total principal balance of the related mortgage
loans as of the Cut-off Date. The exact percentage for each series of Securities
will be disclosed in the prospectus supplement. To the extent that DBSI elects
to purchase Securities as principal, DBSI may realize losses or profits based
upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Securities
of that series.
The depositor will indemnify DBSI and any underwriters against particular
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBSI and any underwriters may be required to make in
respect of these civil liabilities.
In the ordinary course of business, DBSI and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of those mortgage loans or interests in those mortgage loans, including the
Securities. DBSI performs management services for the depositor.
The depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of those purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. securityholders should consult
with their legal advisors in this regard before any reoffer or sale of
Securities.
As to each series of Securities, only those classes rated in one of the
four highest rating categories by any rating agency will be offered by this
prospectus. Any lower rated or unrated class may be initially retained by the
depositor, and may be sold by the depositor at any time to one or more
institutional investors.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the
Securities (the "Registration Statement"). This prospectus, which forms a part
of the Registration Statement, omits some of the information contained in the
Registration Statement pursuant to the rules and regulations of the Commission.
The Registration Statement and the exhibits to the Registration Statement can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at Regional
Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits to
the Registration Statement, through the EDGAR system and therefore these
materials should be available by logging onto the Commission's web site. The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae certificates
and Fannie Mae's annual report and quarterly financial statements as well as
other financial information are available from the Director of Investor
Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The Depositor did not participate in the preparation of Fannie
Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates as
well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac may
be obtained by writing or calling the Investor Inquiry Department of Freddie Mac
at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-3672; within Washington, D.C. metropolitan
area, telephone 703-759-8160). The Depositor did not participate in the
preparation of Freddie Mac's Offering Circular, Information Statement or any
supplement to the Information Statement or any quarterly report of the
Information Statement and, accordingly, makes no representation as to the
accuracy or completeness of the information in those documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund referred
to in the 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 that trust
fund will 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 those documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference in this prospectus will be deemed to be modified or superseded for all
purposes of this prospectus to the extent that a statement contained in this
prospectus (or in the prospectus supplement) or in any other subsequently filed
document that also is or is deemed to be incorporated by reference modifies or
replaces that statement. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
The Trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, upon request, 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 the exhibits are specifically incorporated by
reference into the information that this prospectus incorporates). Requests for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
securityholders of an investment in the Securities of a series, will be passed
upon for the depositor by Brown & Wood LLP, Washington, D.C.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of Securities and no trust
fund will engage in any business activities or have any assets or obligations
before the issuance of the related series of Securities. Accordingly, financial
statements for a trust fund will generally not be included in this prospectus or
in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Securities, they
must not be rated lower than investment grade; that is, they must be rated in
one of the four highest rating categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by securityholders of all distributions on the
underlying mortgage loans. These ratings address the structural, legal and
issuer-related aspects associated with the Securities, the nature of the
underlying assets and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates, mortgage-backed notes and other asset backed
securities do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped interest
certificates in extreme cases might fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
<PAGE>
INDEX OF DEFINED TERMS
1986 Act......................................................................97
1998 Policy Statement........................................................147
Accrual Period................................................................19
Accrual Securities............................................................26
Accrued Security Interest.....................................................29
Adjustable Rate Assets.........................................................2
Agency Securities..............................................................2
Agreemen......................................................................42
ARM Loans......................................................................6
Asset Conservation Act........................................................82
Asset Group...................................................................26
Asset Seller...................................................................2
Assets.........................................................................2
Available Distribution Amount.................................................27
Balloon Payment Assets.........................................................3
Bankruptcy Code...............................................................80
Beneficial Owner..............................................................35
Bi-weekly Assets...............................................................3
Book-Entry Securities.........................................................27
borrower......................................................................71
Buy Down Assets................................................................3
Buydown Funds.................................................................95
Buydown Mortgage Loans........................................................22
Buydown Period................................................................22
Capitalized Interest Account..................................................17
Cash Flow Agreement...........................................................18
Cedel.........................................................................35
CERCLA........................................................................81
Certificates..................................................................26
Charter Act...................................................................12
Code..........................................................................91
Collection Account............................................................46
Commission.....................................................................6
contract borrower.............................................................74
contract lender...............................................................74
Convertible Assets.............................................................3
Cooperative...................................................................72
Cooperative Corporation.......................................................37
Cooperative Loans.............................................................72
Cooperatives...................................................................4
Covered Trust.................................................................68
CPR...........................................................................21
credit support................................................................17
Crime Control Act.............................................................86
Cut-off Date...................................................................5
DBS..........................................................................148
DCR..........................................................................141
Debt Securities...............................................................92
defective obligation..........................................................94
Definitive Securities.........................................................26
Determination Date............................................................27
Disqualified Holder..........................................................122
Disqualified Organization....................................................111
Distribution Date.............................................................19
DOL..........................................................................140
DTC...........................................................................35
Due Period....................................................................27
EDGAR........................................................................149
Eligible Corporation.........................................................122
ERISA........................................................................140
Euroclear.....................................................................35
Euroclear Operator............................................................37
European Depositaries.........................................................38
excess servicing.............................................................127
Exchange Act..................................................................36
Excluded Plan................................................................142
Exemption....................................................................141
Fannie Mae.....................................................................2
FASIT.........................................................................91
FASIT Ownership Security.....................................................119
FASIT Provisions..............................................................91
FASIT Regular Securities.....................................................119
FASIT Securities..............................................................91
FDIC..........................................................................46
FFIEC........................................................................147
FHA............................................................................5
Financial Intermediary........................................................38
Fitch........................................................................141
Freddie Mac....................................................................2
Freddie Mac Act...............................................................13
Freddie Mac Certificate Group.................................................13
Garn-St. Germain Act..........................................................83
GEM Assets.....................................................................3
Ginnie Mae.....................................................................2
GPM Assets.....................................................................3
Grantor Trust Fund............................................................91
Grantor Trust Securities......................................................91
Home Equity Loans..............................................................4
Housing Act...................................................................10
HUD...........................................................................55
Increasing Payment Asset.......................................................3
Indirect Participants.........................................................36
Insurance Proceeds............................................................28
Interest Rate.................................................................28
Interest Reduction Assets......................................................3
land sale contract............................................................74
Land Sale Contracts............................................................4
Level Payment Assets...........................................................2
Liquidation Proceeds..........................................................28
Loan-to-Value Ratio............................................................5
Lock-out Date..................................................................7
Lock-out Period................................................................7
Mark to Market Regulations...................................................113
Mortgage Securities............................................................2
Mortgaged Properties...........................................................4
Mortgages......................................................................5
NCUA.........................................................................146
new partnership..............................................................136
New Regulations..............................................................117
Non-Equity Securities........................................................143
Non-Pro Rata Security.........................................................97
Nonrecoverable Advance........................................................31
Non-U.S. Person..............................................................117
Notes.........................................................................26
OCC..........................................................................146
Offered Securities............................................................26
OID Regulations...........................................................92, 97
old partnership..............................................................136
Participants..................................................................36
Parties in Interest..........................................................140
Partnership Securities........................................................92
Partnership Trust Fund........................................................92
Pass-Through Entity..........................................................111
PCBs..........................................................................81
Permitted Investments.........................................................46
Plans........................................................................140
pooling and servicing agreement...............................................41
Pre-Funded Amount.............................................................16
Pre-Funding Account...........................................................16
Pre-Funding Limit............................................................144
Pre-Funding Period............................................................16
prepayment....................................................................21
Prepayment Assumption.........................................................98
PTCE.........................................................................143
Purchase Price................................................................43
RCRA..........................................................................82
Record Date...................................................................27
Refinance Loans................................................................5
Registration Statement.......................................................149
Regular Securities............................................................93
Regular Securityholder........................................................97
Related Proceeds..............................................................31
Relevant Depositary...........................................................38
Relief Act....................................................................86
REMIC.........................................................................91
REMIC Pool....................................................................92
REMIC Regulations.............................................................92
REMIC Securities..............................................................41
REO Property..................................................................33
Residual Securities...........................................................93
Restricted Group.............................................................141
Retained Interest.............................................................57
Revolving Credit Line Loans....................................................7
RICO..........................................................................86
Rules.........................................................................38
S&P..........................................................................141
SBJPA of 1996.................................................................96
secured-creditor exemption....................................................82
Securities....................................................................26
Security Balance..............................................................29
Senior Securities.............................................................26
Servicemen's Readjustment Act.................................................16
Servicing Standard............................................................50
Single Family Property.........................................................4
SMMEA........................................................................146
SPA...........................................................................21
Special servicer..............................................................60
Standard Securities..........................................................125
Startup Day...................................................................93
Step-up Rate Assets............................................................3
Strip Securities..............................................................26
Stripped Agency Securities....................................................14
Stripped Securities..........................................................124
Subordinate Securities........................................................26
Subsequent Assets.............................................................16
Superliens....................................................................81
super-premium.................................................................98
Taxable Mortgage Pools........................................................92
Terms and Conditions..........................................................38
thrift institutions..........................................................109
Tiered REMICs.................................................................96
Title V.......................................................................84
Title VIII....................................................................85
U.S. Person..................................................................112
UCC...........................................................................36
UST...........................................................................82
VA.............................................................................5
VA Guaranty Policy............................................................56
Value..........................................................................5
Warranting Party..............................................................45
Yield Considerations..........................................................29
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
----------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the glossary of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The notes will represent obligations of the trust only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
The trust will issue the following notes:
ORIGINAL CLASS INTEREST PRICE UNDERWRITING PROCEEDS
CLASS PRINCIPAL AMOUNT(1) RATE(2) TO PUBLIC DISCOUNT TO DEPOSITOR
----- ------------------- -------- --------- ------------ ------------
[ ] $[ ] [ ]% $[ ] [ ]% $[ ]
_______________
(1) This amount is approximate, as described in this prospectus supplement.
(2) The interest rate is subject to increase as described in this prospectus
supplement.
This prospectus supplement and the accompanying prospectus relate only to
the offering of the notes and not to the residual certificate that will be
issued by the trust as described in this prospectus supplement.
[Describe assets of trust fund.]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Describe underwriting arrangements.]
On or about [ ], delivery of the notes offered by this prospectus
supplement will be made through the book-entry facilities of The Depository
Trust Company.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this prospectus
supplement in two separate documents that progressively provide more detail: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your notes, and (2) this prospectus supplement, which describes
the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
____________________
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
____________________
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following tables of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms..............................................................S-
The Offered Notes..........................................................S-
The Mortgage Loans.........................................................S-
[The Pre-Funding Account...................................................S-
Servicing of the Mortgage Loans............................................S-
Optional Purchase of Mortgage Loans........................................S-
Tax Status.................................................................S-
ERISA Considerations.......................................................S-
Legal Investment Considerations............................................S-
Ratings of the Notes.......................................................S-
Risk Factors..................................................................S-
Unpredictability and Effect of Prepayments.................................S-
[Effect of Creation and Maintenance of Overcollateralization on
Payments of Principal on the Notes............. ...........................S-
Geographic Concentration of Mortgage loans.................................S-
[Some of the Loans in the Mortgage Pool Are More Likely to Default
Than Others, And Higher Than Expected Defaults On These Loans could
Reduce the Yield On Your Notes.............................................S-
[Effect of Lack of Primary Mortgage Insurance on the Notes.................S-
Real Estate Market May Affect Performance of Mortgage Loans................S-
[Early Principal Payment From Cash Remaining in Pre-Funding Account........S-
You Will Not Receive Physical Notes, Which Can Cause Delays In
Distributions and Hamper Your Ability to Pledge or Resell Your Notes.......S-
Potential Disruption of Computer Systems...................................S-
Limited Ability to Resell Notes............................................S-
Description of the Trust......................................................S-
General....................................................................S-
The Owner Trustee..........................................................S-
The Residual Certificate...................................................S-
Description of the Notes......................................................S-
General....................................................................S-
[Pre-Funding Account.......................................................S-
Book-Entry Registration....................................................S-
Payments...................................................................S-
Payment Priorities.........................................................S-
Overcollateralization......................................................S-
Maturity Date..............................................................S-
Reports to Noteholders.....................................................S-
Optional Redemption........................................................S-
Rights of Noteholders Upon Occurrence of Event of Default..................S-
The Indenture Trustee......................................................S-
[The Insurance Policy.........................................................S-
The Insurer................................................................S-
Insurer Financial Information..............................................S-
Where You Can Obtain Additional Information About the Insurer..............S-
Year 2000 Readiness Disclosure.............................................S-
Financial Strength Ratings of the Insurer..................................S-
The Insurance Policy.......................................................S-
Description of the Mortgage Pool..............................................S-
General....................................................................S-
Payments on the Mortgage Loans.............................................S-
Characteristics of the Mortgage Loans......................................S-
[Subsequent Mortgage Loans.................................................S-
Additional Information........................................................S-
The Originator................................................................S-
General....................................................................S-
Underwriting Criteria......................................................S-
The Servicer..................................................................S-
General....................................................................S-
Year 2000 Compliance.......................................................S-
Description of the Transfer and Servicing Agreements..........................S-
Sale and Assignment of the Mortgage Loans..................................S-
Trust Fees and Expenses....................................................S-
Voting Rights..............................................................S-
General Servicing Provisions...............................................S-
No Delinquency Advances....................................................S-
Servicing Advances.........................................................S-
Insurance Coverage.........................................................S-
Evidence as to Compliance..................................................S-
Servicing Compensation and Payment of Expenses.............................S-
Subservicing...............................................................S-
Resignation or Removal of the Servicer.....................................S-
Collection Account, Note Distribution Account and Certificate
Distribution Account.......................................................S-
The Owner Trustee and Indenture Trustee....................................S-
Duties of the Owner Trustee and Indenture Trustee..........................S-
Yield Considerations..........................................................S-
General....................................................................S-
Overcollateralization......................................................S-
Maturity Date..............................................................S-
Weighted Average Life......................................................S-
Material Federal Income Tax Considerations....................................S-
General....................................................................S-
Certain U.S. Federal Income Tax Documentation Requirements................S-
State Income Tax Considerations...............................................S-
ERISA Considerations..........................................................S-
Legal Investment Considerations...............................................S-
Use of Proceeds...............................................................S-
Underwriting..................................................................S-
Experts.......................................................................S-
Legal Matters.................................................................S-
Ratings.......................................................................S-
Glossary of Defined Terms.....................................................S-
<PAGE>
PROSPECTUS
PAGE
Description of the Trust Funds..................................................
Assets.......................................................................
Mortgage Loans...............................................................
Contracts....................................................................
Agency Securities............................................................
Mortgage Securities..........................................................
FHA Loans and VA Loans.......................................................
Pre-Funding Accounts.........................................................
Accounts.....................................................................
Credit Support...............................................................
Cash Flow Agreements.........................................................
Use of Proceeds.................................................................
Yield Considerations............................................................
General......................................................................
Interest Rate................................................................
Timing of Payment of Interest................................................
Payments of Principal; Prepayments...........................................
Prepayments--Maturity and Weighted Average Life.................................
Other Factors Affecting Weighted Average Life...................................
The Depositor...................................................................
Description of the Securities...................................................
General......................................................................
Distributions................................................................
Available Distribution Amount................................................
Distributions of Interest on the Securities..................................
Distributions of Principal of the Securities.................................
Components...................................................................
Distributions on the Securities of Prepayment Premiums..........................
Allocation of Losses and Shortfalls..........................................
Advances in Respect of Delinquencies............................................
Reports to Securityholders...................................................
Termination..................................................................
Optional Purchases...........................................................
Book-Entry Registration and Definitive Securities...............................
Description of the Agreements...................................................
Agreements Applicable to a Series............................................
Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements...........................................
Material Terms of the Indenture..............................................
Description of Credit Support...................................................
General.........................................................................
Subordinate Securities.......................................................
Cross-Support Provisions.....................................................
Limited Guarantee............................................................
Financial Guaranty Insurance Policy or Surety Bond..............................
Letter of Credit.............................................................
Pool Insurance Policies......................................................
Special Hazard Insurance Policies............................................
Borrower Bankruptcy Bond.....................................................
Reserve Funds................................................................
Overcollateralization........................................................
Certain Legal Aspects of Mortgage Loans.........................................
General......................................................................
Types of Mortgage Instruments................................................
Interest in Real Property....................................................
Cooperative Loans............................................................
Land Sale Contracts..........................................................
Foreclosure..................................................................
Junior Mortgages.............................................................
Anti-Deficiency Legislation and Other Limitations on Lenders.................
Environmental Considerations.................................................
Due-on-Sale Clauses..........................................................
Prepayment Charges...........................................................
Subordinate Financing........................................................
Applicability of Usury Laws..................................................
Alternative Mortgage Instruments.............................................
Soldiers' and Sailors' Civil Relief Act of 1940..............................
Forfeitures in Drug and RICO Proceedings.....................................
Certain Legal Aspects of the Contracts..........................................
General......................................................................
Security Interests in the Manufactured Homes.................................
Enforcement of Security Interests in Manufactured Homes......................
Soldiers' and Sailors' Civil Relief Act of 1940.................................
Consumer Protection Laws.....................................................
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses...................................................................
Applicability of Usury Laws..................................................
Material Federal Income Tax Considerations......................................
General......................................................................
REMICs.......................................................................
FASITs.......................................................................
Grantor Trust Funds..........................................................
Standard Securities..........................................................
Stripped Securities..........................................................
Partnership Trust Funds......................................................
Consequences for Particular Investors........................................
State and Other Tax Considerations..............................................
ERISA Considerations............................................................
General......................................................................
Pre-Funding Accounts.........................................................
Legal Investment................................................................
Methods of Distribution.........................................................
Additional Information..........................................................
Incorporation of Certain Documents by Reference.................................
Legal Matters...................................................................
Financial Information...........................................................
Rating..........................................................................
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
o WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST, THAT PERCENTAGE HAS BEEN CALCULATED ON THE BASIS OF THE TOTAL
PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF [ ], UNLESS WE SPECIFY
OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER "DESCRIPTION OF
THE NOTES -- RELATED DEFINITIONS" HOW THE PRINCIPAL BALANCE OF A MORTGAGE
LOAN IS DETERMINED. WHENEVER WE REFER IN THIS SUMMARY OF TERMS OR IN THE
RISK FACTORS SECTION OF THIS PROSPECTUS SUPPLEMENT TO THE TOTAL PRINCIPAL
BALANCE OF ANY MORTGAGE LOANS, WE MEAN THE TOTAL OF THEIR PRINCIPAL
BALANCES DETERMINED BY THAT METHOD, UNLESS WE SPECIFY OTHERWISE.
THE OFFERED NOTES
ACE Securities Corp. [ ] Trust [ ] is offering the Class [ ] Asset Backed
Notes as part of Series [ ]. The notes will be issued in book-entry form.
SEE "DESCRIPTION OF THE NOTES -- GENERAL" IN THIS PROSPECTUS SUPPLEMENT FOR
A DISCUSSION OF THE MINIMUM DENOMINATIONS AND THE INCREMENTAL DENOMINATIONS OF
THE NOTES.
The notes will represent obligations of the trust and will be secured by
the assets of the trust, which consist primarily of [describe assets of the
trust.]
The notes will have an approximate total initial principal amount of $[ ].
Any difference between the total principal amount of the notes on the date they
are issued and the approximate total principal amount of the notes on the date
of this prospectus supplement will not exceed 5%.
PAYMENTS ON THE NOTES
Principal and interest on the notes will be payable on the [25]th day of
each month, beginning in [ ]. However, if the [25]th day is not a business day,
payments will be made on the next business day after the [25]th day of the
month.
INTEREST PAYMENTS
Interest will accrue on the notes at the annual rate described in this
prospectus supplement.
SEE "DESCRIPTION OF THE NOTES -- PAYMENTS -- PAYMENTS OF INTEREST" IN THIS
PROSPECTUS SUPPLEMENT.
PRINCIPAL PAYMENTS
The amount of principal payable on the notes will be determined by (1)
funds actually received on the mortgage loans that are available to make
payments on the notes, (2) the amount of interest received on the mortgage loans
that is used to pay principal on the notes, calculated as described in this
prospectus supplement, (3) [the amount of principal received on the mortgage
loans that is released to the residual certificate, calculated as described in
this prospectus supplement,] and (4) [ ]. Funds actually received on the
mortgage loans may consist of expected, scheduled payments, and unexpected
payments resulting from prepayments or defaults by borrowers, liquidation of
defaulted mortgage loans, or repurchases of mortgage loans under the
circumstances described in this prospectus supplement.
WE EXPLAIN HOW PRINCIPAL IS PAID ON THE NOTES UNDER "DESCRIPTION OF THE
NOTES -- PAYMENTS -- PAYMENTS OF PRINCIPAL" IN THIS PROSPECTUS SUPPLEMENT.
The last possible day on which the principal of the notes could become
payable in full is [ ] and is referred to as the maturity date. The notes could
be paid in full before the maturity date.
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the notes will be the assets of the trust. The trust will have no other
source of cash and no entity other than the trust will be required or expected
to make any payments on the notes.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE NOTES
[DESCRIBE ANY APPLICABLE FINANCIAL GUARANTY INSURANCE POLICY OR GUARANTEE.]
[SUBORDINATION OF PAYMENTS
No amounts will be paid to the holder of the residual certificate on any
distribution date until all amounts due to the notes on that date have been paid
and overcollateralization has reached the required level.]
[OVERCOLLATERALIZATION
On the closing date, the total principal balance of the mortgage loans is
expected to exceed the total principal amount of the notes by approximately [
]%. This condition is referred to as "overcollateralization." Any interest
received on the mortgage loans in excess of the amount needed to pay interest on
the notes and some expenses and fees of the trust will be used to reduce the
total principal amount of the notes to a level set by [ ], until the mortgage
loans have a total principal balance that exceeds the total outstanding
principal amount of the notes by the amount required by [ ]. We cannot assure
you that sufficient interest will be generated by the mortgage loans to increase
overcollateralization to the level required by [ ], or to maintain it at that
level.
SEE "DESCRIPTION OF THE NOTES -- OVERCOLLATERALIZATION" IN THIS PROSPECTUS
SUPPLEMENT.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the assets of
the trust will consist primarily of [describe mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT FOR A
GENERAL DESCRIPTION OF THE MORTGAGE LOANS AND "THE ORIGINATOR" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF THE UNDERWRITING GUIDELINES APPLIED
IN ORIGINATING THE MORTGAGE LOANS.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust by the depositor from time to time, from [ ]
until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE NOTES -- PRE-FUNDING ACCOUNT" IN THIS PROSPECTUS
SUPPLEMENT.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
SEE "THE SERVICER" AND "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS" IN THIS PROSPECTUS SUPPLEMENT.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other assets of the trust, after the total principal balance of the mortgage
loans declines to less than [ ]% of their initial total principal balance; if [
] does not exercise that option, [ ] may purchase the mortgage loans and other
assets of the trust.
If the mortgage loans and other assets are purchased, the noteholders will
be paid accrued interest, and principal equal to the outstanding principal
amount of the notes.
SEE "DESCRIPTION OF THE NOTES -- OPTIONAL REDEMPTION" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF THE PURCHASE PRICE TO BE PAID FOR THE MORTGAGE
LOANS.
TAX STATUS
[Tax status to be described as applicable.]
SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS FOR ADDITIONAL INFORMATION
CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS TO THE NOTES.
ERISA CONSIDERATIONS
[To be provided as applicable.]
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR A MORE COMPLETE DISCUSSION OF THESE ISSUES.
LEGAL INVESTMENT CONSIDERATIONS
[The notes will not constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984.]
There are other restrictions on the ability of some types of investors to
purchase the notes that prospective investors should consider.
SEE "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN
THE PROSPECTUS.
RATINGS OF THE NOTES
The notes will initially be rated "[ ]" by [Rating Agency], and "[ ]" by
[Rating Agency].
These ratings are not recommendations to buy, sell or hold these notes. A
rating may be changed or withdrawn at any time by the assigning rating agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your notes may be lower than
anticipated.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR A MORE COMPLETE DISCUSSION
OF THE NOTE RATINGS.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE NOTES.
YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY AND Borrowers may prepay their mortgage
EFFECT OF PREPAYMENTS loans in whole or in part at any time;
however, approximately [ ] of the
mortgage loans require the payment of a
prepayment penalty in connection with
any voluntary prepayment during [ ]. The
prepayment penalties may be waived by
the servicer. A prepayment of a mortgage
loan will usually result in a prepayment
on the notes.
o If you purchase your notes at a
discount and principal is repaid
slower than you anticipate, then
your yield may be lower than you
anticipate.
o If you purchase your notes at a
premium and principal is repaid
faster than you anticipate, then
your yield may be lower than you
anticipate.
The rate at which defaults and losses
occur on the mortgage loans will affect
the rate of payment of principal on the
notes. We encourage you to review the
information in this prospectus
supplement about the underwriting
guidelines applied in originating the
mortgage loans, the credit quality of
the mortgage loans and the collateral
for the mortgage loans.
SEE "YIELD CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION
OF FACTORS THAT MAY INFLUENCE THE RATE
AND TIMING OF PREPAYMENTS ON THE
MORTGAGE LOANS.
[The prepayment experience of the
mortgage loans may differ significantly
from that of first lien residential
mortgage loans, or junior lien mortgage
loans with a principal balance lower
than the value of the related property.]
[EFFECT OF CREATION AND MAINTENANCE We describe in this prospectus
OF OVERCOLLATERALIZATION ON PAYMENTS supplement the underwriting guidelines
OF PRINCIPAL ON THE NOTES used in originating the mortgage loans,
the collateral for the mortgage loans
and the servicing of the mortgage loans.
These and other factors will affect the
rate of defaults and losses on the
mortgage loans, which in turn will
affect the rate at which
overcollateralization is created or
maintained. When overcollateralization
is less than the level required by [ ],
a portion of interest collections on the
mortgage loans will be used to make
principal payments on the notes. This
will accelerate the rate at which you
receive payments of principal. When
overcollateralization is greater than
the level required by [ ], a portion of
principal collections on the mortgage
loans will be released to the residual
certificate. This will slow the rate at
which you receive payments of
principal.]
GEOGRAPHIC CONCENTRATION OF Approximately [ ]% of the mortgage loans
MORTGAGE LOANS expected to be in the trust on the
closing date are secured by properties
in [California]. The rate of
delinquencies and defaults, and
therefore the rate of prepayments, on
the mortgage loans may be higher than if
fewer of the mortgage loans were
concentrated in one state because the
following conditions in [California]
will have a disproportionate impact on
the mortgage loans in general:
o Weak economic conditions in
[California] (which may or may not
affect real property values) may
affect the ability of borrowers to
repay their mortgage loans on time;
o Declines in the [California]
residential real estate market may
reduce the values of properties
located in [California], which
would result in an increase in the
combined loan-to-value ratios;
o Properties in [California] may be
more susceptible than homes located
in other parts of the country to
some types of uninsurable hazards,
such as earthquakes, as well as
floods, mudslides and other natural
disasters; and
o Any increase in the market value of
properties located in [California]
would reduce the combined
loan-to-value ratios of the
mortgage loans and could,
therefore, make alternative sources
of financing available to the
borrowers at lower interest rates,
which could result in an increased
rate of prepayment of the mortgage
loans.
Natural disasters affect regions of the
United States from time to time, and may
result in increased losses on mortgage
loans in those regions, or in insurance
payments that will constitute
prepayments of those mortgage loans.
FOR ADDITIONAL INFORMATION REGARDING THE
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE
LOANS IN THE TRUST, SEE THE APPLICABLE
TABLE UNDER "DESCRIPTION OF THE MORTGAGE
POOL" IN THIS PROSPECTUS SUPPLEMENT.
[SOME OF THE LOANS IN THE MORTGAGE The payment schedules for most of the
POOL ARE MORE LIKELY TO DEFAULT THAN mortgage loans in the pool require the
OTHERS, AND HIGHER THAN EXPECTED borrower to pay off the principal
DEFAULTS ON THESE LOANS COULD REDUCE balance of the loan gradually over the
THE YIELD ON YOUR NOTES life of the loan. Some of the mortgage
loans in the pool, however, have payment
schedules under which the borrowers
makes relatively small payments of
principal over the life of the loan, and
then must make a large final payment at
maturity that pays off the entire
principal balance outstanding. This
final payment is usually much larger
than the previous monthly payments.
Because the borrower's ability to make
this final payment usually depends on
the ability to refinance the loan or
sell the underlying property, the risk
of default is greater than on other
types of loans. High rates of default on
these types of loans in the pool will
result in greater losses on your notes.
The ability of a borrower to refinance
the type of loan described above or sell
the mortgaged property will depend upon
a number of factors, including:
o the level of mortgage interest
rates;
o the borrower's equity in the
mortgage property;
o general economic conditions; and
o the availability of credit.
We cannot predict how these factors will
affect the default rate of these
mortgage loans in the pool. You should
refer to "Description of the Mortgage
Pool" for information on the percentage
of loans in the mortgage pool that
consists of these loans.]
[EFFECT OF LACK OF PRIMARY MORTGAGE Approximately [ ]% of the mortgage loans
INSURANCE ON THE NOTES have loan-to-value ratios greater than
[ ]%. None of the mortgage loans are
covered by a primary mortgage insurance
policy. If borrowers default on their
mortgage loans, there is a greater
likelihood of losses than if the loans
were insured. We cannot assure you that
the applicable credit enhancement will
be adequate to cover those losses.
SEE "DESCRIPTION OF THE NOTES" IN THIS
PROSPECTUS SUPPLEMENT.]
REAL ESTATE MARKET MAY AFFECT A decline in the real estate values or
PERFORMANCE OF MORTGAGE LOANS in economic conditions generally could
increase the rates of delinquencies,
foreclosures and losses on the mortgage
loans to a level that is significantly
higher than those experienced currently;
and no assurance can be given that
values of the properties securing the
mortgage loans will not decline since
the date of origination of the mortgage
loan. If the credit enhancement
described in this prospectus supplement
is not enough to protect your notes from
these losses, the yield on your notes
may be reduced.
[EARLY PRINCIPAL PAYMENT FROM CASH If the cash in the pre-funding account
REMAINING IN PRE-FUNDING ACCOUNT on the closing date is not used to
acquire additional mortgage loans by
[ ], then that cash will be [paid to you
on a proportionate basis with the other
noteholders in reduction of the
principal balance of your notes.] If the
amount of that cash is substantial, you
will receive a significant unexpected
early payment of principal in (or
before) [ ]. We cannot assure you that
you will be able to reinvest that money
in another investment with a comparable
yield.]
YOU WILL NOT RECEIVE PHYSICAL Your ownership of the notes will be
NOTES, WHICH CAN CAUSE DELAYS IN registered electronically with DTC. The
DISTRIBUTIONS AND HAMPER YOUR ABILITY lack of physical notes could:
TO PLEDGE OR RESELL YOUR NOTES
o result in payment delays on the
notes because the indenture trustee
will be sending distributions on
the notes to DTC instead of
directly to you;
o make it difficult for you to pledge
your notes if physical notes are
required by the party demanding the
pledge; and
o could hinder your ability to resell
the notes because some investors
may be unwilling to buy notes that
are not in physical form.
SEE "DESCRIPTION OF THE NOTES --
BOOK-ENTRY REGISTRATION" IN THIS
PROSPECTUS SUPPLEMENT.
POTENTIAL DISRUPTION OF COMPUTER The transition from the year 1999 to the
SYSTEMS year 2000 may interfere with the ability
of computer systems used by the
servicer, the indenture trustee, the
note registrar, The Depository Trust
Company and other parties to process
information, unless modifications to
those systems are completed in time.
This could disrupt collection of
payments on the mortgage loans and
calculation and distribution of payments
on the notes.
LIMITED ABILITY TO RESELL NOTES The underwriter is not required to
assist in resales of the notes, although
it may do so. A secondary market for the
notes may not develop. If a secondary
market does develop, it might not
continue or it might not be sufficiently
liquid to allow you to resell any of
your notes. The certificates will not be
listed on any securities exchange.
[Additional risk factors to be provided as applicable.]
<PAGE>
DESCRIPTION OF THE TRUST
GENERAL
ACE Securities Corp. [ ] Trust [ ] (the "Trust" or the "Issuer") will be a
[statutory business trust] [common law trust] formed under the laws of [ ]
pursuant to an amended and restated Trust Agreement (the "Trust Agreement")
dated as of [ ] (the "Cut-off Date") between ACE Securities Corp. as depositor
(the "Depositor") and [ ] as owner trustee (the "Owner Trustee"), for the
transactions described in this prospectus supplement. The Trust will not engage
in any activity other than acquiring, holding and managing the Mortgage Loans
(as defined in this prospectus supplement) and the other assets of the Trust and
proceeds from the Mortgage Loans and other assets, issuing the Securities (as
defined in this prospectus supplement), making payments on the Securities, and
engaging in related activities.
On or about [ ] (the "Closing Date"), the Trust will purchase the Mortgage
Loans from the Depositor pursuant to a Sale and Servicing Agreement (as amended
and supplemented from time to time, the "Sale and Servicing Agreement") dated as
of the Cut-off Date, among the Trust, the Depositor, the Servicer and [ ], as
indenture trustee (the "Indenture Trustee").
The Trust's principal offices are located in [ ].
THE OWNER TRUSTEE
[ ] will act not in its individual capacity but solely as the Owner Trustee
under the Trust Agreement. [ ] is a [ ] banking corporation and its principal
offices are located at [ ]. The compensation of the Owner Trustee will be paid
by [ ].
THE RESIDUAL CERTIFICATE
The equity interest in the Trust will be represented by a residual interest
certificate (the "Residual Certificate").
The holder of the Residual Certificate (the "Residual Certificateholder,"
and together with the Noteholders (as defined in this prospectus supplement),
the "Securityholders") will be entitled to receive [to be described as
applicable].
DESCRIPTION OF THE NOTES
GENERAL
The Trust will issue the Class [ ] Notes (the "Notes") pursuant to an
Indenture dated as of the Cut-off Date (the "Indenture") between the Issuer and
the Indenture Trustee. The Trust will also issue the Residual Certificate
pursuant to the Trust Agreement. The Notes and the Residual Certificate are
referred to in this prospectus supplement as the "Securities." Only the Notes
are offered by this prospectus supplement. The Notes will be secured by the
Trust Estate (as defined below) pursuant to the Indenture.
The "Trust Estate" will consist primarily of [describe as applicable].
The Notes will be issued in the approximate initial total principal amount
specified on the cover page of this prospectus supplement (the "Original Class
Principal Amount"). The total principal amount of the Notes outstanding at any
time is referred to in this prospectus supplement as the "Class Principal
Amount." The Residual Certificate will be issued without a principal amount or
interest rate, and will be entitled only to the amounts that are described in
this prospectus supplement. The Original Class Principal Amount of the Notes may
be increased or decreased by up to 5% to the extent that the Cut-off Date
Balance (as defined in this prospectus supplement) of the Mortgage Loans is
increased or decreased as described under "Description of the Mortgage Pool" in
this prospectus supplement.
Payments on the Notes will be made on the [25th] day of each month or, if
the [25th] day is not a Business Day, on the next succeeding Business Day,
commencing in [ ] (each, a "Distribution Date"), to holders of Notes
("Noteholders") of record on the applicable Record Date. The "Record Date" for
each Distribution Date will be the close of business on the last Business Day of
the calendar month immediately before the month in which that Distribution Date
occurs.
o A "Business Day" is generally any day other than a Saturday or Sunday
or a day on which banks in [New York] are closed.
Payments on the Notes will be made to each registered holder entitled to
these payments, either (1) by check mailed to the Noteholder's address as it
appears on the books of the Indenture Trustee, or (2) at the request, submitted
to the Indenture Trustee in writing not later than the related Record Date, of
any Noteholder (at the Noteholder's expense) in immediately available funds;
provided, that the final payment for any Note will be made only upon
presentation and surrender of the Note at the Corporate Trust Office (as defined
in this prospectus supplement) of the Indenture Trustee or the office of the
Note Registrar (as defined in this prospectus supplement). See "-- The Indenture
Trustee" in this prospectus supplement.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will be
deposited in an account (the "Pre-Funding Account") maintained by [ ]. During
the period (the "Pre-Funding Period") from [ ] until [ ], the Pre-Funding Amount
will be maintained in the Pre-Funding Account. The Pre-Funded Amount will be
reduced during the Pre-Funding Period by the amount of Subsequent Mortgage Loans
(as defined in this prospectus supplement) purchased by the Trust in accordance
with the [Sale and Servicing Agreement]. During the Pre-Funding Period, the
Pre-Funded Amount will be used only to purchase Subsequent Mortgage Loans.
Immediately following the Pre-Funding Period, any Pre-Funded Amount remaining
will be distributed to [to be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to be
provided as applicable] and all investment earnings on amounts on deposit in the
Pre-Funding Account will be distributed to [to be provided as applicable]
following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Notes (the "Book-Entry Notes") will be issued, maintained and
transferred on the book-entry records of The Depository Trust Company ("DTC") in
the United States [, or through Clearstream Luxembourg, societe anonyme
("Clearstream Luxembourg") or the Euroclear System ("Euroclear") in Europe] and
through [its/their] participating organizations (each, a "Participant"). The
Book-Entry Notes will be issued in minimum denominations in principal amount of
$25,000 and integral multiples of $1 in excess of $25,000.
Each Class of Book-Entry Notes will be represented by one or more
certificates registered in the name of the nominee of DTC. ACE Securities Corp.
(the "Depositor") has been informed by DTC that DTC's nominee will be Cede & Co.
[Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC.] No person acquiring an
interest in a Book-Entry Note (each, a "Beneficial Owner") will be entitled to
receive a certificate representing an interest (a "Definitive Note"), except as
set forth below under "-- Definitive Notes" and in the prospectus under
"Description of the Securities -- Book-Entry Registration and Definitive
Securities -- Definitive Securities."
Unless and until Definitive Notes are issued, it is anticipated that:
o the only "Noteholder" of the Notes will be Cede & Co., as nominee of
DTC, and Beneficial Owners will not be Noteholders as that term is
used in the Indenture.
o Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Notes from the Indenture Trustee through DTC
[, Clearstream Luxembourg or Euroclear, as applicable,] and
[its/their] Participants.
o while the Notes are outstanding, under the rules, regulations and
procedures creating and affecting DTC [Clearstream Luxembourg and
Euroclear] and [its/their] operations, DTC [Clearstream Luxembourg and
Euroclear] [is/are] required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Notes and is
required to receive and transmit distributions of principal of, and
interest on, the Notes. Participants and indirect participants with
whom Beneficial Owners have accounts with respect to Notes are
similarly required to make book-entry transfers and receive and
transmit distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess
certificates, DTC [Clearstream Luxembourg and Euroclear] [has/have] in
place a mechanism by which Beneficial Owners will receive
distributions and will be able to transfer their interest.
None of the Depositor, German American Capital Corporation ("GACC'), the
Servicer , the Owner Trustee or the Indenture Trustee [or additional parties]
(as those terms are defined in this prospectus supplement) 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 Notes held by Cede &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
Some of the computer applications and systems that DTC uses for processing
dates ("Systems") based upon calendar dates, including dates before, on, and
after January 1, 2000, may encounter problems related to the Systems' use of
only two digits to calculate calendar dates ("Year 2000 Problems"). Year 2000
Problems could cause DTC's Systems, as they relate to the timely payment of
distributions (including principal and interest payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, to cease functioning
appropriately. DTC has advised the Depositor that it has developed and is
implementing a technical assessment and remediation plan (which includes a
testing phase) to deal with Year 2000 Problems. However, DTC's ability to
perform its services also depends upon other parties including, among others,
issuers and their agents, third party software and hardware vendors, and third
party service and information providers (including telecommunication and
electrical utility service providers). DTC has advised the Depositor that it is
attempting to determine the extent of the efforts of its vendors to deal with
Year 2000 Problems as they relate to the provision of these services. In
addition, DTC is in the process of developing contingency plans as it deems
appropriate.
For a more complete description of book-entry registration and clearance
and the rules and regulations governing DTC [,Clearstream Luxembourg and
Euroclear], see "Description of the Securities -- Book-Entry Registration and
Definitive Securities" in the prospectus".
DEFINITIVE NOTES. Definitive Notes will be issued to Beneficial Owners or
their nominees, respectively, rather than to DTC or its nominee, only under the
limited conditions set forth in the prospectus under " Description of the
Securities -- Book-Entry Registration and Definitive Securities -- Definitive
Securities." Upon the occurrence of an event described in that section, the
Trustee is required to direct DTC to notify Participants who have ownership of
Book-Entry Notes as indicated on the records of DTC of the availability of
Definitive Notes for their Book-Entry Notes. Upon surrender by DTC of the
Definitive Notes representing the Book-Entry Notes and upon receipt of
instructions from DTC for re-registration, the Trustee will re-issue the
Book-Entry Notes as Definitive Notes in the respective principal amounts owned
by individual Beneficial Owners, and thereafter the Trustee will recognize the
holders of the Definitive Notes as Noteholders under the Indenture and the Sale
and Servicing Agreement.
PAYMENTS
Payments on the Notes on each Distribution Date will be made from the
Available Collection Amount. The Available Collection Amount will be determined
as [to be provided as applicable.]
o With respect to each Distribution Date, the "Due Period" is the
calendar month immediately before that Distribution Date.
PAYMENTS OF INTEREST. Interest on the Class Principal Amount of the Notes
will accrue during each Accrual Period (as defined in this prospectus
supplement) at the interest rate specified on the front cover of this prospectus
supplement (the "Interest Rate") and will be payable to Noteholders on each
Distribution Date, starting in [ ]. [If the Residual Certificateholder does not
exercise its option to purchase the Mortgage Loans and the other assets of the
Trust when it is first entitled to do so, as described under "--Optional
Redemption" in this prospectus supplement, then with respect to each succeeding
Distribution Date the Interest Rate will be increased [to be provided as
applicable.]] See "-- Optional Redemption" in this prospectus supplement.
Interest on the Notes will be calculated on the basis of a 360-day year of
twelve 30-day months.
o The "Accrual Period" for the Notes will be the calendar month
immediately preceding the month in which the related Distribution Date
occurs.
Payments of interest on the Notes will be made from [to be provided as
applicable].
PAYMENTS OF PRINCIPAL. Principal payments will be made to Noteholders on
each Distribution Date in an amount generally equal to [to be provided as
applicable].
o The "Principal Distribution Amount" for any Distribution Date will be
equal to the sum of [to be provided as applicable].
PAYMENT PRIORITIES
On each Distribution Date, the Available Funds will be applied in the
following order of priority:
[to be provided as applicable.]
OVERCOLLATERALIZATION
On the Closing Date the Cut-off Date Balance is expected to exceed the
Original Class Principal Amount of the Notes by approximately $[ ]. The weighted
average Net Mortgage Loan Rate (as defined below) of the Mortgage Loans is
generally expected to be higher than the Interest Rate of the Notes, thus
generating excess interest collections. To the extent described in this
prospectus supplement, Excess Spread will be applied on any Distribution Date as
[to be provided as applicable].
o The "Net Mortgage Loan Rate" for any Mortgage Loan equals [to be
provided as applicable].
MATURITY DATE
The Class Principal Amount of the Notes and all interest accrued and unpaid
on the Notes will be payable in full on [ ] (the "Maturity Date"). See "--Rights
of Noteholders Upon Occurrence of an Event of Default" below. The actual final
Distribution Date for the Notes could be substantially earlier than the Maturity
Date.
REPORTS TO NOTEHOLDERS
On each Distribution Date the Indenture Trustee will make available to each
Noteholder a statement containing the following information:
o the amount of principal distributed on that date to Noteholders;
o the amount of interest distributed on that date to Noteholders;
o the amount of any outstanding Noteholders' Interest Carryforward
Amount for the Notes after distributions on that date;
o the Class Principal Amount of the Notes after distributions on that
date;
o the amount of the Servicing Fees paid with respect to that date;
o the Total Loan Balance as of the related Distribution Date;
o the number and total Principal Balance of Mortgage Loans (1) remaining
outstanding, (2) delinquent by one, two, three or four or more monthly
payments, (3) in foreclosure, and (4) with respect to REO Property;
o any amount distributed to the holder of the Residual Certificate; and
o other information to the extent provided in the Sale and Servicing
Agreement.
OPTIONAL REDEMPTION
On any Distribution Date after the date on which the Total Loan Balance is
less than [ ]% of the Cut-off Date Balance, [ ] will (subject to the terms of
the Sale and Servicing Agreement) have the option to purchase the Mortgage
Loans, any REO Property and any other assets of the Trust for the Termination
Price. If [ ] does not exercise that option, [ ] will then have the same
purchase option. If either purchase option is exercised, the Notes will be
redeemed and the Residual Certificate and the Trust will be terminated (this
event, an "Optional Redemption").
If the Residual Certificateholder does not exercise its option as described
above when it is first entitled to do so, the Interest Rate of the Notes will be
increased as described under "-- Payments of Interest" in this prospectus
supplement.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, a failure to pay the full amount of the Noteholders'
Interest Distribution Amount within five days of the Distribution Date on which
that payment is due (without regard to the amount of Available Funds) or failure
to pay the entire outstanding principal amount of the Notes on the Maturity
Date, will constitute an event of default (an "Event of Default").
Upon the occurrence of an Event of Default, the holders of Notes evidencing
more than [ ]% of the Class Principal Amount of the Notes then outstanding may
exercise their remedies under the Indenture. These remedies include [to be
provided as applicable]. See "Description of the Agreements -- Material Terms of
the Indenture" in the prospectus.
THE INDENTURE TRUSTEE
[ ], a [ ], will be the Indenture Trustee under the Indenture. The
Indenture Trustee will be entitled to [describe applicable fees of the indenture
trustee]. The Indenture Trustee's "Corporate Trust Office" is located at [ ], or
any address as the Indenture Trustee may designate from time to time by notice
to the Noteholders, the Depositor and the Servicer.
[THE INSURANCE POLICY
The following information has been provided by [ ] (the "Insurer") for
inclusion in this prospectus supplement. Neither the Depositor nor the
Underwriter makes any representation as to the accuracy or completeness of this
information.
The Insurer does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained in this prospectus supplement, or omitted from this prospectus
supplement, other than with respect to the accuracy of the information regarding
the Note Guaranty Insurance Policy (the "Insurance Policy") and the Insurer set
forth below under this heading "The Insurance Policy." Additionally, the Insurer
makes no representation regarding the Notes or the advisability of investing in
the Notes.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
YEAR 2000 READINESS DISCLOSURE
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] Mortgage Loans with
original terms to maturity of not more than [thirty] years, having a total
Principal Balance as of the Cut-off Date of approximately $[ ] (the "Cut-off
Date Balance"). The Mortgage Loans are secured by [to be provided as applicable]
("Mortgages"). All of the Mortgage Loans will be [description of Mortgage
Loans.]
Generally, the Mortgage Loans were originated or acquired by the Originator
(as defined in this prospectus supplement) in one of the following ways:
o [to be provided as applicable].
For a description of the underwriting criteria applicable to the Mortgage
Loans, see "The Originator -- Underwriting Criteria" in this prospectus
supplement.
The Servicer will be required to service the Mortgage Loans pursuant to the
Sale and Servicing Agreement and will be compensated for these services as
described under "Description of the Transfer and Servicing Agreements --
Servicing" in this prospectus supplement.
PAYMENTS ON THE MORTGAGE LOANS
[To be provided as applicable.]
CHARACTERISTICS OF THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate total
characteristics as of the Cut-off Date. Prior to the issuance of the Notes,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Depositor deems removal necessary or
appropriate. In addition, a limited number of other home loans may be included
in the Mortgage Pool prior to the issuance of the Notes.
Wherever reference is made in this prospectus supplement to a percentage of
some or all of the Mortgage Loans, the percentage is determined (unless
otherwise specified) on the basis of the total principal balance of the related
Mortgage Loans as of the Cut-off Date.
Approximately [ ] of the Mortgage Loans provide for payment by the borrower
of a prepayment premium in connection with full or partial prepayments of
principal within [three to five years] of the date of origination of the loan,
generally equal to [to be provided as applicable].
The Mortgage Loan Rates of the Mortgage Loans range from approximately [ ]%
annually to [ ]% annually. The weighted average Mortgage Loan Rate of the
Mortgage Loans is approximately [ ]% annually.
The Principal Balances of the Mortgage Loans range from approximately $[ ]
to $[ ]. The Mortgage Loans have an average Principal Balance of approximately
$[ ].
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the total Principal Balances and the percentages in the following tables may not
equal the totals due to rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
The average Cut-off Date Principal Balance is approximately $ .
LOAN-TO-VALUE RATIOS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF ORIGINAL NUMBER OF TOTAL BY TOTAL
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------ -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
The weighted average original Loan-to-Value Ratio is approximately %.
MORTGAGE RATES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
__________
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately % per annum.
LOAN TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
ORIGINAL TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MATURITIES (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
The weighted average original term to maturity is approximately months.
REMAINING TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
REMIANING TERM TO NUMBER OF TOTAL BY TOTAL
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
The weighted average remaining term to maturity of the fully amortizing
Mortgage Loans is approximately months.
GEOGRAPHIC DISTRIBUTION
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
PROPERTY TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
LOAN PURPOSES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
OCCUPANCY STATUS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
DOCUMENTATION TYPES
PERCENTAGE OF
MORTGAGE LOANS
DOCUMENTATION NUMBER OF TOTAL BY TOTAL
TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
CREDIT GRADES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
PREPAYMENT PENALTIES
PERCENTAGE OF
MORTGAGE LOANS
PREPAYMENT NUMBER OF TOTAL BY TOTAL
PENALTY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------- -------------- ----------------- -----------------
$ %
-------------- ----------------- -----------------
Total............ $ 100.00%
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust to purchase additional Mortgage Loans (the
"Subsequent Mortgage Loans") on [any] date, as specified in the [Sale and
Servicing Agreement] (each, a "Subsequent Transfer Date") will be subject to the
Subsequent Mortgage Loans meeting the following criteria: [to be provided as
applicable]. These criteria will be based on the characteristics of the
Subsequent Mortgage Loans on the related Subsequent Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary significantly
from time to time, subject to the requirements described above, and may bear no
particular relationship to the characteristics of the initial Mortgage Loans at
any time. It is expected that a substantial portion of the Subsequent Mortgage
Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this prospectus supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date. A Current Report on Form 8-K will be available
to purchasers of the Notes and will be filed, together with the Sale and
Servicing Agreement, the Indenture and the Trust Agreement, with the Securities
and Exchange Commission (the "SEC") within fifteen days after the initial
issuance of the Notes. In the event that Mortgage Loans are removed from or
added to the Mortgage Pool as described in this prospectus supplement under
"Description of the Mortgage Pool," the removal or addition, to the extent
material, will be noted in the Current Report on Form 8-K.
THE ORIGINATOR
GENERAL
[Describe the Originator.]
UNDERWRITING CRITERIA
The information contained in this prospectus supplement regarding the
Originator's underwriting requirements and practices was obtained from publicly
available information regarding asset-backed notes secured by loans made by the
Originator that are similar to the Mortgage Loans and not from the Originator
directly. As a result, there can be no assurance that the Mortgage Loans were
originated, in whole or in part, in accordance with these underwriting
requirements and practices, or that these underwriting requirements and
practices were in effect when the Mortgage Loans were originated.
[Describe Originator's underwriting guidelines.]
THE SERVICER
The following information has been provided by the Servicer. Neither the
Depositor nor the Underwriter makes any representation as to the accuracy or
completeness of this information.
GENERAL
[ ] (the "Servicer") will service the Mortgage Loans pursuant to the terms
of the Sale and Servicing Agreement.
[Description of the servicer.]
YEAR 2000 COMPLIANCE
[To be provided as applicable.]
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes terms of the Sale and Servicing Agreement,
the Indenture, the Trust Agreement, and the Administration Agreement
(collectively, the "Transfer and Servicing Agreements"). The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Transfer and Servicing Agreements. The
following summary supplements, and to the extent inconsistent, replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements under the headings "Description of the Agreements" in the prospectus.
SALE AND ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, GACC will sell the Mortgage Loans (other than the
right to receive some of the charges payable by borrowers) to the Depositor, and
the Depositor will sell the Mortgage Loans (other than those amounts) to the
Trust. The Trust will, concurrently, deliver or cause to be delivered the
Securities to the Depositor. The Trust will pledge and assign the Mortgage Loans
to the Indenture Trustee in exchange for the Notes. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Sale and Servicing
Agreement (the "Mortgage Loan Schedule").
[In addition, the Depositor will, as to each Mortgage Loan, deliver to a
custodian appointed by the Indenture Trustee (the "Custodian") the following
documents (together, with respect to each Mortgage Loan, a "Mortgage Loan
File"):
o the related Note endorsed to the order of the Indenture Trustee, or in
blank, without recourse,
o any assumption and modification agreements and the Mortgage with
evidence of recording indicated on the Mortgage (except for any
Mortgage not returned from the public recording office),
o an assignment of the Mortgage in the name of the Indenture Trustee, or
in blank, in recordable form, and
o any intervening assignments of the Mortgage.]
Assignments of the Mortgages to the Indenture Trustee will be recorded
following the Closing Date in the real property records of the states in which
the related Mortgaged Properties are located to protect the Indenture Trustee's
interest in the Mortgage Loans against the claims of creditors of GACC or
subsequent purchasers. In the event that, with respect to any Mortgage Loan, the
Depositor cannot deliver the assignment with evidence of recording on the
Mortgage Loan concurrently with the conveyance of the Mortgage Loan under the
Sale and Servicing Agreement because they have not yet been returned by the
public recording office, the Depositor will deliver or cause to be delivered to
the Custodian a certified true photocopy of the assignment. The Depositor will
deliver or cause to be delivered to the Custodian any assignment with evidence
of recording indicated on the assignment upon receipt of the assignment from the
public recording office. The Custodian will review (or cause to be reviewed)
each Mortgage Loan File within ninety days after the conveyance of the related
Mortgage Loan to the Trust to ascertain that all required documents have been
executed and received.
Under the terms of the agreement (the "Mortgage Loan Sale Agreement")
pursuant to which the Depositor will purchase the Mortgage Loans from GACC, and
of the Sale and Servicing Agreement, the Custodian will conduct an initial
review of the Mortgage Loan documents and will notify the Depositor and GACC as
to each Mortgage Loan document that either has not yet been delivered to the
Depositor as required or appears to be not properly executed, not in conformity
with the description of the Mortgage Loan on the Mortgage Loan schedule or
otherwise defective. If any Mortgage Loan document is not delivered or any
material defect in a document is not cured within the time period specified in
the Mortgage Loan Sale Agreement, GACC will be required to repurchase the
affected Mortgage Loan for a price equal to the unpaid principal balance of the
Mortgage Loan plus accrued interest on the Mortgage Loan (the "Repurchase
Price") or, in some circumstances, to substitute another Mortgage Loan that
satisfies the requirements specified in the Sale and Servicing Agreement.
GACC will make to the Depositor under the Mortgage Loan Sale Agreement
representations and warranties that include representations and warranties
similar to those summarized in the prospectus under the heading "Description of
the Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Representations and Warranties; Repurchases."
The Depositor's rights under these representations and warranties will be
assigned to the Indenture Trustee for the benefit of the Noteholders. In the
event of a breach of any of these representations or warranties that materially
and adversely affects the value of any Mortgage Loan or the interests of the
Noteholders, GACC will be obligated, within 60 days following its discovery of a
breach or receipt of notice of a breach, to cure the breach or purchase the
affected Mortgage Loan from the Trust for the Repurchase Price or, in some
circumstances, to substitute another Mortgage Loan.
No assurance can be given that, at any particular time, GACC will be
capable, financially or otherwise, of repurchasing defective Mortgage Loans or
substituting additional Mortgage Loans for defective Mortgage Loans.
TRUST FEES AND EXPENSES
The Servicer is entitled to the Servicing Fee and reimbursement for
specific expenses as described under "-- Servicing Compensation and Payment of
Expenses" below. The fees and expenses of the Indenture Trustee, the Owner
Trustee and the Custodian will be paid by [ ].
VOTING RIGHTS
Voting rights of Securityholders under the Transfer and Servicing
Agreements will be allocated among the Notes and the Residual Certificate as
provided in the Transfer and Servicing Agreements.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance with the
provisions of the Sale and Servicing Agreement.
[Describe servicing provisions as applicable.]
NO DELINQUENCY ADVANCES
In the event of a delinquency or default with respect to a Mortgage Loan,
neither the Servicer nor any Subservicer (as defined below) will have any
obligation to advance scheduled monthly payments of principal or interest with
respect to the Mortgage Loan.
SERVICING ADVANCES
The Servicer or any Subservicer will make reasonable and customary expense
advances with respect to the Mortgage Loans (each, a "Servicing Advance") and
will be entitled to reimbursement for Servicing Advances as described in this
prospectus supplement. Servicing Advances may include costs and expenses
advanced for the preservation, restoration and protection of any Mortgaged
Property, including advances to pay delinquent real estate taxes and
assessments. Any Servicing Advances by the Servicer or any Subservicer will be
reimbursable from late collections on the related Mortgage Loan, or with respect
to any Liquidated Mortgage Loan from the related Liquidation Proceeds. Servicing
Advances remaining outstanding will be reimbursed, to the extent of Available
Funds, as described under "Description of the Notes -- Payment Priorities."
INSURANCE COVERAGE
The Servicer is required to obtain and thereafter maintain in effect a bond
or similar form of insurance coverage (which may provide blanket coverage)
insuring against loss occasioned by the errors and omissions of its officers and
employees.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that each year a firm of
independent accountants will furnish a statement to the Indenture Trustee to the
effect that the firm has examined the necessary documents and records relating
to the servicing of home loans by the Servicer and that, on the basis of that
examination, the firm is of the opinion that the servicing has been conducted in
accordance with applicable accounting standards, except for those exceptions
that the firm believes to be immaterial and those exceptions set forth in the
statement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee (the "Servicing Fee") with respect
to each Mortgage Loan calculated at [ ]% annually (the "Servicing Fee Rate") on
the outstanding principal balance of each Mortgage Loan. No Servicing Fee will
be payable on a Liquidated Mortgage Loan unless the Servicer determines that
additional collection efforts are warranted with respect to that Mortgage Loan.
The Servicer will be entitled to reimbursement from collections on the Mortgage
Loans for some of its expenses before any amounts are paid to Noteholders.
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage Loans, except as permitted by the Sale and Servicing
Agreement, but it may employ one or more subservicers ("Subservicers") as
provided under the Sale and Servicing Agreement. If the Servicer chooses to
employ Subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Sale and Servicing Agreement, and will be considered to
have itself received any payment received by a Subservicer whether or not the
Subservicer actually remits that payment.
RESIGNATION OR REMOVAL OF THE SERVICER
The Servicer will agree in the Sale and Servicing Agreement not to resign
except with the consent of [ ], unless the Servicer delivers to [ ] an opinion
of legal counsel to the effect that the Servicer is no longer permitted under
applicable law to perform the duties of the Servicer under the Sale and
Servicing Agreement.
If the Servicer is in default under the Sale and Servicing Agreement, the
Indenture Trustee or Noteholders having a majority of voting rights may remove
the Servicer. [Events of default include:
o failure by the Servicer to remit any required payment to the Indenture
Trustee for one Business Day after receipt of written notice that the
payment has not been made;
o failure by the Servicer to deposit collections or other recoveries on
the Mortgage Loans in the Collection Account on a daily basis in
accordance with the Sale and Servicing Agreement;
o failure by the Servicer to fulfill any other material requirement
under the Sale and Servicing Agreement within the applicable time
period;
o failure by the Servicer to be qualified to service home loans for
either Fannie Mae or Freddie Mac;
o failure by the Servicer to maintain any applicable licenses in each
jurisdiction where Mortgaged Properties are located;
o failure by the Servicer to maintain a minimum net worth of
$25,000,000;
o insolvency of the Servicer; and
o other events specified in the Sale and Servicing Agreement.]
[If the Servicer is removed, the Indenture Trustee will immediately assume
the role of Servicer under the Sale and Servicing Agreement unless another
Servicer is appointed pursuant to the Sale and Servicing Agreement. The
Indenture Trustee may continue to service the Mortgage Loans if it is legally
qualified to do so or may appoint a successor Servicer as provided in the Sale
and Servicing Agreement].
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to deposit in a segregated account (the
"Collection Account") within [ ] Business Days of receipt all payments received
on or after the Cut-off Date on account of principal and interest on the
Mortgage Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Mortgage Loan and any amount required to be
deposited in the Collection Account in connection with the redemption of the
Notes. Withdrawals will be made from the Collection Account only for the
purposes specified in the Sale and Servicing Agreement. The Collection Account
may be maintained at any depository institution that satisfies the requirements
specified in the Sale and Servicing Agreement.
Amounts on deposit in the Collection Account will be invested as provided
in the Sale and Servicing Agreement. All interest and any other investment
earnings on amounts on deposit in the Collection Account will be paid to [ ].
Any net losses on these investments will be paid by [ ].
The Servicer will establish and maintain with the Paying Agent an account
on behalf of the Noteholders, into which amounts released from the Collection
Account for payment to the Noteholders will be deposited and from which all
payments to the Noteholders will be made (the "Note Distribution Account"). The
Servicer will also establish and maintain with the Paying Agent an account in
the name of the Owner Trustee on behalf of the Residual Certificateholder, into
which amounts released from the Collection Account for distribution to the
Residual Certificateholder will be deposited and from which all distributions to
the Residual Certificateholder will be made (the "Certificate Distribution
Account").
On the [ ] day of each month, or if the [ ] day is not a Business Day, the
preceding Business Day, the Servicer will remit the Available Funds to the
Paying Agent for deposit into the Note Distribution Account and Certificate
Distribution Account by making appropriate withdrawals from the Collection
Account. On each Distribution Date, the Indenture Trustee will make withdrawals
from the Note Distribution Account and Certificate Distribution Account for
application as described under "Description of the Notes -- Payment Priorities"
in this prospectus supplement. Amounts on deposit in the Note Distribution
Account and Certificate Distribution Account will be invested as provided in the
Sale and Servicing Agreement. All interest and any other investment earnings on
amounts on deposit in the Note Distribution Account and Certificate Distribution
Account will be retained by the Indenture Trustee as its compensation. Any net
losses on these investments will be paid by the Indenture Trustee.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of some jurisdictions, the Servicer,
the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of an appointment of another trustee all rights, powers,
duties and obligations conferred or imposed upon the Owner Trustee by the Sale
and Servicing Agreement and the Trust Agreement and upon the Indenture Trustee
by the Indenture will be conferred or imposed upon the Owner Trustee and the
Indenture Trustee, respectively, and in each case the separate trustee or
co-trustee, jointly, or, in any jurisdiction in which the Owner Trustee or
Indenture Trustee will be incompetent or unqualified to perform particular acts,
singly upon the separate trustee or co-trustee, which will exercise and perform
these rights, powers, duties and obligations solely at the direction of the
Owner Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor to the Owner
Trustee or the Indenture Trustee, as the case may be. The Servicer may also
remove the Owner Trustee or the Indenture Trustee if either ceases to be
eligible to continue as Owner Trustee or Indenture Trustee under the Trust
Agreement or the Indenture, as the case may be, becomes legally unable to act or
becomes insolvent. In these circumstances, the Servicer will be obligated to
appoint a successor Owner Trustee or a successor Indenture Trustee, as
applicable. Any resignation or removal of the Owner Trustee or Indenture Trustee
and appointment of a successor Owner Trustee or Indenture Trustee will not
become effective until acceptance of the appointment by the successor.
The Trust Agreement and Indenture will provide that the Owner Trustee and
Indenture Trustee will be entitled to indemnification by GACC and the Depositor
for, and will be held harmless against, any loss, liability or expense incurred
by the Owner Trustee or Indenture Trustee not resulting from its own willful
misfeasance, bad faith or negligence (other than by reason of a breach of any of
its representations or warranties to be set forth in the Trust Agreement or
Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Residual Certificate (other than the
execution and authentication of the Residual Certificate), the Notes or any
Mortgage Loans or related documents, and will not be accountable for the use or
application by the Depositor or the Servicer of any funds paid to the Depositor
or the Servicer in respect of the Securities or the Mortgage Loans, or the
investment of any monies by the Servicer before these monies are deposited into
the Collection Account, the Note Distribution Account or the Certificate
Distribution Account. So long as no Event of Default has occurred and is
continuing, the Owner Trustee will be required to perform only those duties
specifically required of it under the Trust Agreement. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Owner Trustee under the Trust
Agreement, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Trust Agreement. The Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Sale and Servicing Agreement, which failure
constitutes an Event of Default, unless the Owner Trustee has actual knowledge
of any failure.
The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Agreement or to make any investigation of
matters arising under the Trust Agreement or to institute, conduct or defend any
litigation under the Trust Agreement or in relation to the Trust Agreement at
the request, order or direction of the holder of the Residual Certificate,
unless the Residual Certificateholder has offered to the Owner Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred in or by the exercise of its rights or powers, an
investigation by it of matters arising or the institution or defense of any
litigation. Subject to the rights or consent of the Noteholders and Indenture
Trustee, the Residual Certificateholder will not have any right under the Trust
Agreement to institute any proceeding with respect to the Trust Agreement,
unless the Residual Certificateholder previously has given to the Owner Trustee
written notice of the occurrence of an Event of Default and (1) the Event of
Default arises from the Servicer's failure to remit payments when due or (2) the
holder of the Residual Certificate has made written request upon the Owner
Trustee to institute a proceeding in its own name as the Owner Trustee under the
Trust Agreement and have offered to the Owner Trustee reasonable indemnity, and
the Owner Trustee for 30 days has neglected or refused to institute any
proceedings.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Residual Certificate, the Notes (other than
the execution and authentication of the Notes) or any Mortgage Loans or related
documents, and will not be accountable for the use or application by the
Depositor, the Servicer or the Owner Trustee of any funds paid to the Depositor,
the Servicer or the Owner Trustee in respect of the Securities or the Mortgage
Loans, or the investment of any monies by the Servicer before those monies are
deposited into the Collection Account or the Note Distribution Account. So long
as no Event of Default under the Indenture or the Sale and Servicing Agreement
has occurred or is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Transfer and Servicing
Agreements. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Indenture Trustee under the Indenture, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Indenture. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Sale and Servicing
Agreement, which failure constitutes an Event of Default under the Indenture or
the Sale and Servicing Agreement, unless the Indenture Trustee obtains actual
knowledge of any failure.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising under the Indenture or to institute, conduct or defend any
litigation under the Indenture or in relation to the Indenture at the request,
order or direction of any of the Noteholders, unless those Noteholders have
offered to the Indenture Trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred in or by an exercise of any
of its rights or powers, an investigation of matters arising or the institution
or defense of any litigation. No Noteholder will have any right under the
Indenture to institute any proceeding with respect to the Indenture, unless the
holder previously has given to the Indenture Trustee written notice of the
occurrence of an Event of Default and (1) the Event of Default arises from the
Servicer's failure to remit payments when due or (2) Noteholders evidencing not
less than [ ]% of the Class Principal Amount of the Notes, acting together as a
single class, have made written request upon the Indenture Trustee to institute
a proceeding in its own name as the Indenture Trustee under the Indenture and
have offered to the Indenture Trustee reasonable indemnity, and the Indenture
Trustee for 30 days has neglected or refused to institute any proceedings. See
"Description of the Notes -- Rights of Noteholders Upon Occurrence of Event of
Default" in this prospectus supplement.
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Notes will be
affected by the rate of principal payments on the Mortgage Loans (including
prepayments, which may include amounts received by virtue of purchase,
condemnation, insurance or foreclosure) on the Mortgage Loans. Yields will also
be affected by the extent to which Mortgage Loans bearing higher Mortgage Loan
Rates prepay at a more rapid rate than Mortgage Loans with lower Mortgage Loan
Rates, the amount and timing of borrower delinquencies and defaults resulting in
Realized Losses, the application of Monthly Excess Cashflow, the purchase price
paid for the Notes and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. These factors may
include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity, if any, in the mortgaged properties, servicing decisions,
homeowner mobility, the existence and enforceability of "due-on-sale" clauses,
seasoning of loans, market interest rates for similar types of loans and the
availability of funds for the loans. Nearly all of the Mortgage Loans contain
due-on-sale provisions and the Servicer will generally enforce these provisions
unless (1) the Servicer, in a manner consistent with its servicing practices,
permits the purchaser of the related Mortgaged Property to assume the Mortgage
Loan, or (2) enforcement is not permitted by applicable law. In some cases, the
Servicer may, in a manner consistent with its servicing practices, permit a
borrower who is selling his principal residence and purchasing a new one to
substitute the new Mortgaged Property as collateral for the related Mortgage
Loan, or may simply release its lien on the existing collateral, leaving the
related Mortgage Loan unsecured. In that event, the Servicer will generally
require the borrower to make a partial prepayment in reduction of the principal
balance of the Mortgage Loan to the extent that the borrower has received
proceeds from the sale of the prior residence that will not be applied to the
purchase of the new residence.
Approximately [ ] of the Mortgage Loans are subject to prepayment penalties
during the first [three to five years] after origination. Prepayment penalties
may have the effect of reducing the amount or the likelihood of prepayments on
the Mortgage Loans. A prepayment premium may be waived by the Servicer under
some circumstances. The remaining Mortgage Loans may be prepaid in full or in
part at any time without penalty.
In general, if prevailing interest rates fall below the interest rates on
the Mortgage Loans, the Mortgage Loans are likely to be subject to higher
prepayments than if prevailing rates remain at or above the interest rates on
the Mortgage Loans. Conversely, if prevailing interest rates rise above the
interest rates on the Mortgage Loans, the rate of prepayment would be expected
to decrease.
The rate of principal payments on the Mortgage Loans will also be affected
by the amortization schedules of the Mortgage Loans, the rate and timing of
prepayments by the borrowers, liquidations of defaulted Mortgage Loans and
repurchases of Mortgage Loans due to breaches of representations and warranties
or defective documentation as described in this prospectus supplement. The
timing of changes in the rate of prepayments, liquidations and purchases of the
related Mortgage Loans may significantly affect the yield to an investor, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation. Because the rate and timing of principal
payments on the Mortgage Loans will depend on future events and on a variety of
factors (as described more fully in this prospectus supplement and in the
prospectus under "Yield Considerations") no assurance can be given as to the
rate or the timing of principal payments on the Notes. In general, the earlier a
prepayment of principal of the related Mortgage Loans, the greater the effect on
an investor's yield. The effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Notes may not be
offset by a subsequent like decrease (or increase) in the rate of principal
payments.
From time to time, areas of the United States may be affected by flooding,
severe storms, landslides, wildfires or other natural disasters. Any resulting
Realized Losses could affect the rate of payment of principal no the Notes. To
the extent that the insurance proceeds received with respect to any damaged
Mortgage Properties are not applied to the restoration of those Mortgage
Properties, the proceeds will be used to prepay the related Mortgage Loans in
whole or in part. Any repurchases or repayments of the Mortgage Loans may reduce
the weighted average lives of the Notes and will reduce the yields on the Notes
to the extent they are purchased at a premium.
In addition, any future limitations on the rights of borrowers to deduct
interest payments on mortgage loans for federal income tax purposes may result
in a higher rate of prepayment on the Mortgage Loans.
The Depositor and GACC make no representations as to the particular factors
that will affect the prepayment of the Mortgage Loans, as to the relative
importance of these factors, or as to the percentage of the principal balance of
the Mortgage Loans that will be paid as of any date.
Payments of principal at a faster rate than anticipated will decrease the
yield on Notes purchased at a premium; payments of principal at a slower rate
than anticipated will decrease the yield on Notes purchased at a discount. The
effect on an investor's yield due to payments of principal occurring at a rate
that is faster (or slower) than the rate anticipated by the investor during any
period following the issuance of the Notes will not be entirely offset by a
subsequent like reduction (or increase) in the rate of payments of principal
during any subsequent period.
The rate of delinquencies and defaults on the Mortgage Loans and of
recoveries, if any, on defaulted Mortgage Loans and foreclosed properties will
affect the rate and timing of principal payments on the Mortgage Loans, and,
accordingly, the weighted average life of the Notes. Some factors may influence
delinquencies and defaults, including origination and underwriting standards,
loan-to-value ratios and delinquency history. In general, defaults on Mortgage
Loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on similar
types of home loans. The rate of default on Mortgage Loans with high
loan-to-value ratios, or on Mortgage Loans secured by junior liens, may be
higher than that of home loans with lower loan-to-value ratios or secured by
first liens on comparable properties. In addition, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans will be affected by
the general economic condition of the area in which the related Mortgaged
Properties are located or the related borrower is residing. See "Description of
the Mortgage Pool" in this prospectus supplement. The risk of delinquencies and
losses is greater and voluntary principal prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
Investors in the Notes will bear the risk of reinvestment of amounts
received in respect of principal on the Notes at yields that may be lower than
the yield on the Notes.
The yields to investors in the Notes may be affected by the exercise by [ ]
of its right to purchase the Mortgage Loans, as described under "Description of
the Notes -- Optional Redemption" in this prospectus supplement, or the failure
of [ ] to exercise that right.
If the purchaser of a Note offered at a discount from its initial principal
amount calculates its anticipated yield to maturity (or early termination) based
on an assumed rate of payment of principal that is faster than that actually
experienced on the related Mortgage Loans, the actual yield may be lower than
that so calculated. Conversely, if the purchaser of a Note offered at a premium
calculates its anticipated yield based on an assumed rate of payment of
principal that is slower than that actually experienced on the related Mortgage
Loans, the actual yield may be lower than that so calculated.
The effective yield to holders of the Notes will be lower than the yield
otherwise produced by the Interest Rate and the purchase price because monthly
payments will not be payable until the [ ] day (or later) of the month following
the Accrual Period.
OVERCOLLATERALIZATION
[Describe as applicable.]
MATURITY DATE
The Maturity Date of the Notes is as set forth under "Description of the
Notes -- Maturity Date" in this prospectus supplement. The Maturity Date of the
Notes was determined by [to be provided as applicable]. The actual maturity of
the Notes may be significantly earlier than the Maturity Date.
WEIGHTED AVERAGE LIFE
The following information illustrates the effect of prepayments of the
Mortgage Loans on the weighted average life of the Notes under stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Mortgage Loans. Weighted average life refers to the
average amount of time that will elapse from the date of issuance of a security
to the date of distribution to the investor of each dollar distributed in net
reduction of principal of the security (assuming no losses). The weighted
average life of the Notes will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions and
repurchases by or on behalf of GACC or the Depositor) and [to be provided as
applicable].
Prepayments on loans such as the Mortgage Loans are commonly measured
relative to a prepayment standard or model. The model used in this prospectus
supplement for the Mortgage Loans represents [to be provided as applicable]. [ ]
does not purport to be either a historical description of the prepayment
experience or any pool of loans or a prediction of the anticipated rate of
prepayment of any pool of loans, including the Mortgage Loans. Neither the
Depositor nor the Underwriter makes any representation about the appropriateness
of the [ ] model.
[The following table was prepared based on the following assumptions, among
other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amount and the Interest Rate are as set
forth on the cover of this prospectus supplement;
o each scheduled payment of principal and interest on a Mortgage Loan is
timely received on the last day of each month starting in [ ];
o principal prepayments are received in full on the last day of each
month starting in [ ], and each prepayment includes 30 days of
interest on the Mortgage Loan;
o prepayments are received on the Mortgage Loans at the applicable
constant rates indicated;
o there are no defaults or delinquencies on the Mortgage Loans;
o Distribution Dates occur on the [ ] day of each month, starting in
[ ];
o there are no re-purchases or substitutions of the Mortgage Loans;
o the Notes are issued on [ ]; and
o the Mortgage Loans were aggregated into assumed Mortgage Loans having
the following characteristics:]
HOME NET HOME REMAINING
HOME LOAN LOAN TERM TO
LOAN PRINCIPAL INTEREST INTEREST MATURITY
NUMBER BALANCE RATE RATE (IN MONTHS)
------ --------- -------- -------- -----------
The actual characteristics of the Mortgage Loans may, and the performance
of the Mortgage Loans will, differ from the assumptions used in constructing the
table below, which is hypothetical in nature and is provided only to give a
general sense of how the principal cash flows might behave under varying
prepayment scenarios. For example, it is not expected that the Mortgage Loans
will prepay at a constant rate until maturity, that all of the Mortgage Loans
will prepay at the same rate or that there will be no defaults or delinquencies
on the Mortgage Loans. Moreover, the diverse remaining terms to maturity of the
Mortgage Loans could produce slower or faster principal payments than indicated
in the table in the [assumed prepayment rate] specified, even if the weighted
average remaining term to maturity of the Mortgage Loans is as assumed. Any
difference between those assumptions and the actual characteristics and
performance of the Mortgage Loans or actual prepayment or loss experience will
cause the percentages of Original Principal Amounts outstanding over time and
the weighted average lives of the Notes to differ (which difference could be
material) from the corresponding information in the table for each indicated
[assumed prepayment rate].
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Notes and set forth the percentages
of the Original Principal Amount of the Notes that would be outstanding after
each of the Distribution Dates shown at the indicated [assumed prepayment rate].
The weighted average life of the Notes is determined by (1) multiplying the
net reduction, if any, of the Class Principal Amount by the number of years from
the date of issuance of the Note to the related Distribution Date, (2) adding
the results and (3) dividing the sum by the total of the net reductions of Class
Principal Amount referred to in clause (1) and rounding to one decimal place.
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT OF THE NOTES
OUTSTANDING AT THE FOLLOWING [PREPAYMENT RATES]
Class [ ]
-----------------------------------------------
DISTRIBUTION DATE [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
----------------- ----- ----- ----- ----- ----- ----- -----
Initial Percentage.............. 100 100 100 100 100 100 100
Weighted Average
Life in Years
With Optional Redemption....
Without Optional Redemption.
__________
* Based upon the assumption that [ ] does not exercise its option to
repurchase the Mortgage Loans as described under "Description of the Notes
-- Optional Redemption" in this prospectus supplement.
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
[In the opinion of Stroock & Stroock & Lavan LLP, for federal income tax
purposes, the Notes will be characterized as debt, and the Trust will not be a
business entity classified as an association (or a publicly traded partnership)
treated as a corporation or a taxable mortgage pool. Each Noteholder, by the
acceptance of a Note, will agree to treat the Notes as indebtedness for federal
income tax purposes. See "Material Federal Income Tax Considerations" in the
prospectus for additional information concerning the application of federal
income tax laws to the Trust and the Notes.]
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
[To be provided as applicable.]
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax matters described under "Material
Federal Income Tax Considerations" above, prospective 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, prospective investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Notes.
ERISA CONSIDERATIONS
[Except as described below, the Notes may be purchased by an employee
benefit plan or an individual retirement account (a "Plan") subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section
4975 of the Internal Revenue Code of 1986, as amended (the "Code"). A fiduciary
of a Plan must determine that the purchase of a Note is consistent with its
fiduciary duties under ERISA and does not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code. For
additional information regarding treatment of the Notes under ERISA, See "ERISA
Considerations" in the prospectus.
The Notes may not be purchased with the assets of a Plan if the Depositor,
the Servicer, the Indenture Trustee, the Owner Trustee or any of their
affiliates (a) has investment or administrative discretion with respect to the
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to the Plan assets, for a fee and pursuant to an
agreement or understanding that this advice (1) will serve as a primary basis
for investment decisions with respect to the Plan assets and (2) will be based
on the particular investment needs for the Plan; or (c) is an employer
maintaining or contributing to the Plan.]
LEGAL INVESTMENT CONSIDERATIONS
[The Notes will [not] constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in "mortgage related securities" may
[not] be legally authorized to invest in the Notes.]
There may be restrictions on the ability of some investors, including
depository institutions, either to purchase the Notes or to purchase Notes
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal, tax and accounting advisors in
determining whether and to what extent the Notes constitute legal investments
for the investors and the applicable tax, regulatory and accounting treatment of
the Notes.
See "Legal Investment Considerations" in the prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be applied by the
Depositor, or an affiliate of the Depositor, toward the purchase of the Mortgage
Loans. The Mortgage Loans will be acquired by the Depositor from GACC in a
privately negotiated transaction.
UNDERWRITING
[Subject to the terms and conditions provided in the underwriting agreement
and in a terms agreement (collectively, the "Underwriting Agreement") among the
Depositor, GACC and the Underwriter, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, all
of the Notes.
The Underwriter has advised the Depositor that the Underwriter intends to
initially offer the Notes to the public at the price specified on the front
cover of this prospectus supplement. After the initial public offering of the
Notes, the public offering price may be changed. The Underwriting Agreement
provides that the Depositor will indemnify the Underwriter against some civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Until the distribution of the Notes is completed, the rules of the SEC may
limit the ability of the Underwriter and some selling group members to bid for
and purchase the Notes. As an exception to these rules, the Underwriter is
permitted to engage in transactions that stabilize the price of the Notes. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Notes.
If the Underwriter creates a short position in the Notes in connection with
the offering, that is, if they sell more Notes than the amount specified on the
cover page of this prospectus supplement, the Underwriter may reduce that short
position by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Depositor nor the Underwriter makes any representation that the Underwriter will
engage in these transactions or that these transactions, once begun, will not be
discontinued without notice.]
Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $[ ].
The Underwriter expects to make a secondary market in the Notes, but has no
obligation to do so. There can be no assurance that any secondary market will
develop, or, if it does develop, that it will continue.
[ ] has entered into an agreement with the Depositor to purchase the
Residual Certificate simultaneously with the purchase of the Notes.
The Underwriter is an affiliate of GACC and performs management services
for the Depositor. The Underwriter has engaged in other transactions with,
arranged other transactions for or performed other services for the Depositor
and GACC in the ordinary course of business.
EXPERTS
[To be provided as applicable].
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for the
Depositor and for the Underwriter by [Stroock & Stroock & Lavan LLP, New York,
New York].
RATINGS
It is a condition to the issuance of the Notes that they be rated "[ ]" by
[Rating Agency] and "[ ]" by [Rating Agency]. [Rating Agency] and [Rating
Agency] are referred to in this prospectus supplement as the "Rating Agencies."
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. A securities rating addresses the likelihood of the receipt by
holders of Notes of distributions in the amount of scheduled payments on the
Mortgage Loans. The rating takes into consideration the characteristics of the
Mortgage Loans and the structural, legal and tax aspects associated with the
Notes. The ratings on the Notes do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that holders of Notes might suffer a lower than anticipated yield
due to prepayments.
The security ratings assigned to 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 either Rating Agency.
The Depositor has not requested a rating of the Notes by any rating agency
other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Notes or, if it does, what rating
would be assigned by the other rating agency. The rating assigned by the other
rating agency to the Notes could be lower than the ratings assigned by the
Rating Agencies.
<PAGE>
GLOSSARY OF DEFINED TERMS
[To be provided.]
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered ACE Securities
Corp. [ ] Asset Backed Notes (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold the Global
Securities through any of DTC, Clearstream Luxembourg or Euroclear. The Global
Securities will be tradable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or Euroclear
and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless those holders meet specific requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold the positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last interest
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the accrual period and a year assumed to consist of 360
days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (that would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will need to
make available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream Luxembourg or
Euroclear. Under this approach, they may take on credit exposure to Clearstream
Luxembourg or Euroclear until the Global Securities are credited to their
accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although this
result will depend on each Clearstream Luxembourg Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last interest payment to and excluding the settlement date on the
basis of either the actual number of days in the accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (that is, the trade
fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Luxembourg Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
o borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to the settlement, which would give the
Global Securities sufficient time to be reflected in their Clearstream
Luxembourg or Euroclear account in order to settle the sale side of
the trade; or
o staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Clearstream
Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear (or through DTC if the holder has an address
outside the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Beneficial Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner or
his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), (3) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (4) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities.
<PAGE>
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
DEUTSCHE BANC ALEX. BROWN
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it by Ace
Securities Corp. The assets in each trust fund will generally consist of one or
more of the following:
o mortgage loans secured by one- to four-family residential properties;
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed by
mortgage loans secured by residential properties or participations in
those types of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
THE SECURITIES:
Ace Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is [ ] , 2000.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some or
all of the following types of assets:
o single family mortgage loans, which may include Home Equity Loans and
Land Sale Contracts (each as defined in this prospectus);
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively, "Agency Securities");
o previously issued asset-backed certificates, collateralized mortgage
obligations or participation certificates (each, and collectively,
"Mortgage Securities") evidencing interests in, or collateralized by,
mortgage loans or Agency Securities; or
o a combination of mortgage loans, Agency Securities and/or Mortgage
Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or insured
by a governmental agency or instrumentality or other person only if and to the
extent expressly provided in the prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of interest,
and full repayment of principal, in level monthly payments with a
fixed rate of interest computed on their declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic adjustments
to their rates of interest to equal the sum of a fixed margin and an
index;
o "Buy Down Assets," which are Assets for which funds have been provided
by someone other than the related borrowers to reduce the borrowers'
monthly payments during the early period after origination of those
Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time reduction
of the interest rate payable on these Assets;
o "GEM Assets," which provide for (1) monthly payments during the first
year after origination that are at least sufficient to pay interest
due on these Assets, and (2) an increase in those monthly payments in
later years at a predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of those Assets;
o "GPM Assets," which allow for payments during a portion of their terms
which are or may be less than the amount of interest due on their
unpaid principal balances, and this unpaid interest will be added to
the principal balances of those Assets and will be paid, together with
interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that increase
over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to limitations, the related
borrowers may exercise an option to convert the adjustable interest
rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by borrowers
on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the prospectus supplement from the date of origination, after
which the monthly payment is fixed at a level-payment amount so as to fully
amortize the Asset over its remaining term to maturity. The scheduled monthly
payment for an Increasing Payment Asset is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower's initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate some number of percentage points below the
Asset Rate of that Increasing Payment Asset. The borrower's monthly payments on
each Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Securities (as defined in this prospectus) will be entitled to payment
only from the assets of the related trust fund and will not be entitled to
payments from the assets of any other trust fund established by the depositor.
The assets of a trust fund may consist of certificates representing beneficial
ownership interests in, or indebtedness of, another trust fund that contains the
Assets, if specified in the prospectus supplement.
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property"). Single Family Properties are sometimes referred to in this
prospectus as "Mortgaged Properties." The mortgage loans will be secured by
first and/or junior mortgages or deeds of trust or other similar security
instruments creating a first or junior lien on Mortgaged Property.
The Mortgaged Properties may also include:
o Apartments owned by cooperative housing corporations ("Cooperatives");
and
o Leasehold interests in properties, the title to which is held by third
party lessors. The term of these leaseholds will exceed the term of
the related mortgage note by at least five years or some other time
period specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of these
home equity loans ("Home Equity Loans"); and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for the
sale of properties pursuant to which the borrower promises to pay the
amount due on the mortgage loans to the holder of the Land Sale
Contract with fee title to the related property held by that holder
until the borrower has made all of the payments required pursuant to
that Land Sale Contract, at which time fee title is conveyed to the
borrower.
The originator of each mortgage loan will have been a person other than the
depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the mortgage loan to the Value of the related Mortgaged Property. The "Value" of
a Mortgaged Property, other than for Refinance Loans, is generally the lesser of
(a) the appraised value determined in an appraisal obtained by the originator at
origination of that loan and (b) the sales price for that property. "Refinance
Loans" are loans made to refinance existing loans. Unless otherwise specified in
the prospectus supplement, the Value of the Mortgaged Property securing a
Refinance Loan is the appraised value of the Mortgaged Property determined in an
appraisal obtained at the time of origination of the Refinance Loan. The value
of a Mortgaged Property as of the date of initial issuance of the related series
may be less than the Value at origination and will fluctuate from time to time
based upon changes in economic conditions and the real estate market.
MORTGAGE LOAN INFORMATION IN THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the mortgage loans as of,
unless otherwise specified in that prospectus supplement, the close of
business on the first day of the month of formation of the related
trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the mortgage
loans;
o the mortgage rates or range of mortgage rates and the weighted average
mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"), the
index, the frequency of the adjustment dates, the range of margins
added to the index, and the maximum mortgage rate or monthly payment
variation at the time of any adjustment of and over the life of the
ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number of
days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report that will be
available to purchasers of the related Securities at or before the initial
issuance of that Security and will be filed as part of a Current Report on Form
8-K with the Securities and Exchange Commission (the "Commission") within
fifteen days after that initial issuance. The characteristics of the mortgage
loans included in a trust fund will not vary by more than five percent (by total
principal balance as of the Cut-off Date) from the characteristics of the
mortgage loans that are described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans include
Home Equity Loans, which may be secured by Mortgages that are junior to other
liens on the related Mortgaged Property. In addition, the prospectus supplement
will specify whether the mortgage loans contain some mortgage loans evidenced by
Land Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the mortgage loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at some
other interval as is specified in the prospectus supplement or for payments in
another manner described in the prospectus supplement. Each mortgage loan may
provide for no accrual of interest or for accrual of interest on the mortgage
loan at a mortgage rate that is fixed over its term or that adjusts from time to
time, or that may be converted from an adjustable to a fixed mortgage rate or a
different adjustable mortgage rate, or from a fixed to an adjustable mortgage
rate, from time to time pursuant to an election or as otherwise specified in the
related mortgage note, in each case as described in the prospectus supplement.
Each mortgage loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the mortgage rate or to
reflect the occurrence of particular events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the prospectus supplement. Each
mortgage loan may be fully amortizing or require a balloon payment due on its
stated maturity date, in each case as described in the prospectus supplement.
Each mortgage loan may contain prohibitions on prepayment (a "Lock-out Period"
and, the date of expiration thereof, a "Lock-out Date") or require payment of a
premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the prospectus supplement. If
the holders of any class or classes of Offered Securities are entitled to all or
a portion of any Prepayment Premiums collected from the mortgage loans, the
prospectus supplement will specify the method or methods by which any of these
amounts will be allocated. See "--Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the prospectus supplement, the mortgage loans
may consist, in whole or in part, of revolving Home Equity Loans or balances of
these Home Equity Loans ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving Credit
Line Loan, principal amounts on that Revolving Credit Line Loan may be drawn
down (up to a maximum amount as set forth in the prospectus supplement) or
repaid. If specified in the prospectus supplement, new draws by borrowers under
the Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the trust fund and principal payments are applied to
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some circumstances,
under a Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest that accrues on the loan during the
billing cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
GINNIE MAE
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
III of the Housing Act authorizes Ginnie Mae to guarantee the timely payment of
the principal of and interest on certificates that are based on and backed by a
pool of FHA loans, VA loans or by pools of other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
GINNIE MAE CERTIFICATES
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as described
below with respect to Stripped Agency Securities, each Ginnie Mae certificate
will provide for the payment, by or on behalf of the issuer, to the registered
holder of that Ginnie Mae certificate of monthly payments of principal and
interest equal to the holder's proportionate interest in the total amount of the
monthly principal and interest payments on each related FHA loan or VA loan,
minus servicing and guaranty fees totaling the excess of the interest on that
FHA loan or VA loan over the Ginnie Mae certificates' interest rate. In
addition, each payment to a holder of a Ginnie Mae certificate will include
proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or evidence
any recourse against, the issuer of the Ginnie Mae certificates, the depositor
or any affiliates of the depositor, and the only recourse of a registered holder
(for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee, as
registered holder of the Ginnie Mae certificates included in a trust fund, is
entitled to proceed directly against Ginnie Mae under the terms of the guaranty
agreement or contract relating to the Ginnie Mae certificates for any amounts
that are unpaid when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
FANNIE MAE
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thus expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
FANNIE MAE CERTIFICATES
Fannie Mae certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus that is periodically revised by Fannie
Mae. Fannie Mae certificates represent fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program. Mortgage
loans underlying Fannie Mae certificates included in a trust fund will consist
of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations solely
of Fannie Mae and are not backed by, nor entitled to, the full faith and credit
of the United States. If Fannie Mae were unable to satisfy those obligations,
distributions to the holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying loans and, accordingly, monthly
distributions to the holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
FREDDIE MAC
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests in mortgage loans which
it deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of these
mortgage loans must meet the applicable standards set forth in the Freddie Mac
Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the trust
fund includes Freddie Mac certificates, your prospectus supplement will include
any material additional information regarding the Freddie Mac guaranty program,
the characteristics of the pool underlying that Freddie Mac certificate, the
servicing of the related pool, payment of principal and interest on the Freddie
Mac certificate and any other relevant matters about the Freddie Mac
certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely payment
of scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event no
later than one year after demand has been made upon the borrower for
accelerated payment of principal.
In taking actions regarding the collection of principal after default on
the mortgage loans underlying Freddie Mac certificates, including the timing of
demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy those obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Securities. The Freddie Mac certificates
and underlying mortgage loans will be described in the prospectus supplement.
STRIPPED AGENCY SECURITIES
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying securities
backing the Stripped Agency Securities or to the extent described above for a
Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the prospectus supplement. If the trust fund includes Stripped
Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans of the
type that would otherwise be eligible to be mortgage loans or Agency Securities,
or collateralized obligations secured by mortgage loans or Agency Securities.
The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its affiliates;
(2) acquired in bona fide secondary market transactions from persons
other than the issuer of the Mortgage Securities or its affiliates; and
(3) (a) offered and distributed to the public pursuant to an effective
registration statement or (b) purchased in a transaction not involving any
public offering from a person who is not an affiliate of the issuer of
those securities at the time of sale (nor an affiliate of the issuer at any
time during the preceding three months); provided a period of two years
elapsed since the later of the date the securities were acquired from the
issuer.
Although individual Underlying Loans may be insured or guaranteed by the
United States or an agency or instrumentality of the United States, they need
not be, and Mortgage Securities themselves will not be so insured or guaranteed.
Except as otherwise set forth in the prospectus supplement, Mortgage Securities
will generally be similar to Securities offered under this prospectus.
The prospectus supplement for Securities of each series evidencing
interests in a trust fund including Mortgage Securities will include a
description of the Mortgage Securities and any related credit enhancement, and
the related mortgage loans or Agency Securities will be described together with
any other mortgage loans or Agency Securities included in the trust fund of that
series. As used in this prospectus, the terms "mortgage loans" include the
mortgage loans underlying the Mortgage Securities in your trust fund. References
in this prospectus to advances to be made and other actions to be taken by the
master servicer in connection with the Assets may include any advances made and
other actions taken pursuant to the terms of the applicable Mortgage Securities.
FHA LOANS AND VA LOANS
FHA loans will be insured by the FHA as authorized under the Housing Act,
and the United States Housing Act of 1937, as amended. One- to four-family FHA
loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans that are FHA loans are insured by the FHA (as described in
the prospectus supplement, up to an amount equal to 90% of the sum of the unpaid
principal of the FHA loan, a portion of the unpaid interest and other
liquidation costs) pursuant to Title I of the Housing Act.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the trustee (a "Pre-Funding Account"). In that case, the
depositor will be obligated to sell at a predetermined price - and the trust
fund for the related series of Securities will be obligated to purchase -
additional Assets (the "Subsequent Assets") from time to time, and as frequently
as daily, within the period (not to exceed three months) specified in the
prospectus supplement (the "Pre-Funding Period") after the issuance of the
Securities having a total principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the "Pre-Funded Amount") for that series on
the date of its issuance. The Pre-Funded Amount for a series will be specified
in the prospectus supplement, and will not in any case exceed 50% of the total
initial Security Balance of the related Securities. Any Subsequent Assets will
be required to satisfy specific eligibility criteria more fully set forth in the
prospectus supplement, which criteria will be consistent with the eligibility
criteria of the Assets initially included in the trust fund, subject to those
exceptions that are expressly stated in the prospectus supplement. In addition,
specific conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations--Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount will
be used only to purchase Subsequent Assets. Any portion of the Pre-Funded Amount
remaining in the Pre-Funding Account at the end of the Pre-Funding Period will
be used to prepay one or more classes of Securities in the amounts and in the
manner specified in the prospectus supplement. In addition, if specified in the
prospectus supplement, the depositor may be required to deposit cash into an
account maintained by the trustee (the "Capitalized Interest Account") for the
purpose of assuring the availability of funds to pay interest on the Securities
during the Pre-Funding Period. Any amount remaining in the Capitalized Interest
Account at the end of the Pre-Funding Period will be remitted as specified in
the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts will
be permitted to be invested, pending application, only in eligible investments
authorized by each applicable rating agency.
ACCOUNTS
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the trust
fund. This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as cash
or invested in some short-term, investment grade obligations, in each case as
described in the prospectus supplement. See "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related trust fund may be
provided to one or more classes of Securities in the related series in the form
of subordination of one or more other classes of Securities in that series or by
one or more other types of credit support, for example, a letter of credit,
insurance policy, guarantee, reserve fund or another type of credit support, or
a combination of these (any of these types of coverage for the Securities of any
series, is referred to generally as "credit support"). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information for each type of credit support, if any,
will be described in the prospectus supplement for a series of Securities. See
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the prospectus supplement, the trust fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The trust fund may also include other agreements, for example, interest
rate swap agreements, interest rate cap or floor agreements, currency swap
agreements or similar agreements provided to reduce the effects of interest rate
or currency exchange rate fluctuations on the Assets or on one or more classes
of Securities. (Currency swap agreements might be included in the trust fund if
some or all of the Assets were denominated in a non-United States currency.) The
principal terms of any related guaranteed investment contract or other agreement
(any of these types of agreement, a "Cash Flow Agreement"), including provisions
relating to the timing, manner and amount of payments under these documents and
provisions relating to the termination of these documents, will be described in
the prospectus supplement for the related series. In addition, the prospectus
supplement will provide information with respect to the borrower under any Cash
Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the depositor to the purchase of Assets, or the repayment of the
financing incurred in that purchase, and to pay for some of the expenses
incurred in connection with that purchase of Assets and sale of Securities. The
depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors, including
the volume of Assets acquired by the depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Interest Rates, which may or may not be based upon the interest rates
borne by the Assets in the related trust fund. The prospectus supplement for any
series will specify the Interest Rate for each class of Securities or, in the
case of a variable or adjustable Interest Rate, the method of determining the
Interest Rate; the effect, if any, of the prepayment of any Asset on the
Interest Rate of one or more classes of Securities; and whether the
distributions of interest on the Securities of any class will be dependent, in
whole or in part, on the performance of any borrower under a Cash Flow
Agreement.
If specified in the prospectus supplement, the effective yield to maturity
to each holder of Securities entitled to payments of interest will be below that
otherwise produced by the applicable Interest Rate and purchase price of that
Security because, while interest may accrue on each Asset during a period (each,
an "Accrual Period"), the distribution of that interest will be made on a day
that may be several days, weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities entitled to distributions of
interest (or addition to the Security Balance of a class of Accrual Securities)
will be made by or on behalf of the trustee each month on the date specified in
the related prospectus supplement (each date, a "Distribution Date"), and will
include interest accrued during the Accrual Period for that Distribution Date.
As indicated above under "--Interest Rate," if the Accrual Period ends on a date
other than the day before a Distribution Date for the related series, the yield
realized by the holders of those Securities may be lower than the yield that
would result if the Accrual Period ended on the day before the Distribution
Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), including principal prepayments resulting from both
voluntary prepayments by the borrowers and involuntary liquidations. The rate at
which principal prepayments occur will be affected by a variety of factors,
including the terms of the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the level of prevailing interest rates, the availability of
mortgage credit and economic, demographic, geographic, tax, legal and other
factors.
In general, however, if prevailing interest rates fall significantly below
the interest rates on the Assets in a particular trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), those assets are likely to be the
subject of higher principal prepayments than if prevailing rates remain at or
above the rates borne by those assets. However, you should note that some Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may consist of
loans with different interest rates. The rate of principal payment on Mortgage
Securities will also be affected by the allocation of principal payments on the
underlying assets among the Mortgage Securities or Agency Securities and other
Mortgage Securities or Agency Securities of the same series. The rate of
principal payments on the Assets in the related trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities) is likely to be affected by the
existence of any Lock-out Periods and Prepayment Premium provisions of the
mortgage loans underlying or comprising those Assets, and by the extent to which
the servicer of any of these mortgage loans is able to enforce these provisions.
Mortgage loans with a Lock-out Period or a Prepayment Premium provision, to the
extent enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical mortgage loans without those
provisions, with shorter Lock-out Periods or with lower Prepayment Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for a
series of Securities, the effect on yield on one or more classes of the
Securities of that series of prepayments of the Assets in the related trust fund
may be mitigated or exacerbated by any provisions for sequential or selective
distribution of principal to those classes.
When a full prepayment is made on a mortgage loan, the borrower is charged
interest on the principal amount of the mortgage loan so prepaid for the number
of days in the month actually elapsed up to the date of the prepayment or some
other period specified in the prospectus supplement. Generally, the effect of
prepayments in full will be to reduce the amount of interest paid in the
following month to holders of Securities entitled to payments of interest
because interest on the principal amount of any mortgage loan so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related mortgage loan as of its due date in the month in which
the partial prepayment is received or some other date as is specified in the
prospectus supplement.
The timing of changes in the rate of principal payments on the Assets (or,
in the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities) may significantly
affect an investor's actual yield to maturity, even if the average rate of
distributions of principal is consistent with an investor's expectation. In
general, the earlier a principal payment is received on the mortgage loans and
distributed on a Security, the greater the effect on that investor's yield to
maturity. The effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during a
particular period may not be offset by a similar decrease (or increase) in the
rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a trust fund and the rate at which payments are made from any
credit support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of that
series. Prepayments on the mortgage loans comprising or underlying the Assets in
a particular trust fund will generally accelerate the rate at which principal is
paid on some or all of the classes of the Securities of the related series.
If so provided in the prospectus supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or before which the Security Balance of the class of
Securities is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. 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 that security will be repaid to the investor.
The weighted average life of a class of Securities of a series will be
influenced by the rate at which principal on the Assets is paid to that class,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments, in whole or in part, and
liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Assets in a trust fund. If any Assets in a
particular trust fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of these Securities may be fully paid
before their respective final scheduled Distribution Dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the Assets will, to
some extent, be a function of the mix of mortgage rates or Contract Rates and
maturities of the mortgage loans comprising or underlying those Assets. See
"Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents a
constant assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans for the life of those loans. SPA represents
an assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans. A prepayment assumption of 100% of SPA
assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of those loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Starting in the thirtieth month and in each month thereafter during the life of
the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the mortgage
loans underlying or comprising the Assets.
The prospectus supplement for each series of Securities may contain tables,
if applicable, setting forth the projected weighted average life of each class
of Offered Securities of that series and the percentage of the initial Security
Balance of each class that would be outstanding on specified Distribution Dates
based on the assumptions stated in the prospectus supplement, including
assumptions that prepayments on the mortgage loans comprising or underlying the
related Assets are made at rates corresponding to various percentages of CPR,
SPA or some other standard specified in the prospectus supplement. These tables
and assumptions are intended to illustrate the sensitivity of the weighted
average life of the Securities to various prepayment rates and will not be
intended to predict or to provide information that will enable investors to
predict the actual weighted average life of the Securities. It is unlikely that
prepayment of any mortgage loans comprising or underlying the Assets for any
series will conform to any particular level of CPR, SPA or any other rate
specified in the prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans may
have balloon payments due at maturity (which, based on the amortization schedule
of those mortgage loans, may be a substantial amount), and because the ability
of a borrower to make a balloon payment typically will depend on its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Balloon Payment Assets may default at maturity. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Securities
and may thus lengthen the period of time elapsed from the date of issuance of a
Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. Under the applicable
underwriting standards, the borrower under each mortgage loan generally will be
qualified on the basis of the mortgage rate in effect at origination. The
repayment of any of these mortgage loans may therefore be dependent on the
ability of the borrower to make larger level monthly payments following the
adjustment of the mortgage rate. In addition, some mortgage loans may be subject
to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which the
monthly payments made by the borrower during the early years of the mortgage
loan will be less than the scheduled monthly payments on the mortgage loan (the
"Buydown Period"). The periodic increase in the amount paid by the borrower of a
Buydown Mortgage Loan during or at the end of the applicable Buydown Period may
create a greater financial burden for the borrower, who might not have otherwise
qualified for a mortgage, and may accordingly increase the risk of default for
the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance of
any related class or classes of Securities will lengthen the weighted average
life of those Securities and may adversely affect yield to holders of those
Securities, depending on the price at which those Securities were purchased. In
addition, for some ARM Loans subject to negative amortization, during a period
of declining interest rates, it might be expected that each minimum scheduled
monthly payment on this type of mortgage loan would exceed the amount of
scheduled principal and accrued interest on the principal balance of that
mortgage loan, and since that excess will be applied to reduce the principal
balance of the related class or classes of Securities, the weighted average life
of those Securities will be reduced and may adversely affect yield to holders of
those Securities, depending on the price at which those Securities were
purchased.
As may be described in the prospectus supplement, the related Agreement may
provide that all or a portion of the principal collected on or with respect to
the related mortgage loans may be applied by the related trustee to the
acquisition of additional mortgage loans during a specified period (rather than
used to fund payments of principal to securityholders during that period) with
the result that the related Securities possess an interest-only period, also
commonly referred to as a revolving period, which will be followed by an
amortization period. Any of these interest-only or revolving periods may, upon
the occurrence of particular events to be described in the prospectus
supplement, terminate before the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of this
principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related mortgage loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time the Securities are issued. Any similar feature
applicable to any Securities may end on the occurrence of events to be described
in the prospectus supplement, resulting in the current funding of principal
payments to the related securityholders and an acceleration of the amortization
of these Securities.
TERMINATION
If specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the repurchase of the Assets in
the related trust fund by the party specified in the prospectus supplement, on
any date on which the total Security Balance of the Securities of that series
declines to a percentage specified in the prospectus supplement (generally not
to exceed 10%) of the Initial Security Balance, under the circumstances and in
the manner set forth therein. In addition, if so provided in the prospectus
supplement, some classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities--Termination."
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. The rate of default on mortgage loans that are
refinance or limited documentation mortgage loans, and on mortgage loans with
high Loan-to-Value Ratios, may be higher than for other types of mortgage loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the mortgage loans will be affected by the general economic condition of the
region of the country in which the related Mortgage Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of the
mortgage loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of mortgage loans
that are repaid in accordance with their terms will affect the weighted average
life of the mortgage loans comprising or underlying the Assets and that of the
related series of Securities.
REFINANCING
At the request of a borrower, the servicer may allow the refinancing of a
mortgage loan in any trust fund by accepting prepayments on the mortgage loan
and permitting a new loan secured by a mortgage on the same property. In the
event of that refinancing, the new loan would not be included in the related
trust fund and, therefore, that refinancing would have the same effect as a
prepayment in full of the related mortgage loan. A servicer may, from time to
time, implement programs designed to encourage refinancing. These programs may
include modifications of existing loans, general or targeted solicitations, the
offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. In addition, servicers may encourage the
refinancing of mortgage loans, including defaulted mortgage loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of those
mortgage loans.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of transfers of underlying
Mortgaged Property is another factor affecting prepayment rates that may not be
reflected in the prepayment standards or models used in the relevant prospectus
supplement. A number of the mortgage loans comprising or underlying the Assets,
other than FHA loans and VA loans, may include "due-on-sale clauses" that allow
the holder of the mortgage loans to demand payment in full of the remaining
principal balance of the mortgage loans upon sale, transfer or conveyance of the
related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus supplement,
the servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the servicer will not take any action in relation to the enforcement of any
due-on-sale provision that would adversely affect or jeopardize coverage under
any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Due-on-Sale Provisions."
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own and
sell mortgage loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in mortgage
loans and other financial assets, collections on the mortgage loans and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. If a series of Securities includes
Asset-backed notes (the "Notes," and together with the Certificates, the
"Securities"), the Notes will represent indebtedness of the related trust fund
and will be issued and secured pursuant to an indenture. Each series of
Securities will consist of one or more classes of Securities that may:
o provide for the accrual of interest on the series of Securities based
on fixed, variable or adjustable rates;
o be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other classes
of Securities in respect of distributions on the Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest on the series of
Securities which begin only following the occurrence of specific
events, that as the retirement of one or more other classes of
Securities of that series (collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described in
the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of the Securities with one or more of the characteristics
described in this paragraph including a Strip Security component.
If specified in the prospectus supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Assets in the related trust fund (each portion of the
Assets, an "Asset Group"). Any of these classes may include classes of Offered
Securities.
Each class of Securities offered by this prospectus and the related
prospectus supplement (the "Offered Securities") will be issued in minimum
denominations corresponding to the Security Balances or, in the case of some
classes of Strip Securities, notional amounts or percentage interests specified
in the prospectus supplement. The transfer of any Offered Securities may be
registered and those Securities may be exchanged without the payment of any
service charge payable in connection with that registration of transfer or
exchange, but the depositor or the trustee or any agent of the depositor or the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Securities of a series may be issued
in fully registered, certificated form ("Definitive Securities") or in
book-entry form ("Book-Entry Securities"), as provided in the prospectus
supplement. See "Description of the Securities--Book-Entry Registration and
Definitive Securities." Definitive Securities will be exchangeable for other
Securities of the same class and series of a similar total Security Balance,
notional amount or percentage interest but of different authorized
denominations.
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the trustee on each Distribution Date as specified in the prospectus
supplement from the Available Distribution Amount for that series and that
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the prospectus supplement,
the last business day of the month preceding the month in which the Distribution
Date occurs (the "Record Date"), and the amount of each distribution will be
determined as of the close of business on the date specified in the prospectus
supplement (the "Determination Date"). All distributions for each class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding securityholders in that class or by random selection or as described
in the prospectus supplement. Payments will be made either by wire transfer in
immediately available funds to the account of a securityholder at a bank or
other entity having appropriate facilities for these payments, if that
securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Securities in the
requisite amount specified in the prospectus supplement), or by check mailed to
the address of the person entitled to the payment as it appears on the Security
Register; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the location specified in the notice to securityholders of that final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below,
subject to the terms described in the prospectus supplement. Generally, the
"Available Distribution Amount" for each Distribution Date equals the sum of the
following amounts:
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive, unless otherwise specified in the prospectus supplement,
of:
(a) all scheduled payments of principal and interest
collected but due on a date after the related Due Period (unless
a different period is specified in the prospectus supplement, a
"Due Period " for any Distribution Date will begin on the second
day of the month in which the immediately preceding Distribution
Date occurs, or the Cut-off Date in the case of the first Due
Period, and will end on the first day of the month of the related
Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of
any FHA insurance, VA Guaranty Policy or insurance policies to be
maintained for each Asset (to the extent that proceeds are not
applied to the restoration of the Asset or released in accordance
with the normal servicing procedures of a servicer, subject to
the terms and conditions applicable to the related Asset)
(collectively, "Insurance Proceeds"), all other amounts received
and retained in connection with the liquidation of Assets in
default in the trust fund ("Liquidation Proceeds"), and other
unscheduled recoveries received after the related Due Period, or
other period specified in the prospectus supplement,
(c) all amounts in the Collection Account that are due or
reimbursable to the depositor, the trustee, an Asset Seller, a
servicer, the master servicer or any other entity as specified in
the prospectus supplement or that are payable in respect of
particular expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset from
the trust fund for defective documentation or a breach of
representation or warranty received after the related Due Period,
or other period specified in the prospectus supplement;
(2) if the prospectus supplement so provides, interest or investment
income on amounts on deposit in the Collection Account, including any net
amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or any
other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any credit support for that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Securities (including any Securities not offered by this prospectus)
on each Distribution Date, and accordingly will be released from the trust fund
and will not be available for any future distributions.
The prospectus supplement for a series of Securities will describe any
variation in the calculation or distribution of the Available Distribution
Amount for that series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Strip Securities which have
no Interest Rate) may have a different Interest Rate, which will be a fixed,
variable or adjustable rate at which interest will accrue on that class or a
component of that class (the "Interest Rate" in the case of Certificates). The
prospectus supplement will specify the Interest Rate for each class or component
or, in the case of a variable or adjustable Interest Rate, the method for
determining the Interest Rate. Interest on the Securities will be calculated on
the basis of a 360-day year consisting of twelve 30-day months unless the
prospectus supplement specifies a different basis.
Distributions of interest on the Securities of any class will be made on
each Distribution Date (other than any class of Accrual Securities, which will
be entitled to distributions of accrued interest starting only on the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that class
and that Distribution Date, subject to the sufficiency of the portion of the
Available Distribution Amount allocable to that class on that Distribution Date.
Before any interest is distributed on any class of Accrual Securities, the
amount of Accrued Security Interest otherwise distributable on that class will
instead be added to the Security Balance of that class on each Distribution
Date.
For each class of Securities and each Distribution Date (other than some
classes of Strip Securities), "Accrued Security Interest" will be equal to
interest accrued during the related Accrual Period on the outstanding Security
Balance of the class of Securities immediately before the Distribution Date, at
the applicable Interest Rate, reduced as described below. Accrued Security
Interest on some classes of Strip Securities will be equal to interest accrued
during the related Accrual Period on the outstanding notional amount of the
Strip Security immediately before each Distribution Date, at the applicable
Interest Rate, reduced as described below, or interest accrual in the manner
described in the prospectus supplement. The method of determining the notional
amount for a particular class of Strip Securities will be described in the
prospectus supplement. Reference to notional amount is solely for convenience in
some of the calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the prospectus
supplement, the Accrued Security Interest on a series of Securities will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full accrual period resulting from prepayments
before the due date in that accrual period on the mortgage loans comprising or
underlying the Assets in the trust fund for that series. The particular manner
in which these shortfalls are to be allocated among some or all of the classes
of Securities of that series will be specified in the prospectus supplement. The
prospectus supplement will also describe the extent to which the amount of
Accrued Security Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans comprising or underlying the Assets in the related trust fund.
Unless otherwise provided in the prospectus supplement, any reduction in the
amount of Accrued Security Interest otherwise distributable on a class of
Securities by reason of the allocation to that class of a portion of any
deferred interest on the mortgage loans comprising or underlying the Assets in
the related trust fund will result in a corresponding increase in the Security
Balance of that class. See "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than some classes of Strip Securities,
will have a "Security Balance" which, at any time, will equal the then maximum
amount that the holder will be entitled to receive on principal out of the
future cash flow on the Assets and other assets included in the related trust
fund. The outstanding Security Balance of a Security will be reduced:
o to the extent of distributions of principal on that Security from time
to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Securities of a series will be greater than the
outstanding total principal balance of the related Assets as of the applicable
Cut-off Date. The initial total Security Balance of a series and each class of
the series will be specified in the prospectus supplement. Distributions of
principal will be made on each Distribution Date to the class or classes of
Securities in the amounts and in accordance with the priorities specified in the
prospectus supplement. Some classes of Strip Securities with no Security Balance
are not entitled to any distributions of principal.
If specified in the related prospectus supplement, the trust fund may issue
securities from time to time and use the proceeds of thsi issuance to make
principal payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion of
the principal collections may be applied by the trustee to the acquisition of
subsequent mortgage loans or asset-backed or mortgage backed securities during a
specified period rather than used to distribute payments of principal to
securityholders during that period. These securities would then possess an
interest only period, also commonly referred to as a "Revolving Period", which
will be followed by an "Amortization Period", during which principal will be
paid. Any interest only or revolving period may terminate prior to the end of
the specified period and result in the earlier than expected principal repayment
of the securities.
COMPONENTS
To the extent specified in the prospectus supplement, distribution on a
class of Securities may be based on a combination of two or more different
components as described under "--General" above. To that extent, the
descriptions set forth under "--Distributions of Interest on the Securities" and
"--Distributions of Principal of the Securities" above also relate to components
of the component class of Securities. References in those sections to Security
Balance may refer to the principal balance, if any, of these components and
reference to the Interest Rate may refer to the Interest Rate, if any, on these
components.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the prospectus supplement, Prepayment Premiums that are
collected on the mortgage loans in the related trust fund will be distributed on
each Distribution Date to the class or classes of Securities entitled to the
distribution as described in the prospectus supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in the prospectus supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
trust fund against losses and shortfalls on Assets comprising that trust fund.
The prospectus supplement for a series of Securities will describe the
entitlement, if any, of a class of Securities whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Securities has been reduced to zero as the result of principal distributions,
the allocation of losses on the Assets, an optional termination or an optional
purchase or redemption, that class will no longer be entitled to receive
principal distributions from amounts received on the assets of the related trust
fund, including distributions in respect of principal losses previously
allocated to that class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the prospectus supplement, the servicer or another entity
described in the prospectus supplement will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal to
the total of payments of (1) principal (other than any balloon payments) and (2)
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in that trust fund during the related Due Period and were delinquent
on the related Determination Date, subject to a good faith determination that
the advances will be reimbursable from Related Proceeds (as defined below). In
the case of a series of Securities that includes one or more classes of
Subordinate Securities and if so provided in the prospectus supplement, the
servicer's (or another entity's) advance obligation may be limited only to the
portion of those delinquencies necessary to make the required distributions on
one or more classes of Senior Securities and/or may be subject to a good faith
determination that advances will be reimbursable not only from Related Proceeds
but also from collections on other Assets otherwise distributable on one or more
classes of those Subordinate Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Securities entitled to
the payments, rather than to guarantee or insure against losses. Advances of the
servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of credit
support) respecting which those advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the prospectus supplement,
including out of any amounts otherwise distributable on one or more classes of
Subordinate Securities of that series; provided, however, that any advance will
be reimbursable from any amounts in the related Collection Account before any
distributions being made on the Securities to the extent that the servicer (or
some other entity) determines in good faith that that advance (a "Nonrecoverable
Advance") is not ultimately recoverable from Related Proceeds or, if applicable,
from collections on other Assets otherwise distributable on the Subordinate
Securities. If advances have been made by the servicer from excess funds in the
related Collection Account, the servicer is required to replace these funds in
that Collection Account on any future Distribution Date to the extent that funds
in that Collection Account on that Distribution Date are less than payments
required to be made to securityholders on that date. If specified in the
prospectus supplement, the obligations of the servicer (or another entity) to
make advances may be secured by a cash advance reserve fund, a surety bond, a
letter of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of and the identity of any borrower on any surety
bond will be set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the servicer
(or another entity) will be entitled to receive interest at the rate specified
in the prospectus supplement on its outstanding advances and will be entitled to
pay itself this interest periodically from general collections on the Assets
before any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific conditions
described in the prospectus supplement, in the event of a servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Securities of a series,
the servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will forward or cause to be forwarded to each holder, to the
depositor and to any other parties as may be specified in the related Agreement,
a statement containing the information specified in the prospectus supplement,
or if no information is specified in the prospectus supplement, generally
setting forth, in each case to the extent applicable and available:
(1) the amount of that distribution to holders of Securities of that
class applied to reduce the Security Balance of the Securities;
(2) the amount of that distribution to holders of Securities of that
class allocable to Accrued Security Interest;
(3) the amount of that distribution allocable to Prepayment Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to prepare
their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of business on that
Distribution Date;
(6) the total principal balance of the Assets at the close of business
on that Distribution Date;
(7) the number and total principal balance of mortgage loans in
respect of which
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have begun;
(8) for any mortgage loan liquidated during the related Due Period,
(a) the portion of the related liquidation proceeds payable or reimbursable
to a servicer (or any other entity) in respect of that mortgage loan and
(b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage loan
and included in the trust fund as of the end of the related Due Period, the
date of acquisition;
(10) for each REO Property relating to a mortgage loan and included in
the trust fund as of the end of the related Due Period,
(a) the book value,
(b) the principal balance of the related mortgage loan
immediately following that Distribution Date (calculated as if that
mortgage loan were still outstanding taking into account limited
modifications to the terms of the mortgage loan specified in the
Agreement),
(c) the total amount of unreimbursed servicing expenses and
unreimbursed advances in respect of the REO Property and
(d) if applicable, the total amount of interest accrued and
payable on related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable or reimbursable
to the master servicer in respect of that REO Property or the related
mortgage loan and
(c) the amount of any loss to securityholders in respect of the
related mortgage loan;
(12) the total Security Balance or notional amount, as the case may
be, of each class of Securities (including any class of Securities not
offered by this prospectus) at the close of business on that Distribution
Date, separately identifying any reduction in that Security Balance due to
the allocation of any loss and increase in the Security Balance of a class
of Accrual Securities if any Accrued Security Interest has been added to
that balance;
(13) the total amount of principal prepayments made during the related
Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the close
of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each class
of Securities at the close of business on that Distribution Date;
(17) in the case of Securities with a variable Interest Rate, the
Interest Rate applicable to that Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in accordance with
the method specified in the prospectus supplement;
(18) in the case of Securities with an adjustable Interest Rate, for
statements to be distributed in any month in which an adjustment date
occurs, the adjustable Interest Rate applicable to that Distribution Date,
if available, and the immediately succeeding Distribution Date as
calculated in accordance with the method specified in the prospectus
supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included as of the close of
business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent Assets
since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of
(a) default interest,
(b) late charges and
(c) assumption and modification fees collected during the related
Due Period.
Within a reasonable period of time after the end of each calendar year, the
servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year the information required by the Code and applicable regulations
under the Code to enable securityholders to prepare their tax returns. See
"Description of the Securities--Book-Entry Registration and Definitive
Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Securities will terminate upon the payment to securityholders of that series of
all amounts held in the Collection Accounts or by a servicer, the master
servicer, if any, or the trustee and required to be paid to them pursuant to
that Agreement following the earlier of (1) the final payment or other
liquidation of the last Asset subject to the related Agreement or the
disposition of all property acquired upon foreclosure of any mortgage loan
subject to the Agreement and (2) the purchase of all of the assets of the trust
fund by the party entitled to effect that termination, under the circumstances
and in the manner set forth in the prospectus supplement. In no event, however,
will the trust fund continue beyond the date specified in the prospectus
supplement. Written notice of termination of the Agreement will be given to each
securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice of
termination.
If specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the purchase of the Assets in the
related trust fund by the party specified in the prospectus supplement, under
the circumstances and in the manner set forth in the prospectus supplement. If
so provided in the prospectus supplement, upon the reduction of the Security
Balance of a specified class or classes of Securities by a specified percentage,
the party specified in the prospectus supplement will solicit bids for the
purchase of all assets of the trust fund, or of a sufficient portion of those
assets to retire that class or classes or purchase that class or classes at a
price set forth in the prospectus supplement, in each case, under the
circumstances and in the manner set forth in the prospectus supplement. That
price will at least equal the outstanding Security Balances and any accrued and
unpaid interest on the Security Balances (including any unpaid interest
shortfalls for prior Distribution Dates). Any sale of the Assets of the trust
fund will be without recourse to the trust fund or the securityholders. Any
purchase or solicitation of bids may be made only when the total Security
Balance of that class or classes declines to a percentage of the Initial
Security Balance of those Securities (not to exceed 10%) specified in the
prospectus supplement. In addition, if so provided in the prospectus supplement,
some classes of Securities may be purchased or redeemed in the manner set forth
in the prospectus supplement at a price at least equal to the outstanding
Security Balance of each class so purchased or redeemed and any accrued and
unpaid interest on the Security Balance (including any unpaid interest
shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the depositor, the
servicer or any other party specified in the prospectus supplement may, at that
party's option, repurchase any mortgage loan that is in default or as to which
default is reasonably foreseeable if, in the depositor's, the servicer's or any
other party's judgment, the related default is not likely to be cured by the
borrower or default is not likely to be averted, at a price equal to the unpaid
principal balance of the mortgage loan plus accrued interest on the mortgage
loan and under the conditions set forth in the prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of the
Offered Securities of any series will be issued as Book-Entry Securities, and
each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Clearstream Luxembourg, societe anonyme ("Clearstream Luxembourg") or
the Euroclear System ("Euroclear"). Each class of Book-Entry Securities will be
issued in one or more certificates or notes, as the case may be, that equal the
initial principal amount of the related class of Offered Securities and will
initially be registered in the name of Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "--Definitive Securities." Unless and until Definitive
Securities are issued for the Book-Entry Securities under the limited
circumstances described in the applicable prospectus supplement or this
prospectus, all references to actions by securityholders with respect to the
Book-Entry Securities will refer to actions taken by DTC, Clearstream Luxembourg
or Euroclear upon instructions from their Participants (as defined below), and
all references in this prospectus to distributions, notices, reports and
statements to securityholders with respect to the Book-Entry Securities will
refer to distributions, notices, reports and statements to DTC, Clearstream
Luxembourg or Euroclear, as applicable, for distribution to Beneficial Owners by
DTC in accordance with the procedures of DTC and if applicable, Clearstream
Luxembourg and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in the
United States, or, if the Offered Securities are offered for sale globally,
through Clearstream Luxembourg or Euroclear in Europe if they are participating
organizations ("Participants") of those systems. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include some other organizations. Indirect access to the DTC, Clearstream
Luxembourg and Euroclear systems also is available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Securities,
whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Securities will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
CLEARSTREAM LUXEMBOURG
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thus eliminating the need for
physical movement of securities 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 Corporation"). 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 Corporation. The Cooperative Corporation establishes policy
for Euroclear on behalf of its 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 Participant of Euroclear, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of its
Participants, and has no record of or relationship with persons holding through
Participants of Euroclear.
Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf
of their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective depositaries
which in turn will hold positions in customers' securities accounts in the
depositaries names on the books of DTC. Citibank will act as depositary for
Clearstream Luxembourg and The Chase Manhattan Bank will act as depositary for
Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to receive
a physical certificate representing a Certificate, or note representing a Note.
Unless and until Definitive Securities are issued, it is anticipated that the
only "securityholder" of the Offered Securities will be Cede & Co., as nominee
of DTC. Beneficial Owners will not be "Certificateholders" as that term is used
in any Agreement, nor "Noteholders" as that term is used in any indenture.
Beneficial Owners are only permitted to exercise their rights indirectly through
Participants, DTC, Clearstream Luxembourg or Euroclear, as applicable.
The Beneficial 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 that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered 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 Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have accounts
with respect to Offered Securities are similarly required to make book-entry
transfers and receive and transmit distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates or notes, the Rules provide a mechanism by which Beneficial Owners
will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Securities,
except under the limited circumstances described below. Unless and until
Definitive Securities are issued, Beneficial Owners who are not Participants may
transfer ownership of Offered Securities only through Participants and Indirect
Participants by instructing the Participants and Indirect Participants to
transfer Offered Securities, by book-entry transfer, through DTC for the account
of the purchasers of the Offered Securities, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfer of ownership of Book-Entry 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 Beneficial Owners.
Because of time zone differences, any credits of securities received in
Clearstream Luxembourg 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. These credits or any
transactions in securities settled during this processing will be reported to
the relevant Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg or
Euroclear to a Participant of DTC will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Securities, see "Material Federal Income Tax Considerations -- Tax Treatment of
Foreign Investors" in this prospectus and, if the Book-Entry Securities are
globally offered and the prospectus supplement so provides, see "Global
Clearance, Settlement and Tax Documentation Procedures -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
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 Participants of
Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that 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. Participants of
Clearstream Luxembourg or Euroclear may not deliver instructions directly to the
European Depositaries.
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 each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC will
be responsible for disbursing the distribution to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, because the
distributions will be forwarded by the Trustee to Cede & Co. Any distributions
on Securities held through Clearstream Luxembourg or Euroclear will be credited
to the cash accounts of Participants of Clearstream Luxembourg or Euroclear in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Considerations -- REMICs -- Taxation of Certain
Foreign Investors" in this prospectus. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial 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 Book-Entry Securities, may be
limited due to the lack of physical securities for the Book-Entry Securities. In
addition, issuance of the Book-Entry Securities in book-entry form may reduce
the liquidity of the securities in the secondary market since potential
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial 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 Beneficial Owners are credited.
Generally, DTC will advise the applicable 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 or indenture, as
applicable, only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Securities are credited, to the extent that
actions are taken on behalf of Financial Intermediaries whose holdings include
the Book-Entry Securities. If the Book-Entry Securities are globally offered,
Clearstream Luxembourg or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a securityholder under the Agreement
or indenture, as applicable, on behalf of a Participant of Clearstream
Luxembourg or Euroclear only in accordance with its relevant rules and
procedures and subject to the ability of the Relevant Depositary to effect those
actions on its behalf through DTC. DTC may take actions, at the direction of the
related Participants, with respect to some Offered Securities that conflict with
actions taken with respect to other Offered Securities.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Securities
among Participants of DTC, Clearstream Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform these procedures and the
procedures may be discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee, any
securities registrar or paying agent or any of their affiliates 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 or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
DEFINITIVE SECURITIES
Securities initially issued in book-entry form will be issued as Definitive
Securities to Beneficial Owners or their nominees, rather than to DTC or its
nominee only
(1) if the depositor advises the trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as
depository for the Securities and the depositor is unable to locate a
qualified successor,
(2) if the depositor, at its option, elects to end the book-entry system
through DTC or
(3) in accordance with any other provisions described in the prospectus
supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Beneficial Owners.
Upon surrender by DTC of the security or securities representing the Book-Entry
Securities, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Securities to which they are entitled, and
thereafter the trustee will recognize the holders of those Definitive Securities
as securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT SECURITIES, GRANTOR TRUST SECURITIES
Securities representing interests in a trust fund, or a portion of a trust
fund, that the trustee will elect to have treated as a real estate mortgage
investment conduit under Sections 860A through 860G of the Code ("REMIC
Securities"), FASIT Securities (as defined in this prospectus), or Grantor Trust
Securities (as defined in this prospectus) will be issued, and the related trust
fund will be created, pursuant to a pooling and servicing agreement or trust
agreement (in either case, generally referred to in this prospectus as the
"pooling and servicing agreement") among the depositor, the trustee and the sole
servicer or master servicer, as applicable. The Assets of that trust fund will
be transferred to the trust fund and thereafter serviced in accordance with the
terms of the pooling and servicing agreement. In the event there are multiple
servicers of the Assets of that trust fund, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant to
a related underlying servicing agreement.
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Securities that are partnership interests for tax purposes will be issued,
and the related trust fund will be created, pursuant to the pooling and
servicing agreement or trust agreement.
A series of Notes issued by a trust fund will be issued pursuant to an
indenture between the related trust fund and an indenture trustee named in the
prospectus supplement. The trust fund will be established either as a statutory
business trust under the law of the State of Delaware or as a common law trust
under the law of the State of New York pursuant to a trust agreement between the
depositor and an owner trustee specified in the prospectus supplement relating
to that series of Notes. The Assets securing payment on the Notes will be
serviced in accordance with a sale and servicing agreement or servicing
agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may appear in
each pooling and servicing agreement, sale and servicing agreement or servicing
agreement (each an "Agreement"). The prospectus supplement for a series of
Securities will describe any provision of the Agreement relating to that series
that materially differs from the description of those provisions contained in
this prospectus. The summaries do not purport to be complete and are subject to,
and are qualified by reference to, all of the provisions of the Agreement for
each trust fund and the description of those provisions in the prospectus
supplement. The provisions of each Agreement will vary depending on the nature
of the Securities to be issued under the Agreement and the nature of the related
trust fund. As used in this prospectus for any series, the term "Security"
refers to all of the Securities of that series, whether or not offered by this
prospectus and by the prospectus supplement, unless the context otherwise
requires. A form of a pooling and servicing agreement has been filed as an
exhibit to the Registration Statement of which this prospectus is a part. The
depositor will provide a copy of the pooling and servicing agreement (without
exhibits) relating to any series of Securities without charge upon written
request of a securityholder of that series addressed to ACE Securities Corp.,
6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention:
Elizabeth S. Eldridge.
The servicer or master servicer and the trustee for any series of
Securities will be named in the prospectus supplement. In the event there are
multiple servicers for the Assets in a trust fund, a master servicer will
perform some of the administration, calculation and reporting functions for that
trust fund and will supervise the related servicers pursuant to a pooling and
servicing agreement. For a series involving a master servicer, references in
this prospectus to the servicer will apply to the master servicer where
non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the depositor will
assign (or cause to be assigned) to the designated trustee the Assets to be
included in the related trust fund, together with all principal and interest to
be received on or with respect to those Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The trustee will, concurrently with that assignment, deliver
the Securities to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged Property and
type of that property, the mortgage rate and, if applicable, the applicable
index, margin, adjustment date and any rate cap information, the original
and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Loan-to-Value Ratio as of the date
indicated and payment and prepayment provisions, if applicable, and
(2) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest rate on
the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) particular loan documents, which
will generally include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original Mortgage (or a certified copy
of the original Mortgage) with evidence of recording indicated on the original
Mortgage and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers to the trustee or
the custodian a copy or a duplicate original of the mortgage note, together with
an affidavit certifying that the original of the mortgage note has been lost or
destroyed. For those mortgage loans, the trustee (or its nominee) may not be
able to enforce the mortgage note against the related borrower. The Asset Seller
or other entity specified in the prospectus supplement will be required to agree
to repurchase, or substitute for, each of these mortgage loans that is
subsequently in default if the enforcement thereof or of the related Mortgage is
materially adversely affected by the absence of the original mortgage note. The
related Agreement will generally require the depositor or another party
specified in the prospectus supplement to promptly cause each of these
assignments of Mortgage to be recorded in the appropriate public office for real
property records, except in the State of California or in other states where, in
the opinion of counsel acceptable to the trustee, recording is not required to
protect the trustee's interest in the related mortgage loan against the claim of
any subsequent transferee or any successor to or creditor of the depositor, the
servicer, the relevant Asset Seller or any other prior holder of the mortgage
loan.
The trustee (or a custodian) will review the mortgage loan documents within
a specified period of days after receipt of the mortgage loan documents, and the
trustee (or a custodian) will hold those documents in trust for the benefit of
the securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new mortgage loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the servicer nor the depositor will be obligated to
repurchase or substitute for that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans will be delivered to the trustee (or a custodian) only to the
extent specified in the prospectus supplement. Generally these documents will be
retained by the servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the trustee will be recorded only to the
extent specified in the prospectus supplement.
Mortgage Securities and Agency Securities will be registered in the name of
the trustee or its nominee on the books of the issuer or guarantor or its agent
or, in the case of Mortgage Securities and Agency Securities issued only in
book-entry form, through the depository with respect to the Mortgage Securities
and Agency Securities, in accordance with the procedures established by the
issuer or guarantor for registration of those certificates, and distributions on
those securities to which the trust fund is entitled will be made directly to
the trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the prospectus supplement the depositor will, for
each Asset, assign representations and warranties, as of a specified date (the
person making those representations and warranties, the "Warranting Party")
covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary provisions
in the related mortgage note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the
Mortgage; and
o the existence of hazard and extended perils insurance coverage on the
Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate of the Asset
Seller or any other person acceptable to the depositor and will be identified in
the prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of the
related series of Securities evidencing an interest in that Asset. In the event
of a breach of any of these representations or warranties, the Warranting Party
will be obligated to reimburse the trust fund for losses caused by that breach
or either cure that breach or repurchase or replace the affected Asset as
described below. Since the representations and warranties may not address events
that may occur following the date as of which they were made, the Warranting
Party will have a reimbursement, cure, repurchase or substitution obligation in
connection with a breach of that representation and warranty only if the
relevant event that causes that breach occurs before that date. That party would
have no obligations if the relevant event that causes that breach occurs after
that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of an Asset that materially and adversely affects
the value of that Asset or the interests in the prospectus supplement of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the Warranting
Party was notified of that breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of that series of
Securities, to cause the removal of that Asset from the trust fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the prospectus supplement. If so provided in the
prospectus supplement for a series, a Warranting Party, rather than repurchase
or substitute an Asset as to which a breach has occurred, will have the option
to reimburse the trust fund or the securityholders for any losses caused by that
breach. This reimbursement, repurchase or substitution obligation will
constitute the sole remedy available to securityholders or the trustee for a
breach of representation by a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make representations and warranties regarding its authority
to enter into, and its ability to perform its obligations under, the related
Agreement. A breach of any representation of the servicer that materially and
adversely affects the interests of the securityholders and which continues
unremedied for the number of days specified in the Agreement after the discovery
of the breach by the servicer or the receipt of written notice of that breach by
the servicer from the trustee, the depositor or the holders of Securities
evidencing not less than 25% of the voting rights or other percentage specified
in the related Agreement, will constitute an Event of Default under that
Agreement. See "Events of Default" and "Rights Upon Event of Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC")
(to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured so that the securityholders have a claim
with respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing those
funds that is superior to the claims of any other depositors or
general creditors of the institution with which the Collection Account
is maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Securities of that series.
Investment of amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ("Permitted Investments"). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held in the
Collection Account may be invested pending each succeeding Distribution Date in
short-term Permitted Investments. Any interest or other income earned on funds
in the Collection Account will, unless otherwise specified in the prospectus
supplement, be paid to the servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution that
is an affiliate of the servicer, if applicable, provided that that institution
meets the standards imposed by the rating agency or agencies. If permitted by
the rating agency or agencies, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the servicer or
serviced or master serviced by it on behalf of others.
DEPOSITS. A servicer or the trustee will deposit or cause to be deposited
in the Collection Account for one or more trust funds on a daily basis, or any
other period provided in the related Agreement, the following payments and
collections received, or advances made, by the servicer or the trustee or on its
behalf after the Cut-off Date (other than payments due on or before the Cut-off
Date, and exclusive of any amounts representing a Retained Interest), except as
otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion retained by a
servicer as its servicing compensation and net of any Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with the net
proceeds on a monthly basis with respect to any Assets acquired for the
benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any fund that
constitutes credit support for the related series of Securities as
described under "Description of Credit Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage loan,
property acquired in respect of the mortgage loan purchased by the
depositor, any Asset Seller or any other specified person as described
above under "--Assignment of Assets; Repurchases" and "--Representations
and Warranties; Repurchases," all proceeds of any defaulted mortgage loan
purchased as described below under "--Realization Upon Defaulted Assets,"
and all proceeds of any Asset purchased as described under "Description of
the Securities--Termination;"
(8) any amounts paid by a servicer to cover interest shortfalls
arising out of the prepayment of Assets in the trust fund as described
below under "--Retained Interest; Servicing Compensation and Payment of
Expenses;"
(9) to the extent that any of these items do not constitute additional
servicing compensation to a servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(10) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the trustee
in connection with losses realized on investments for the benefit of the
servicer or the trustee, as the case may be, of funds held in the
Collection Account; and
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the
prospectus supplement.
WITHDRAWALS. A servicer or the trustee may, from time to time as provided
in the related Agreement, make withdrawals from the Collection Account for each
trust fund for any of the following purposes, except as otherwise provided in
the Agreement:
(1) to make distributions to the securityholders on each Distribution
Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," which reimbursement is to be made out of amounts received
that were identified and applied by the servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Assets for which the advances were made or out
of amounts drawn under any form of credit support with respect to those
Assets;
(3) to reimburse a servicer for unpaid servicing fees earned and
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect of the Assets, which reimbursement is to be
made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Assets and properties, and net income
collected on the particular properties, which fees were earned or expenses
were incurred or out of amounts drawn under any form of credit support for
those Assets and properties;
(4) to reimburse a servicer for any advances described in clause (2)
above and any servicing expenses described in clause (3) above which, in
the servicer's good faith judgment, will not be recoverable from the
amounts described in those clauses, which reimbursement is to be made from
amounts collected on other Assets or, if and to the extent so provided by
the related Agreement and described in the prospectus supplement, just from
that portion of amounts collected on other Assets that is otherwise
distributable on one or more classes of Subordinate Securities, if any,
remain outstanding, and otherwise any outstanding class of Securities, of
the related series;
(5) if and to the extent described in the prospectus supplement, to
pay a servicer interest accrued on the advances described in clause (2)
above and the servicing expenses described in clause (3) above while those
advances and servicing expenses remain outstanding and unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for
expenses, costs and liabilities incurred by these parties, as and to the
extent described below under "--Certain Matters Regarding Servicers, the
Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for the
payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred by these parties, as and to the extent described below
under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(10) to pay the person so entitled any amounts deposited in the
Collection Account that were identified and applied by the servicer as
recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, which payments are to be made out of income
received on that property;
(12) if one or more elections have been made to treat the trust fund
or designated portions of the trust fund as a REMIC, to pay any federal,
state or local taxes imposed on the trust fund or its assets or
transactions, as and to the extent described under "Material Federal Income
Tax Considerations--REMICs--Taxes That May Be Imposed on the REMIC Pool" or
in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect of a mortgage
loan in connection with the liquidation of that mortgage loan or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of securityholders;
(15) to pay for the costs of recording the related Agreement if that
recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the trust fund whether by reason of purchase or
substitution as contemplated above under "--Assignment of Assets;
Repurchase" and "--Representations and Warranties; Repurchases" or
otherwise;
(17) to make any other withdrawals permitted by the related Agreement;
and
(18) to clear and terminate the Collection Account at the termination
of the trust fund.
OTHER COLLECTION ACCOUNTS. If specified in the prospectus supplement, the
Agreement for any series of Securities may provide for the establishment and
maintenance of a separate collection account into which the servicer will
deposit on a daily basis, or any other period as provided in the related
Agreement, the amounts described under "--Deposits" above for one or more series
of Securities. Any amounts on deposit in any of these collection accounts will
be withdrawn from these collection accounts and deposited into the appropriate
Collection Account by a time specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection accounts,
including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
COLLECTION AND OTHER SERVICING PROCEDURES. The servicer is required to make
reasonable efforts to collect all scheduled payments under the Assets and will
follow or cause to be followed those collection procedures that it would follow
with respect to assets that are comparable to the Assets and held for its own
account, provided that those procedures are consistent with
(1) the terms of the related Agreement and any related hazard insurance
policy or instrument of credit support, if any, included in the
related trust fund described in this prospectus or under "Description
of Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the prospectus supplement
or, if no standard is so specified, its normal servicing practices (in
either case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to waive any
late payment charge or penalty interest in respect of a late payment on an
Asset.
Each servicer will also be required to perform other customary functions of
a servicer of comparable assets, including maintaining hazard insurance policies
as described in this prospectus and in any prospectus supplement, and filing and
settling claims under these policies; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of borrowers for payment of taxes,
insurance and other items required to be paid by any borrower pursuant to the
terms of the Assets; processing assumptions or substitutions in those cases
where the servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties under some
circumstances; and maintaining accounting records relating to the Assets. The
servicer or any other entity specified in the prospectus supplement will be
responsible for filing and settling claims in respect of particular Assets under
any applicable instrument of credit support. See "Description of Credit
Support."
The servicer may agree to modify, waive or amend any term of any Asset in a
manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
its judgment, that modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment of
any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans may
grant to the servicer and/or the holder or holders of some classes of Securities
a right of first refusal to purchase from the trust fund at a predetermined
purchase price any mortgage loan as to which a specified number of scheduled
payments under the Agreement are delinquent. Any right of first refusal granted
to the holder of an Offered Security will be described in the prospectus
supplement. The prospectus supplement will also describe any similar right
granted to any person if the predetermined purchase price is less than the
Purchase Price described above under "--Representations and Warranties;
Repurchases."
If specified in the prospectus supplement, the servicer may offer to sell
any defaulted mortgage loan described in the preceding paragraph and not
otherwise purchased by any person having a right of first refusal with respect
to that defaulted mortgage loan, if and when the servicer determines, consistent
with the Servicing Standard, so that a sale would produce a greater recovery on
a present value basis than would liquidation through foreclosure, repossession
or similar proceedings. The related Agreement will provide that any offering be
made in a commercially reasonable manner for a specified period and that the
servicer accept the highest cash bid received from any person (including itself,
an affiliate of the servicer or any securityholder) that constitutes a fair
price for that defaulted mortgage loan. If there is no bid that is determined to
be fair, the servicer will proceed with respect to that defaulted mortgage loan
as described below. Any bid in an amount at least equal to the Purchase Price
described above under "--Representations and Warranties; Repurchases" will in
all cases be deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise, if that
action is consistent with the Servicing Standard and a default on that mortgage
loan has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to which
a REMIC election has been made, the servicer, on behalf of the trust fund, will
be required to sell the Mortgaged Property within three years of acquisition,
unless (1) the Internal Revenue Service grants an extension of time to sell that
property or (2) the trustee receives an opinion of independent counsel to the
effect that the holding of the property by the trust fund longer than three
years after its acquisition will not result in the imposition of a tax on the
trust fund or cause the trust fund to fail to qualify as a REMIC under the Code
at any time that any Securities are outstanding. Subject to the foregoing, the
servicer will be required to (A) solicit bids for any Mortgaged Property so
acquired in that manner as will be reasonably likely to realize a fair price for
that property and (B) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made for the related trust fund) on
the ownership and management of any Mortgaged Property acquired on behalf of the
trust fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the servicer nevertheless will be obligated to follow
or cause to be followed those normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued on
the defaulted Asset at the applicable interest rate, plus the total amount of
expenses incurred by the servicer in connection with those proceedings and which
are reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that difference. The servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, before the distribution of those Liquidation
Proceeds to securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is not
required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it has not
received a distribution for any Mortgage Security or Agency Security by the
fifth business day after the date on which that distribution was due and payable
pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the trustee and
the securityholders, will present claims to the borrower under each instrument
of credit support, and will take those reasonable steps as are necessary to
receive payment or to permit recovery under these instruments for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits its holder to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, then the level of coverage that
is consistent with the Servicing Standard. That coverage will be in general in
an amount equal to the lesser of the principal balance owing on that mortgage
loan (but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or any other amount specified in
the prospectus supplement. The ability of the servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by borrowers. All amounts collected by
the servicer under any of these policies (except for amounts 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, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation to
cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited in the Collection Account but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the 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 mortgage 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 of the policies are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of uninsured
risks.
The hazard insurance policies covering the Mortgaged Properties securing
the mortgage loans will typically contain a coinsurance 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 to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the coinsurance clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (1) the replacement cost of the improvements less physical
depreciation and (2) that proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of those
improvements.
Each Agreement for a trust fund composed of mortgage loans will require the
servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for the related Mortgaged Property as is consistent with the
terms of the related Mortgage and the Servicing Standard, which insurance may
typically include flood insurance (if the related Mortgaged Property was located
at the time of origination in a federally designated flood area).
Any cost incurred by the servicer in maintaining any insurance policy will
be added to the amount owing under the mortgage loan where the terms of the
mortgage loan so permit; provided, however, that the addition of that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The servicer, on behalf of the trustee and
securityholders, is obligated to present or cause to be presented claims under
any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the mortgage loans. However, the ability of the servicer to
present or cause to be presented those claims is dependent upon the extent to
which information in this regard is furnished to the servicer by borrowers.
FHA INSURANCE AND VA GUARANTEES
FHA loans will be insured by the FHA as authorized under the Housing Act.
Some FHA loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units, the FHA 245 graduated payment mortgage program and the FHA Title I
Program. These programs generally limit the principal amount and interest rates
of the mortgage loans insured. The prospectus supplement for Securities of each
series evidencing interests in a trust fund including FHA loans will set forth
additional information regarding the regulations governing the applicable FHA
insurance programs. Except as otherwise specified in the prospectus supplement,
the following describes FHA insurance programs and regulations as generally in
effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved by
the Department of Housing and Urban Development ("HUD") or by the servicer and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA loan, the servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the borrower. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those circumstances is accompanied by other
criteria, HUD may provide relief by making payments to the servicer in partial
or full satisfaction of amounts due under the FHA loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of insurance
benefits generally paid by the FHA is equal to the entire unpaid principal
amount of the defaulted FHA loan adjusted to reimburse the servicer for some of
its costs and expenses and to deduct amounts received or retained by the
servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid before that date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to make
any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA
loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination of these insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the servicer. The related Agreement will allow the servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the servicer so long as the criteria set forth in the Agreement
are met.
DUE-ON-SALE CLAUSES
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable insurance
policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The servicer will generally permit that transfer so long as the transferee
satisfies the servicer's then applicable underwriting standards. The purpose of
those transfers is often to avoid a default by the transferring borrower.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
of this Retained Interest. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A "Retained Interest" in an Asset represents a specified portion of the interest
payable on the Asset. The Retained Interest will be deducted from borrower
payments as received and will not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Securities
will come from the periodic payment to it of a portion of the interest payment
on each Asset or any other amount specified in the prospectus supplement. Since
any Retained Interest and a servicer's primary compensation are percentages of
the principal balance of each Asset, those amounts will decrease in accordance
with the amortization of the Assets. The prospectus supplement for a series of
Securities evidencing interests in a trust fund that includes mortgage loans may
provide that, as additional compensation, the servicer may retain all or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from borrowers and any interest or other income
that may be earned on funds held in the Collection Account or any account
established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement, pay
from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some other
expenses, including expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the prospectus supplement, interest on these
expenses at the rate specified in the prospectus supplement may be borne by the
trust fund.
If and to the extent provided in the prospectus supplement, the servicer
may be required to apply a portion of the servicing compensation otherwise
payable to it in respect of any Due Period to interest shortfalls resulting from
the voluntary prepayment of any Assets in the related trust fund during that
period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans, unless
otherwise provided in the prospectus supplement, will provide that on or before
a specified date in each year, beginning with the first of these dates at least
six months after the related Cut-off Date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by that firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers, the Audit
Program for Mortgages serviced for Freddie Mac or any other program used by the
servicer, the servicing by or on behalf of the servicer of mortgage loans under
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with the terms of those agreements or that program
except for any significant exceptions or errors in records that, in the opinion
of the firm, either the Audit Program for Mortgages serviced for Freddie Mac, or
paragraph 4 of the Uniform Single Attestation Program for Mortgage Bankers, or
any other program, requires it to report.
Each Agreement will also provide for delivery to the trustee, on or before
a specified date in each year, of an officer's certificate of the servicer to
the effect that the servicer has fulfilled its obligations under the Agreement
throughout the preceding calendar year or other specified twelve-month period.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE DEPOSITOR
The servicer or master servicer under each Agreement will be named in the
prospectus supplement. The entities serving as servicer or master servicer may
be affiliates of the depositor and may have other normal business relationships
with the depositor or the depositor's affiliates. If applicable, reference in
this prospectus to the servicer will also be deemed to be to the master
servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties under the
Agreement only upon a determination that its duties under the
Agreement 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 that conflict being of a type and nature carried on by the
servicer at the date of the Agreement. No resignation will become
effective until the trustee or a successor servicer has assumed the
servicer's obligations and duties under the Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under any
liability to the related trust fund or securityholders for any action
taken, or for refraining from the taking of any action, in good faith
pursuant to the Agreement; provided, however, that neither a servicer,
the depositor nor any other person will be protected against any
breach of a representation, warranty or covenant made in the related
Agreement, or against any liability specifically imposed by the
Agreement, or against any liability that would otherwise be imposed by
reason of willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under the Agreement or by reason
of reckless disregard of obligations and duties under the Agreement.
o Any servicer, the depositor and any director, officer, employee or
agent of a servicer or the depositor will be entitled to
indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities; provided,
however, that that indemnification will not extend to any loss,
liability or expense
(1) specifically imposed by that Agreement or otherwise incidental to
the performance of obligations and duties under the Agreement,
including, in the case of a servicer, the prosecution of an
enforcement action in respect of any specific mortgage loan or
mortgage loans (except as any loss, liability or expense will be
otherwise reimbursable pursuant to that Agreement);
(2) incurred in connection with any breach of a representation,
warranty or covenant made in that Agreement;
(3) incurred by reason of misfeasance, bad faith or gross negligence
in the performance of obligations or duties under the Agreement,
or by reason of reckless disregard of those obligations or
duties;
(4) incurred in connection with any violation of any state or federal
securities law; or
(5) imposed by any taxing authority if that loss, liability or
expense is not specifically reimbursable pursuant to the terms of
the related Agreement.
o Neither any servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action that is not incidental
to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. Any servicer
or the depositor may, however, in its discretion undertake any action
which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties to the Agreement and the
interests of the securityholders under the Agreement. In that event,
the legal expenses and costs of that action and any liability
resulting will be expenses, costs and liabilities of the
securityholders, and the servicer or the depositor, as the case may
be, will be entitled to be reimbursed therefor and to charge the
Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be liable
for the performance of a Special servicer only if, and to the extent, set forth
in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be distributed
to securityholders, or to remit to the trustee for distribution to
securityholders, any required payment that continues after a grace
period, if any;
o any failure by the servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the Agreement
that continues unremedied for 30 days after written notice of that
failure has been given to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by
securityholders evidencing not less than 25% of the voting rights for
that series;
o any breach of a representation or warranty made by the servicer under
the Agreement that materially and adversely affects the interests of
securityholders and which continues unremedied for 30 days after
written notice of that breach has been given to the servicer by the
trustee or the depositor, or to the servicer, the depositor and the
trustee by the holders of Securities evidencing not less than 25% of
the voting rights for that series; and
o some events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and actions by or on behalf of
the servicer indicating its insolvency or inability to pay its
obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied, the
depositor or the trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or any other percentage specified in the
Agreement) of the voting rights for that series, the trustee will terminate all
of the rights and obligations of the servicer under the Agreement and in and to
the mortgage loans (other than as a securityholder or as the owner of any
Retained Interest), whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the servicer under the Agreement
(except that if the trustee is prohibited by law from obligating itself to make
advances regarding delinquent Assets, or if the prospectus supplement so
specifies, then the trustee will not be obligated to make those advances) and
will be entitled to similar compensation arrangements. If the trustee is
unwilling or unable so to act, it may or, at the written request of the holders
of Securities entitled to at least 51% (or any other percentage specified in the
Agreement) of the voting rights for that series, it must appoint, or petition a
court of competent jurisdiction for the appointment of, a loan servicing
institution acceptable to the rating agency with a net worth at the time of that
appointment of at least $15,000,000 (or any other amount specified in the
Agreement) to act as successor to the servicer under the Agreement. Pending that
appointment, the trustee is obligated to act in that capacity. The trustee and
any successor servicer may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the servicer
under the Agreement.
The holders of Securities representing at least 66 2/3% (or any other
percentage specified in the Agreement) of the voting rights allocated to the
respective classes of Securities affected by any event of default will be
entitled to waive that event of default; provided, however, that an Event of
Default involving a failure to distribute a required payment to securityholders
described in clause (1) under "Events of Default under the Agreements" may be
waived only by all of the securityholders. Upon any waiver of an event of
default, that event of default will cease to exist and will be deemed to have
been remedied for every purpose under the Agreement.
No securityholders will have the right under any Agreement to institute any
proceeding with respect to the Agreement unless that holder previously has given
to the trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or any other percentage specified in the
Agreement) of the voting rights have made written request upon the trustee to
institute that proceeding in its own name as trustee under the Agreement and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
(or any other number of days specified in the Agreement) has neglected or
refused to institute any proceeding. The trustee, however, is under no
obligation to exercise any of the trusts or powers vested in it by any Agreement
or to make any investigation of matters arising under the Agreement or to
institute, conduct or defend any litigation under the Agreement or in relation
to the Agreement at the request, order or direction of any of the
securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Securities will be specified in the Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties to it, without the
consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision in the Agreement that
may be inconsistent with any other provision in the Agreement or with the
prospectus supplement;
(3) make any other provisions with respect to matters or questions
arising under the Agreement that are not materially inconsistent with the
provisions of the Agreement; or
(4) comply with any requirements imposed by the Code; provided that,
in the case of clause (3), that amendment will not adversely affect in any
material respect the interests of any securityholders covered by the
Agreement as evidenced either by an opinion of counsel to that effect or
the delivery to the trustee of written notification from each rating agency
that provides, at the request of the depositor, a rating for the Offered
Securities of the related series to the effect that that amendment or
supplement will not cause that rating agency to lower or withdraw the then
current rating assigned to those Securities.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Securities as to which a REMIC election is to be made, the
trustee will not consent to any amendment of the Agreement unless it has first
have received an opinion of counsel to the effect that that amendment will not
result in the imposition of a tax on the related trust fund or, if applicable,
cause the related trust fund to fail to qualify as a REMIC, at any time that the
related Securities are outstanding.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any servicer of any
funds paid to the master servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the servicer. If no Event of Default has
occurred and is continuing, the trustee is required to perform only those duties
specifically required under the related Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the trustee is required to examine those documents and to
determine whether they conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the trustee
will be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the trustee's
(1) enforcing its rights and remedies and protecting the interests of
the securityholders during the continuance of an Event of
Default,
(2) defending or prosecuting any legal action in respect of the
related Agreement or series of Securities,
(3) being the mortgagee of record for the mortgage loans in a trust
fund and the owner of record for any Mortgaged Property acquired
in respect thereof for the benefit of securityholders, or
(4) acting or refraining from acting in good faith at the direction
of the holders of the related series of Securities entitled to
not less than 25% (or any other percentage as is specified in the
related Agreement for any particular matter) of the voting rights
for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or negligence on the part of the
trustee in the performance of its obligations and duties under the Agreement, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made in the Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice of its resignation to the depositor, the
servicer, if any, each rating agency, and all securityholders. Upon receiving
that notice of resignation, the depositor is required promptly to appoint a
successor trustee acceptable to the servicer, if any. If no successor trustee
has been so appointed and has accepted appointment within 30 days after the
giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a trustee
under the related Agreement, or if at any time the trustee becomes incapable of
acting, or is adjudged bankrupt or insolvent, or a receiver of the trustee or of
its property is appointed, or any public officer takes charge or control of the
trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, or if a change in the financial condition of the
trustee has adversely affected or will adversely affect the rating on any class
of the Securities, then the depositor and/or a party specified in the related
Agreement may remove the trustee and appoint a successor trustee acceptable to
the master servicer, if any, according to the terms of the related Agreement.
Securityholders of any series entitled to at least 51% (or any other percentage
specified in the prospectus supplement) of the voting rights for that series may
at any time remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
MATERIAL TERMS OF THE INDENTURE
GENERAl
The following summary describes the material provisions that may appear in
each indenture. The prospectus supplement for a series of Notes will describe
any provision of the indenture relating to that series that materially differs
from the description of that provision contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified by
reference to, all of the provisions of the indenture for a series of Notes. A
form of an indenture has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
indenture (without exhibits) relating to any series of Notes without charge upon
written request of a securityholder of that series addressed to ACE Securities
Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211,
Attention: Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified in
the prospectus supplement) or more in the payment of any principal of
or interest on a Note of that series, to the extent specified in the
prospectus supplement;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture that continues for a period of sixty days (or
any other number of days specified in the prospectus supplement or the
indenture) after notice of the failure is given in accordance with the
procedures described in the prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any certificate or other writing delivered
pursuant to the indenture or in connection with the indenture with
respect to or affecting that series having been incorrect in a
material respect as of the time made, and that breach is not cured
within sixty days (or any other number of days specified in the
prospectus supplement) after notice of the breach is given in
accordance with the procedures described in the prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o 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, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes, the
Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of that series
as they would have become due if there had not been that declaration. In
addition, the indenture 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 that
series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that series
consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would not be
sufficient on an ongoing basis to make all payments on the Notes as those
payments would have become due if the Notes had not been declared due and
payable, and the indenture trustee obtains the consent of the holders of 66
2/3% (or any other percentage specified in the indenture) of the then total
outstanding amount of the Notes of that series.
If so specified in the prospectus supplement, only holders of particular
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with an
event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less than
would otherwise be the case. However, the indenture 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 securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the Notes
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default occurs and continues for a series
of Notes, the indenture trustee will be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the securityholders of that series, unless those holders offer to the indenture
trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities that might be incurred by it in complying with that request or
direction. Subject to those provisions for indemnification and some limitations
contained in the indenture, the holders of a majority of the then total
outstanding amount of the Notes of that series will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the indenture trustee or exercising any trust or power conferred on the
indenture trustee with respect to the Notes of that series, and the holders of a
majority of the then total outstanding amount of the Notes of that series may,
in some cases, waive any default with respect to the Notes, 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 that series affected.
DISCHARGE OF INDENTURE
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified for
the Notes of any series, the related trust fund will be discharged from any and
all obligations in respect of the Notes of that series (except for obligations
specified in the indenture including obligations relating to temporary Notes and
exchange of Notes, to register the transfer of or exchange Notes of that series,
to replace stolen, lost or mutilated Notes of that series, to maintain paying
agencies and to hold monies for payment in trust) upon the deposit with the
indenture trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect of the Notes 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 that series on the maturity date for
those Notes and any installment of interest on those Notes in accordance with
the terms of the indenture and the Notes of that series. In the event of any
defeasance and discharge of Notes of that series, holders of Notes of that
series would be able to look only to that money and/or those direct obligations
for payment of principal and interest, if any, on their Notes until maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee for each series of Notes will be required to mail
each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of indebtedness owing
by that Trust to the applicable indenture trustee in its individual capacity,
the property and funds physically held by the indenture trustee in its capacity
as indenture trustee and any action taken by it that materially affects the
Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for that series.
The bank or trust company serving as indenture trustee may have a banking
relationship with the depositor or any of its affiliates, a servicer or any of
its affiliates or the master servicer or any of its affiliates. To the extent
consistent with its fiduciary obligations as indenture trustee, the indenture
trustee may delegate its duties to one or more agents as provided in the
indenture and the Agreement.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities, credit support may be provided for one or
more classes of the series or the related Assets. Credit support may be in the
form of:
o the subordination of one or more classes of Securities;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by more
than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Securities and interest on the Security Balance. If
losses or shortfalls occur that exceed the amount covered by credit support or
that are not covered by credit support, securityholders will bear their
allocable share of deficiencies. Moreover, if a form of credit support covers
more than one series of Securities (each, a "Covered Trust"), securityholders
evidencing interests in any of those Covered Trusts will be subject to the risk
that the credit support will be exhausted by the claims of other Covered Trusts
before that Covered Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Securities of a
series, or the related Assets, the prospectus supplement will include a
description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus,
(c) the conditions (if any) under which the amount of coverage under that
credit support may be reduced and under which that credit support may
be terminated or replaced and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with respect
to the obligor under any financial guaranty insurance policy, letter of credit,
guarantee or similar instrument of credit support, including
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
(3) if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
(4) its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Securities of a series may be Subordinate Securities
if specified in the prospectus supplement. The rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to those
rights of the holders of Senior Securities. The subordination of a class may
apply only in the event of (or may be limited to) particular types of losses or
shortfalls. The prospectus supplement will set forth information concerning the
amount of subordination of a class or classes of Subordinate Securities in a
series, the circumstances in which that subordination will be applicable and the
manner, if any, in which the amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of mortgage loans before
distributions on Subordinate Securities evidencing interests in a different
group of mortgage loans within the trust fund. The prospectus supplement for a
series that includes a cross-support provision will describe the manner and
conditions for applying those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for a series of Securities,
credit enhancement may be provided in the form of a limited guarantee issued by
a guarantor named in the prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Securities may be provided by
the issuance of a letter of credit by the bank or financial institution
specified in the prospectus supplement. The coverage, amount and frequency of
any reduction in coverage provided by a letter of credit issued for a series of
Securities will be set forth in the prospectus supplement relating to that
series.
POOL INSURANCE POLICIES
If specified in the prospectus supplement relating to a series of
Securities, a pool insurance policy for the mortgage loans in the related trust
fund will be obtained. The pool insurance policy will cover any loss (subject to
the limitations described in the prospectus supplement) by reason of default to
the extent a related mortgage loan is not covered by any primary mortgage
insurance policy. The amount and principal terms of any pool insurance coverage
will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will, subject
to the limitations described in the prospectus supplement, protect against loss
by reason of damage to Mortgaged Properties caused by hazards not insured
against under the standard form of hazard insurance policy for the respective
states, in which the Mortgaged Properties are located. The amount and principal
terms of any special hazard insurance coverage will be set forth in the
prospectus supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Securities will, if
specified in the prospectus supplement, be covered under a borrower bankruptcy
bond (or any other instrument that will not result in a downgrading of the
rating of the Securities of a series by the rating agency or agencies that rate
that series). Any borrower bankruptcy bond or any other instrument will provide
for coverage in an amount meeting the criteria of the rating agency or agencies
rating the Securities of the related series, which amount will be set forth in
the prospectus supplement. The amount and principal terms of any borrower
bankruptcy coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a series of Securities,
deficiencies in amounts otherwise payable on those Securities or specific
classes of Securities will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
of these will be deposited, in the amounts so specified in the prospectus
supplement. The reserve funds for a series may also be funded over time by
depositing a specified amount of the distributions received on the related
Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the purposes,
in the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If specified in the prospectus
supplement, reserve funds may be established to provide limited protection
against only some types of losses and shortfalls. Following each Distribution
Date amounts in a reserve fund in excess of any amount required to be maintained
in the reserve fund may be released from the reserve fund under the conditions
and to the extent specified in the prospectus supplement and will not be
available for further application to the Securities.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the trust fund.
Additional information concerning any reserve fund will be set forth in the
prospectus supplement, including the initial balance of the reserve fund, the
balance required to be maintained in the reserve fund, the manner in which the
required balance will decrease over time, the manner of funding the reserve
fund, the purposes for which funds in the reserve fund may be applied to make
distributions to securityholders and use of investment earnings from the reserve
fund, if any.
OVERCOLLATERALIZATION
If specified in the prospectus supplement, subordination provisions of a
trust fund may be used to accelerate to a limited extent the amortization of one
or more classes of Securities relative to the amortization of the related
Assets. The accelerated amortization is achieved by the application of excess
interest to the payment of principal of one or more classes of Securities. This
acceleration feature creates, for the Assets or groups of Assets,
overcollateralization, which is the excess of the total principal balance of the
related Assets, or a group of related Assets, over the principal balance of the
related class or classes of Securities. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to the provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of legal aspects of loans secured by single-family residential properties.
Because these legal aspects are governed primarily by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the mortgage loans is situated. The
summaries are qualified in their entirety by reference to the applicable federal
and state laws governing the mortgage loans. In this regard, the following
discussion does not fully reflect federal regulations for FHA loans and VA
loans. See "Description of The Trust Funds--FHA Loans and VA Loans,"
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA Guarantees"
and "Description of the Trust Funds--Assets."
GENERAL
All of the mortgage loans are evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are in this
prospectus collectively referred to as "mortgages." Any of the foregoing types
of mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a borrower (usually the owner of the subject
property) and a mortgagee (the lender). In contrast, a deed of trust is a
three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably until
the debt is paid, in trust, generally with a power of sale as security for the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. By executing a deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until the underlying debt is repaid, generally with a power of sale as security
for the indebtedness evidenced by the related mortgage note.
In case the borrower under a mortgage is a land trust, there would be an
additional party because legal title to the property is held by a land trustee
under a land trust agreement for the benefit of the borrower. At origination of
a mortgage loan involving a land trust, the borrower executes a separate
undertaking to make payments on the mortgage note. The mortgagee's authority
under a mortgage, the trustee's authority under a deed of trust and the
grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of that interest
before the mortgage, deed of trust, security deed or deed to secure debt is
paid. The depositor, the Asset Seller or other entity specified in the
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
in the building. The Cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property borrower, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make that final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "--Foreclosure--Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in that situation does not have to foreclose to obtain title to the
property, although in some cases a quiet title action is in order if the
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default during
the early years of a land sale contract, the courts will permit ejectment of the
buyer and a forfeiture of his or her interest in the property. However, most
state legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under land sale contracts from the harsh consequences of forfeiture.
Under those statues, a judicial contract may be reinstated upon full payment of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a contract
borrower with significant investment in the property under a land sale contract
for the sale of real estate to share the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the contract lender's procedures for
obtaining possession and clear title under a land sale contract for the sale of
real estate in a particular state are simpler and less time consuming and costly
than are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from state to
state. Two primary methods of foreclosing a mortgage are judicial foreclosure
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. There are several other foreclosure procedures available in some
states that are either infrequently used or available only in some limited
circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. 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 may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Those sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
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 and
have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
and to any other party who has recorded a request for a copy of a notice of
default and notice of sale. In addition, in some states the trustee must provide
notice to any other party having an interest of record in the real property,
including junior lienholders. A notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and vary
among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of trust,
except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to secure
debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of that property at the
time of sale, due to, among other things, redemption rights that may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses that may be recovered
by a lender. Thereafter, subject to the borrower's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make those repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending on
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgage to avoid its foreclosure. Accordingly, for those mortgage loans,
if any, that are junior mortgage loans, if the lender purchases the property the
lender's title will be subject to all senior mortgages, prior liens and specific
governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the borrower, and all persons who have an interest
in the property that is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest that is subordinate to that of the foreclosing mortgagee have
an equity of redemption and may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has begun,
the redeeming party must pay some of the costs of that action. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right that exists
before completion of the foreclosure, is not waivable by the borrower, must be
exercised before foreclosure sale and should be distinguished from the post-sale
statutory rights of redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. 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
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. For a series
of Securities for which an election is made to qualify the trust fund or a part
of the trust fund as a REMIC, the Agreement will permit foreclosed property to
be held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell the property or independent counsel
renders an opinion to the effect that holding the property for that additional
period is permissible under the REMIC Provisions.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required under the proprietary lease or occupancy agreeement. Typically, the
lender and the Cooperative enter into a recognition agreement that establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest on the
Cooperative Loan.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building that was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws that apply to tenants who elected to
remain in a building so converted.
YEAR 2000 LEGISLATION
In July 1999, a new federal law was passed to limit liability for losses
due to year 2000 computer-related errors. This law will, among other things,
protect borrowers from foreclosure if their residential mortgage loans become
delinquent because an actual year 2000 failure results in inability to
accurately or timely process their mortgage payments.
This law is not intended to extinguish or otherwise affect a borrower's
payment obligations but will instead delay the enforcement of obligations on an
otherwise defaulted mortgage loan. Borrowers seeking foreclosure protection
under this law must provide timely written notice and documentation of that
failure to the servicer. Absent an extension from the lender, borrowers will
then have four weeks to make up late payments on their loans. This law will not
apply to mortgage loans for which a default occurs before December 15, 1999, or
for which an imminent default is foreseeable before that date. This law will
also not protect borrowers who deliver notice of a year 2000 failure after March
15, 2000. Mortgage loans that remain in default after the applicable grace
period will be subject to foreclosure or other enforcement.
This law could delay the ability of a servicer to foreclose on some
mortgage loans during the first quarter of the year 2000. These delays could
affect the distributions on your Securities.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds of
trust, that are subordinate to first or other senior mortgages or deeds of trust
held by other lenders. The rights of the trust fund as the holder of a junior
deed of trust or a junior mortgage are subordinate in lien and in payment to
those of the holder of the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a
mortgage by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial 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
lender from obtaining a large deficiency judgment against the former borrower as
a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the case, that affected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These 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 property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
Some tax liens arising under the Code may in some circumstances provide
priority over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos-containing materials; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some states, environmental
contamination on a property may give rise to a lien on the property to ensure
the availability and/or reimbursement of cleanup costs. Generally all subsequent
liens on that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
particular types of activities that may constitute management of the mortgaged
property may become liable in some circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the total assets of the property owner.
Although some provisions of the Asset Conservation Act (as defined in this
prospectus) apply to trusts and fiduciaries, the law is somewhat unclear as to
whether and under what precise circumstances cleanup costs, or the obligation to
take remedial actions, could be imposed on a secured lender, such as the trust
fund. Under the laws of some states and under CERCLA, a lender may be liable as
an "owner or operator" for costs of addressing releases or threatened releases
of hazardous substances on a mortgaged property if that lender or its agents or
employees have "participated in the management" of the operations of the
borrower, even though the environmental damage or threat was caused by a prior
owner or current owner or operator or other third party. Excluded from CERCLA's
definition of "owner or operator" is a person "who without participating in the
management of . . . [the] facility, holds indicia of ownership primarily to
protect his security interest" (the "secured-creditor exemption"). This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of that facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property, the
lender may incur potential CERCLA liability in various circumstances, including
among others, when it holds the facility or property as an investment (including
leasing the facility or property to a third party), fails to market the property
in a timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under some circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and RCRA. The Asset Conservation Act more explicitly
defined the kinds of "participation in management" that would trigger liability
under CERCLA and specified activities that would not constitute "participation
in management" or otherwise result in a forfeiture of the secured-creditor
exemption before foreclosure or during a workout period. The Asset Conservation
Act also clarified the extent of protection against liability under CERCLA in
the event of foreclosure and authorized specific regulatory clarifications of
the scope of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the trust fund and occasion a loss to the trust fund and to securityholders in
some circumstances. The new secured creditor amendments to CERCLA, also, would
not necessarily affect the potential for liability in actions by either a state
or a private party under other federal or state laws that may impose liability
on "owners or operators" but do not incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan or
before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property with
any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
DUE-ON-SALE CLAUSES
The mortgage loans may contain due-on-sale clauses. These clauses generally
provide that the lender may accelerate the maturity of the loan if the borrower
sells, transfers or conveys the related Mortgaged Property. The enforceability
of due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, for some loans 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
limited exceptions. Due-on-sale clauses contained in mortgage loans originated
by federal savings and loan associations of federal savings banks are fully
enforceable pursuant to regulations of the United States Federal Home Loan Bank
Board, as succeeded by the Office of Thrift Supervision, which preempt state law
restrictions on the enforcement of those clauses. Similarly, "due-on-sale"
clauses in mortgage loans made by national banks and federal credit unions are
now fully enforceable pursuant to preemptive regulations of the Comptroller of
the Currency and the National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The inability to enforce a "due-on-sale" clause may result in a mortgage
that bears an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
PREPAYMENT CHARGES
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are paid
before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In addition,
if the junior loan permits recourse to the borrower (as junior loans
often do) and the senior loan does not, a borrower may be more likely
to repay sums due on the junior loan than those on the senior loan.
o Acts of the senior lender that prejudice the junior lender or impair
the junior lender's security may create a superior equity in favor of
the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate
payable on the senior loan, the senior lender may lose its priority to
the extent any existing junior lender is harmed or the borrower is
additionally burdened.
o If the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations will not apply to some types of residential first mortgage loans
originated by lenders after March 31, 1980. A similar federal statute was in
effect for mortgage loans made during the first three months of 1980. The Office
of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects application of
the federal law. 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. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of that state action will be eligible for
inclusion in a trust fund unless (1) the mortgage loan provides for the interest
rate, discount points and charges as are permitted in that state or (2) the
mortgage loan provides that its terms will be construed in accordance with the
laws of another state under which the interest rate, discount points and charges
would not be usurious and the borrower's counsel has rendered an opinion that
the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the borrower may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard and officers of the U.S. Public Health Service assigned to
duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related mortgage loan, no information can be provided as to
the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the servicer to collect full amounts of interest
on some of the mortgage loans. Any shortfalls in interest collections resulting
from the application of the Relief Act would result in a reduction of the
amounts distributable to the holders of the related series of Securities, and
would not be covered by advances. These shortfalls will be covered by the credit
support provided in connection with the Securities only to the extent provided
in the prospectus supplement. In addition, the Relief Act imposes limitations
that would impair the ability of the servicer to foreclose on an affected
mortgage loan during the borrower's period of active duty status, and, under
some circumstances, during an additional three month period thereafter. Thus, if
an affected mortgage loan goes into default, there may be delays and losses
occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of the Securities offered under this prospectus. This
opinion assumes compliance with all provisions of the Agreements pursuant to
which the Securities are issued. This discussion is directed solely to
securityholders that hold the Securities as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Securities. See "State and Other Tax Considerations." The depositor recommends
that securityholders consult their own tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of the Securities offered under this prospectus.
The following discussion addresses securities of five general types:
o REMIC Securities representing interests in a trust fund, or a portion
of a trust fund, that the trustee will elect to have treated as a real
estate mortgage investment conduit ("REMIC") under Sections 860A
through 860G (the " ") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to
have treated as a financial asset securitization investment trust
("FASIT") under Sections 860H through 860L (the "FASIT Provisions") of
the Code;
o securities ("Grantor Trust Securities") representing interests in a
trust fund (a "Grantor Trust Fund") as to which no election will be
made;
o securities ("Partnership Securities") representing interests in a
trust fund (a "Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes.
The prospectus supplement for each series of Securities will indicate
which of the foregoing treatments will apply to that series and, if a REMIC
election (or elections) will be made for the related trust fund, will identify
all "regular interests" and "residual interests" in the REMIC or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interests" in the FASIT. For purposes of this tax
discussion,
(1) references to a "securityholder" or a "holder" are to the beneficial
owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof as to
which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement, references to
"mortgage loans" include Contracts. Except to the extent specified in
the prospectus supplement, no REMIC election will be made for
Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1273 and 1275 of the
Code and in the Treasury regulations issued under the Code (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
issued under the Code (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance have
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of the
holders of FASIT Securities. In addition, the OID Regulations do not adequately
address some issues relevant to, and in some instances provide that they are not
applicable to, securities such as the Securities.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT (as defined in this
prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of "real
estate mortgages,"
(2) that entity is the borrower under debt obligations with two or more
maturities, and
(3) under the terms of the debt obligations on which the entity is the
borrower, payments on those obligations bear a relationship to
payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the total adjusted
basis of the nonqualified assets is less than 1% of the total adjusted basis of
all the REMIC Pool's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimis amount of
nonqualified assets. A REMIC Pool also must provide "reasonable arrangements" to
prevent its residual interests from being held by "disqualified organizations"
or agents of "disqualified organizations" and must furnish applicable tax
information to transferors or agents that violate this requirement. The pooling
and servicing agreement for each series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests,
shares held by a tenant stockholder in a cooperative housing corporation, and
manufactured housing that qualifies as a "single family residence" under Code
Section 25(e)(10) can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month period
thereafter; or
(2) in exchange for a "defective obligation" within a two-year period
thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty made
at the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held for more than three taxable years after the taxable
year of acquisition unless extensions are granted by the Secretary of the
Treasury.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet specific requirements. All of the interests in a REMIC Pool
must be either of the following: (1) one or more classes of regular interests or
(2) a single class of residual interests on which distributions, if any, are
made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued on
the Startup Day with fixed terms, is designated as a regular interest,
and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest
payments (or other similar amounts), if any, at or before maturity
either are payable based on a fixed rate or a qualified variable rate,
or consist of a specified, nonvarying portion of the interest payments
on qualified mortgages. That specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference between
two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that
provides for interest payments consisting of a specified, nonvarying
portion of interest payments on qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is
designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even if
payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, in the opinion of Stroock & Stroock & Lavan LLP, the
Regular Securities of a series will constitute one or more classes of regular
interests, and the Residual Securities for that series will constitute a single
class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for that status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for that
year and thereafter. In that event, that entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, none of these regulations
have been issued. Any relief provided, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
trust fund's income for the period in which the requirements for that status are
not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
In the opinion of Stroock & Stroock & Lavan LLP, the REMIC Securities will
be treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC Pool underlying these Securities would
be so treated. Moreover, if 95% or more of the assets of the REMIC Pool qualify
for either of the foregoing treatments at all times during a calendar year, the
REMIC Securities will qualify for the corresponding status in their entirety for
that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "Buydown Funds"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60% of assets test
for meeting the definition of a "domestic building and loan association."
Interest (including original issue discount) on the Regular Securities and
income allocated to the class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the Securities are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, in the opinion of Stroock & Stroock & Lavan LLP, the
Regular Securities generally will be "qualified mortgages" within the meaning of
Section 860G(a)(3) of the Code if transferred to another REMIC on its Startup
Day in exchange for regular or residual interests in the REMIC.
The determination as to the percentage of the REMIC Pool's assets that
constitute assets described in the foregoing sections of the Code will be made
for each calendar quarter based on the average adjusted basis of each category
of the assets held by the REMIC Pool during that calendar quarter. The REMIC
will report those determinations to securityholders in the manner and at the
times required by applicable Treasury regulations. The Small Business Job
Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve method of bad
debts of domestic building and loan associations and mutual savings banks, and
thus has eliminated the asset category of "qualifying real property loans" in
former Code Section 593(d) for taxable years beginning after December 31, 1995.
The requirements in the SBJPA of 1996 that these institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a portion of their
assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if those loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the mortgage loans of
any series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the mortgage loans, or whether those assets (to the extent not invested in
assets described in the foregoing sections) otherwise would receive the same
treatment as the mortgage loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on mortgage loans held
pending distribution are considered part of the mortgage loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For some series of REMIC 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. Upon the issuance of any of these
series of REMIC Securities, Stroock & Stroock & Lavan LLP will deliver its
opinion that, assuming compliance with all provisions of the related pooling and
servicing agreement, the Tiered REMICs will each qualify as a REMIC and the
respective REMIC Securities issued by each Tiered REMIC will be considered to
evidence ownership of Regular Securities or Residual Securities in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities 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 those Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
(1) General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994, as amended on June 14, 1996, (the "OID Regulations") under Code Section
1271 through 1273 and 1275 and in part on the provisions of the Tax Reform Act
of 1986 (the "1986 Act"). Regular Securityholders should be aware, however, that
the OID Regulations do not adequately address some of the issues relevant to
prepayable securities, such as the Regular Securities. To the extent that those
issues are not addressed in the regulations, the Seller intends to apply the
methodology described in the Conference Committee Report to the 1986 Act. No
assurance can be provided that the Internal Revenue Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion in the OID Regulations and
the appropriate method for reporting interest and original issue discount for
the Regular Securities.
Each Regular Security (except to the extent described below for a Regular
Security on which principal is distributed in a single installment or by lots of
specified principal amounts upon the request of a securityholder or by random
lot (a "Non-Pro Rata Security")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that amount
from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. Likewise, it is anticipated that the trustee will treat an
interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if the original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular 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 Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income will
be capital gain if the Regular Security is held as a capital asset. Under the
OID Regulations, however, Regular Securityholders may elect to accrue all de
minimis original issue discount as well as market discount and market premium,
under the constant yield method. See "-Election to Treat All Interest Under the
Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. For each
Regular Security, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Security. The Conference Committee Report to the 1986 Act
states that the rate of accrual of original issue discount is intended to be
based on the Prepayment Assumption. The original issue discount accruing in a
full accrual period would be the excess, if any, of:
(1) the sum of:
(a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period and
(b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated
redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at the beginning
of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue
date;
(2) events (including actual prepayments) that have occurred
before the end of the accrual period; and
(3) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the trustee
will determine the yield to maturity of that Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount for the entire Class, as determined in accordance with the preceding
paragraph. However, in the case of a distribution in retirement of the entire
unpaid principal balance of any Non-Pro Rata Security (or portion of the unpaid
principal balance), (a) the remaining unaccrued original issue discount
allocable to the Security (or to that portion) will accrue at the time of the
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of that Class will be adjusted by reducing the present value
of the remaining payments on that Class and the adjusted issue price of that
Class to the extent attributable to the portion of the unpaid principal balance
that was distributed. The depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but with
the rate of accrual of original issue discount determined based on the
Prepayment Assumption for the Class as a whole. Investors are advised to consult
their tax advisors as to this treatment.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (1) the issue price does not exceed the original principal balance by
more than a specified amount and (2) the interest compounds or is payable at
least annually at current values of
(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."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be subject to a fixed cap or floor, or a cap or floor
that is not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate is any rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is based
on objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. A qualified inverse floating
rate is a rate equal to a fixed rate minus a qualified floating rate that
inversely reflects contemporaneous variations in the cost of newly borrowed
funds; an inverse floating rate that is not a qualified inverse floating rate
may nevertheless be an objective rate. A Class of Regular Securities may be
issued under this prospectus that does not have a variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest" within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion that would be the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or variable rate as described in this
paragraph.
Under the REMIC Regulations, a Regular Security (1) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates, including a rate based on the average cost of funds of one
or more financial institutions), or the product of that rate and a positive or a
negative multiple (plus or minus a specified number of basis points), or that
represents a weighted average of rates on some or all of the mortgage loans,
including a rate that is subject to one or more caps or floors, or (2) bearing
one or more variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, it is
anticipated that the trustee will treat Regular Securities that qualify as
regular interests under this rule in the same manner as obligations bearing a
variable rate for original issue discount reporting purposes.
The amount of original issue discount for a Regular Security bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount," with the yield to maturity and future payments on
that Regular Security generally to be determined by assuming that interest will
be payable for the life of the Regular Security based on the initial rate (or,
if different, the value of the applicable variable rate as of the pricing date)
for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the trustee will treat that variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class or a Class bearing interest at a rate equal
to the weighted average of the net rates on the mortgage loans, which will be
treated as non-qualified stated interest includible in the stated redemption
price at maturity. Ordinary income reportable for any period will be adjusted
based on subsequent changes in the applicable interest rate index.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity of the Regular Security are received, in an amount
not exceeding that distribution. The market discount would accrue in a manner to
be provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
these regulations are issued, the market discount would accrue either (1) on the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period. The purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. The purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable on the Regular Security. The deferred portion of the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that year. Any deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero if the
market discount is less than 0.25% of the remaining stated redemption price at
maturity of the Regular Security (or, in the case of a Regular Security having
original issue discount, the adjusted issue price of that Regular Security)
multiplied by the weighted average maturity of the Regular Security (determined
as described above in the third paragraph under "--Original Issue Discount"
above) remaining after the date of purchase. It appears that de minimis market
discount would be reported in a manner similar to de minimis original issue
discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of the
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue Procedure 92-67 concerning the elections
to include market discount in income currently and to accrue market discount on
the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
this election, (1) "interest" includes stated interest, original issue discount,
de minimis original issue discount, market discount and de minimis market
discount, as adjusted by any amortizable bond premium or acquisition premium and
(2) the debt instrument is treated as if the instrument were issued on the
holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectible, the Internal Revenue Service may take the
position that original issue discount must continue to be accrued in spite of
its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. These taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as provided
in this paragraph, any gain or loss on the sale or exchange of a Regular
Security realized by an investor who holds the Regular Security as a capital
asset will be capital gain or loss and will be long-term or short-term depending
on whether the Regular Security has been held for the long-term capital gain
holding period (currently, more than one year). That gain will be treated as
ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income for any
prior disposition of property that was held as part of that transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates; or
(3) to the extent that the gain does not exceed the excess, if any, of
(a) the amount that would have been includible in the gross income of the
holder if its yield on that Regular Security were 110% of the applicable
federal rate as of the date of purchase, over (b) the amount of income
actually includible in the gross income of the holder for that Regular
Security.
In addition, gain or loss recognized from the sale of a Regular Security by
some banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income of those taxpayers (39.6%) for property held for more than one year.
Currently, the maximum tax rate for corporations is the same for both ordinary
income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in that quarter
and by allocating that daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on that day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any class of
the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and (2) the discount on the mortgage loans that is
includible in income may exceed the deduction allowed upon those distributions
on those Regular Securities on account of any unaccrued original issue discount
relating to those Regular Securities. When there is more than one Class of
Regular Securities that distribute principal sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier Classes of Regular Securities to
the extent that those Classes are not issued with substantial discount or are
issued at a premium. If taxable income attributable to that mismatching is
realized, in general, losses would be allowed in later years as distributions on
the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as
a result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of that series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate mortgage loans, interest income for any particular
mortgage loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, Residual Holders must have
sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of that mismatching or unrelated deductions against which
to offset that income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of
mismatching of income and deductions described in this paragraph, if present for
a series of Securities, may have a significant adverse effect upon a Residual
Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably in
three contexts:
(1) it may not be offset by current or net operating loss deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for that Residual Security. The adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom the loss was disallowed and may be used by the Residual Holder only
to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in some respects, the recovery of basis by
the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--Taxation
of REMIC Income," the period of time over which the issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of the residual interest
as zero rather than the negative amount for purposes of determining the REMIC
Pool's basis in its assets. The preamble to the REMIC Regulations states that
the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
mortgage loans and expenses for the Regular Securities, and different methods
could result in different timing or reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of premium will be
determined in the same manner as original issue discount income on Regular
Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of mortgage loans if, in general, the basis of the REMIC Pool in those mortgage
loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
those mortgage loans is generally the fair market value of the mortgage loans
immediately after the transfer of the mortgage loans to the REMIC Pool. The
REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of the market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "--Taxation
of Owners of Regular Securities--Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds the unpaid principal balances of the mortgage loans, the REMIC Pool will
be considered to have acquired those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage loans
is the fair market value of the mortgage loans, based on the total of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer of the mortgage loans to the REMIC Pool. In a manner analogous to
the discussion above under "--Taxation of Owners of Regular
Securities--Amortizable Premium," a person that holds a mortgage loan as a
capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an offset
to interest income on the mortgage loans, rather than as a separate deduction
item. Because substantially all of the borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely to
the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for that quarterly period of (1) 120% of the
long-term applicable federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (2) the adjusted issue price of the Residual Security at
the beginning of the quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of those daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Security before the beginning of
that quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
that income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for persons who are not U.S. Persons
(as defined below under "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors"), and the portion thereof attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax (by
treaty or otherwise). See "--Taxation of Certain Foreign Investors--Residual
Securities" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to persons who are not U.S. Persons. The SBJPA of 1996 has
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 Residual Securities that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except for Residual Securities
continuously held by a thrift institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have those rules apply only to
taxable years beginning after August 20, 1996.
(5) Tax-Related Restrictions on Transfer of Residual Securities
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. That tax
generally would be imposed on the transferor of the Residual Security, except
that where the transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. The tax also may be waived by the
Internal Revenue Service if the Disqualified Organization promptly disposes of
the Residual Security and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Security is
actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period that person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished particular affidavits by record holders of interests in the entity and
that does not know those affidavits are false, is not available to an electing
large partnership.
o "Disqualified Organization" means the United States, any state or
political subdivision of the United States, any foreign government,
any international organization, any agency or instrumentality of any
of the foregoing (provided, that the term does not include an
instrumentality if all of its activities are subject to tax and a
majority of its board of directors in not selected by any governmental
entity), any cooperative organization furnishing electric energy or
providing telephone service or persons in rural areas as described in
Code Section 1381(a)(2)(C), and any organization (other than a
farmers' cooperative described in Code Section 531) that is exempt
from taxation under the Code unless the organization is subject to the
tax on unrelated business income imposed by Code Section 511.
o "Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or
estate and corporations operating on a cooperative basis. Except as
may be provided in Treasury regulations, any person holding an
interest in a Pass-Through Entity as a nominee for another will, with
respect to that interest, be treated as a Pass-Through Entity.
The pooling and servicing agreement for a series will provide that no legal
or beneficial interest in a Residual Security may be transferred or registered
unless (1) the proposed transferee furnished to the transferor and the trustee
an affidavit providing its taxpayer identification number and stating that the
transferee is the beneficial owner of the Residual Security and is not a
Disqualified Organization and is not purchasing the Residual Security on behalf
of a Disqualified Organization (i.e., as a broker, nominee or middleman) and (2)
the transferor provides a statement in writing to the trustee that it has no
actual knowledge that the affidavit is false. Moreover, the pooling and
servicing agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest no
rights in any purported transferee. Each Residual Security for a series will
bear a legend referring to those restrictions on transfer, and each Residual
Holder will be deemed to have agreed, as a condition of ownership of the
Residual Security, to any amendments to the related pooling and servicing
agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard some
transfers of Residual Securities, in which case the transferor would continue to
be treated as the owner of the Residual Securities and thus would continue to be
subject to tax on its allocable portion of the net income of the REMIC Pool.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest" (as
defined below) to a Residual Holder (other than a Residual Holder who is not a
U.S. Person as defined below under "--Foreign Investors") is disregarded to all
federal income tax purposes if a significant purpose of the transfer is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is 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 the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that 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
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (2) the transferee represents to the transferor
that it understands that, as the holder of the non-economic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due. The pooling and servicing
agreement for each series of Certificates will require the transferee of a
Residual Security to certify to the matters in the preceding sentence as part of
the affidavit described above under the heading "--Disqualified Organizations."
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (1) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (2) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and before the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership
(except as provided in applicable Treasury regulations) or other entity treated
as a partnership or as a corporation created or organized in or under the laws
of the United States or of any state (including, for this purpose, the District
of Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect to be treated as U.S.
Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses") of the Residual Holder in the Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Holder will have taxable income to the extent that
any cash distribution to it from the REMIC Pool exceeds that adjusted basis on
that Distribution Date. That income will be treated as gain from the sale or
exchange of the Residual Holder's Residual Security, in which case, if the
Residual Holder has an adjusted basis in its Residual Security remaining when
its interest in the REMIC Pool terminates, and if it holds the Residual Security
as a capital asset under Code Section 1221, then it will recognize a capital
loss at that time in the amount of the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. In addition,
gain or loss recognized from the sale of a Residual Security by some banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash sale
rules of Code Section 1091 will apply to dispositions of Residual Securities
where the seller of the Residual Security, during the period beginning six
months before the sale or disposition of the Residual Security and ending six
months after the sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual Security.
(7) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited transactions,
will not be part of the calculation of income or loss includible in the federal
income tax returns of Residual Holders, but rather will be taxed directly to the
REMIC Pool at a 100% rate. Prohibited transactions generally include:
(1) the disposition of a qualified mortgages other than for
(a) substitution within two years of the Startup Day for a
defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup
Day;
(b) foreclosure, default, or imminent default of a qualified
mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to
sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Securities is outstanding). The REMIC Regulations indicate that the modification
of a mortgage loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
mortgage loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a borrower pursuant to the terms of a
convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for the income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those proceedings
in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser or (1) 3% of the excess, if any, of
adjusted gross income over $100,000 ($50,000 in the case of a married individual
filing a separate return) (subject to adjustment for inflation), or (2) 80% of
the amount of itemized deductions otherwise allowable for that year. In the case
of a REMIC Pool, those deductions may include deductions under Code Section 212
for the Servicing Fee and all administrative and other expenses relating to the
REMIC Pool, or any similar expenses allocated to the REMIC Pool for a regular
interest it holds in another REMIC. Those investors who hold REMIC Securities
either directly or indirectly through pass-through entities may have their pro
rata share of those expenses allocated to them as additional gross income, but
may be subject to that limitation on deductions. In addition, those expenses are
not deductible at all for purposes of computing the alternative minimum tax, and
may cause those investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. For a
REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of those expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be allocable
to the Residual Securities.
In general, the allocable portion will be determined based on the ratio
that a REMIC securityholder's income, determined on a daily basis, bears to the
income of all holders of Regular Securities and Residual Securities for a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or other pass-through entities described in the foregoing
temporary Treasury regulations) may have taxable income in excess of the
interest income at the Interest Rate on Regular Securities that are issued in a
single class or otherwise consistently with fixed investment trust status or in
excess of cash distributions for the related period on Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person provides the
trustee, or the person who would otherwise be required to withhold tax from
those distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Security is a Non-U.S. Person. If that statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by that Non-U.S. Person. In the latter case,
the Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") that would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a foreign
partnership, that (x) the certification described above be provided by the
partners rather than by the foreign partnership and (y) the partnership provide
specific information, including a United States taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets in the trust fund (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "--Taxation of Owners
of Residual Securities--Limitations on Offset or Exemption of REMIC Income"
above. If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by those Non-U.S. Persons, 30% (or lower treaty rate) withholding will
not apply. Instead, the amounts paid to those Non-U.S. Persons will be subject
to United States federal income tax at regular rates. If 30% (or lower treaty
rate) withholding is applicable, those amounts generally will be taken into
account for purposes of withholding only when paid or otherwise distributed (or
when the Residual Security is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"--Tax-Related Restrictions on Transfer of Residual Securities--Foreign
Investors" above concerning the disregard of transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning Residual
Securities.
(3) Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through brokers, may be subject to a "backup"
withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) unless the Regular Holder complies with
specific reporting and/or certification procedures, including the provision of
its taxpayer identification number to the trustee, its agent or the broker who
effected the sale of the Regular Security, or that Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability.
(4) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 for a particular series of Regular Securities. Holders
through nominees must request the information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence. Treasury
regulations require that, in addition to the foregoing requirements, information
must be furnished quarterly to Residual Holders, furnished annually, if
applicable, to holders of Regular Securities, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses (see "Limitations
on Deduction of Certain Expenses" above) allocable to those holders.
Furthermore, under these regulations, information must be furnished quarterly to
Residual Holders, furnished annually to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"--Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The Internal Revenue Service may assess a deficiency resulting from
a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code Section 6111 because it generally
will not have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Security as a nominee for another
person may be required to furnish the related REMIC Pool, in a manner to be
provided in Treasury regulations, with the name and address of that person and
other specified information.
FASITS
CLASSIFICATION OF FASITS
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a FASIT. The trust fund will qualify
under the Code as a FASIT in which FASIT regular securities (the "FASIT Regular
Securities") and the ownership interest security (the "FASIT Ownership
Security") will constitute the "regular interests" and the "ownership interest,"
respectively, if
(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the FASIT are
met on a continuing basis; and
(3) the trust fund is not a regulated investment company as defined in
Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status, substantially
all of the assets of the trust fund must consist of "permitted assets" as of the
close of the third month beginning after the closing date and at all times
thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in Section 860D of the Code
(generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) some hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the
obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to that holder. A
debt instrument is a permitted asset only if the instrument is indebtedness for
federal income tax purposes, including regular interests in a REMIC or regular
interests issued by another FASIT and it bears (1) fixed interest or (2)
variable interest of a type that relates to qualified variable rate debt (as
defined in Treasury regulations prescribed under section 860G(a)(1)(B)).
Permitted debt instruments must bear interest, if any, at a fixed or qualified
variable rate. Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees of
payment default and similar instruments to be provided in regulations, and which
are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the depositor had no
knowledge or reason to know as of the date the asset was acquired by the FASIT
that a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an Eligible
Corporation (as defined in this prospectus).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of securities will indicate
which securities of the Series will be designated as regular interests, and
which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its stated
principal amount;
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to the principal
amount.
Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interests (i.e., qualified floating rates and weighted
average rates). Interest will be considered to be based on a permissible
variable rate if generally:
(1) this interest is unconditionally payable at least annually;
(2) the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
(3) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more "qualified
floating rates," one "qualified inverse floating rate," or a combination of
"qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on the FASIT regular
interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (3), (4), or (5) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "high-yield interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (6), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
it's FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, the
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally will be
accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular Securities must report income
from these Securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. Except in
the case of FASIT Regular Securities issued with original issue discount,
interest paid or accrued on a FASIT Regular Security generally will be treated
as ordinary income to the Holder and a principal payment on the security will be
treated as a return of capital to the extent that the securityholder's basis is
allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on these Securities in the same manner described for REMIC
Regular Securities. See "--REMICs - Taxation of Owners of Regular Securities"
above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the return
on instruments issued by a FASIT yielding an equity-like return continues to
have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of this interest, and the ability of these
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire interests such as inventory.
o An "Eligible Corporation" is a taxable domestic C corporation that
does not qualify as a regulated investment company, a real estate
investment trust, a REMIC, or a cooperative.
o A "Disqualified Holder" is any holder other than (1) an Eligible
Corporation, or (2) a dealer who acquires FASIT debt for resale to
customers in the ordinary course of business.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income from
the high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to Disqualified Holders will be
disregarded for federal income tax purposes, and the transferor will continue to
be treated as the holder of the high-yield interest.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the high-yield interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT Provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Interest that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Interest and that have the same features as high-yield interests.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Security will be the same as the
character of the income to the FASIT, except that any tax-exempt interest income
taken into account by the holder of a FASIT Ownership Security is treated as
ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, a holder of a FASIT Ownership Security is subject to the same
limitations on their ability to use losses to offset income from their FASIT
Regular Securities as are holders of high-yield interest. See "--Taxation of
Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by the holder,
then Section 475 of the Code will continue to apply to these securities, except
that the amount realized under the mark-to-market rules or the securities' value
after applying special valuation rules contained in the FASIT Provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable federal rate,
compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition;
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired through
foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular interest
(i.e., a qualified liquidation);
(2) incident to the foreclosure, default (or imminent default) on an
asset of the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for another permitted
debt instrument; or
(7) in order to reduce over-collateralization where a principal
purposes of the disposition was not to avoid recognition of gain arising
from an increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Securities for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities. In addition, for purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities. See
"--REMICs" above.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
For each series of Grantor Trust Securities, assuming compliance with all
provisions of the related Agreement, in the opinion of Stroock & Stroock & Lavan
LLP, the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code and not as a partnership, an
association taxable as a corporation, or a "taxable mortgage pool" within the
meaning of Code Section 7701(i). Accordingly, each holder of a Grantor Trust
Security generally will be treated as the beneficial owner of an undivided
interest in the mortgage loans included in the Grantor Trust Fund.
STANDARD SECURITIES
GENERAL
Where there is no Retained Interest or "excess" servicing for the mortgage
loans underlying the Securities of a series, and where these Securities are not
designated as "Stripped Securities," the holder of each Security of that series
(referred to in this prospectus as "Standard Securities") will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Grantor Trust Fund represented by its Standard Security and will
be considered the beneficial owner of a pro rata undivided interest in each of
the mortgage loans, subject to the discussion below under "--Recharacterization
of Servicing Fees." Accordingly, the holder of a Standard Security of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the mortgage loans represented by
its Standard Security, including interest at the coupon rate on those mortgage
loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the servicer, in accordance with that
securityholder's method of accounting. A securityholder generally will be able
to deduct its share of the Servicing Fee and all administrative and other
expenses of the trust fund in accordance with its method of accounting, provided
that those amounts are reasonable compensation for services rendered to the
Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through pass-through entities, will be
subject to limitations for some itemized deductions described in Code Section
67, including deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses of the Grantor Trust Fund, to the extent that
those deductions, in total, do not exceed two percent of an investor's adjusted
gross income. In addition, Code Section 68 provides that itemized deductions
otherwise allowable for a taxable year of an individual taxpayer will be reduced
by the lesser of (1) 3% of the excess, if any, of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate return)
(in each case, as adjusted for post-1991 inflation), or (2) 80% of the amount of
itemized deductions otherwise allowable for that year. As a result, those
investors holding Standard Securities, directly or indirectly through a
pass-through entity, may have total taxable income in excess of the total amount
of cash received on the Standard Securities with respect to interest at the
Interest Rate or as discount income on the Standard Securities. In addition,
those expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause those investors to be subject to
significant additional tax liability. Moreover, where there is Retained Interest
for the mortgage loans underlying a series of Securities the transaction will be
subject to the application of the "stripped bond" rules of the Code as described
below under "--Stripped Securities." Where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped coupon" rules of the Code, as described below under
"--Recharacterization of Servicing Fees."
Holders of Standard Securities, particularly any class of a series that are
Subordinate Securities, may incur losses of interest or principal with respect
to the mortgage loans. Those losses would be deductible generally only as
described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that securityholders on the cash method
of accounting would not be required to report qualified stated interest as
income until actual receipt.
(1) Tax Status
For a series, in the opinion of Stroock & Stroock & Lavan LLP, a Standard
Security owned by a:
o "domestic building and loan association" within the meaning of Code
Section 7701(a)(19) will be considered to represent "loans . . .
secured by an interest in real property which is . . . residential
real property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the mortgage loans
represented by that Standard Security is of the type described in that
section of the Code.
o real estate investment trust will be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(4)(A) to the
extent that the assets of the related Grantor Trust Fund consist of
qualified assets, and interest income on those assets will be
considered "interest on obligations secured by mortgages on real
property" to that extent within the meaning of Code Section
856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including any
participation or certificate of beneficial ownership therein) which is
principally secured by an interest in real property" within the
meaning of Code Section 860G(a)(3)(A) to the extent that the assets of
the related Grantor Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraph or whether the amount qualifying for that
treatment must be reduced by the amount of the Buydown Mortgage Funds. There is
indirect authority supporting treatment of an investment in a Buydown Mortgage
Loan as entirely secured by real property if the fair market value of the real
property securing the loan exceeds the principal amount of the loan at the time
of issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, securityholders are urged to
consult their own tax advisors concerning the effects of those arrangements on
the characterization of the securityholder's investment for federal income tax
purposes.
(2) Premium and Discount
The depositor recommends that securityholders consult with their tax
advisors as to the federal income tax treatment of premium and discount arising
either upon initial acquisition of Standard Securities or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a securityholder's interest in those
mortgage loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. The rules
allowing for the amortization of premium are available for mortgage loans
originated after September 27, 1985. Under the OID Regulations, original issue
discount could arise by the charging of points by the originator of the
mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under some circumstances, by the presence of
"teaser" rates on the mortgage loans. See "--Stripped Securities" below
regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to that income. No
prepayment assumption will be assumed for purposes of that accrual except as set
forth in the prospectus supplement. However, Code Section 1272 provides for a
reduction in the amount of original issue discount includible in the income of a
holder of an obligation that acquires the obligation after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if those mortgage loans acquired by a securityholder are purchased at a price
equal to the then unpaid principal amount of those mortgage loans, no original
issue discount attributable to the difference between the issue price and the
original principal amount of those mortgage loans (i.e., points) will be
includible by that holder.
MARKET DISCOUNT. securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the mortgage loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described in that section will not
apply. Rather, the holder will accrue market discount pro rata over the life of
the mortgage loans, unless the constant yield method is elected. No prepayment
assumption will be assumed for purposes of that accrual except as set forth in
the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed reasonable
servicing compensation, the amount of that excess would represent neither income
nor a deduction to securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that the amount would exceed reasonable servicing compensation as to
some of the mortgage loans would be increased. Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the mortgage loans to be treated under the "stripped
bond" rules. That guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of those amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer who receives a servicing fee in excess of those amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
mortgage loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of those mortgage loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Securities," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder of the Standard Securities. While
securityholders would still be treated as owners of beneficial interests in a
grantor trust for federal income tax purposes, the corpus of the trust could be
viewed as excluding the portion of the mortgage loans the ownership of which is
attributed to the servicer, or as including that portion as a second class of
equitable interest. Applicable Treasury regulations treat that arrangement as a
fixed investment trust, since the multiple classes of trust interests should be
treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, that recharacterization should not have any significant
effect upon the timing or amount of income reported by a securityholder, except
that the income reported by a cash method holder may be slightly accelerated.
See "--Stripped Securities" below for a further description of the federal
income tax treatment of stripped bonds and stripped coupons.
(4) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total adjusted basis will equal the
securityholder's cost for the Standard Security, exclusive of accrued interest,
increased by the amount of any income previously reported for the Standard
Security and decreased by the amount of any losses previously reported for the
Standard Security and the amount of any distributions (other than accrued
interest) received on the Standard Security. Except as provided above with
respect to market discount on any mortgage loans, and except for financial
institutions subject to the provisions of Code Section 582(c), the gain or loss
generally would be capital gain or loss if the Standard Security was held as a
capital asset. However, gain on the sale of a Standard Security will be treated
as ordinary income (1) if a Standard Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the securityholder's net investment in the conversion
transaction at 120% of the appropriate applicable federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income for any prior disposition of property that was held
as part of that transaction or (2) in the case of a non-corporate taxpayer, to
the extent that the taxpayer has made an election under Code Section 163(d)(4)
to have net capital gains taxed as investment income at ordinary income rates.
Long-term capital gains of some non-corporate taxpayers generally are subject to
a lower maximum tax rate (20%) than ordinary income or short-term capital gains
of those taxpayers (39.6%) for property held for more than one year. The maximum
tax rate for corporations currently is the same for both ordinary income and
capital gains.
STRIPPED SECURITIES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" for principal payments and "stripped coupons" for
interest payments. For purposes of this discussion, Securities that are subject
to those rules will be referred to as "Stripped Securities." In the opinion of
Stroock & Stroock & Lavan LLP, the Securities will be subject to those rules if:
o the depositor or any of its affiliates retains (for its own account or
for purposes of resale), in the form of Retained Interest or
otherwise, an ownership interest in a portion of the payments on the
mortgage loans;
o the depositor or any of its affiliates is treated as having an
ownership interest in the mortgage loans to the extent it is paid (or
retains) servicing compensation in an amount greater than reasonable
consideration for servicing the mortgage loans (see "--Standard
Securities--Recharacterization of Servicing Fees" above); and
o a Class of Securities are issued in two or more Classes or Subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the mortgage loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for its pro rata share
of all or a portion of the interest payments on each mortgage loan, including
the Stripped Security's allocable share of the servicing fees paid to a
servicer, to the extent that those fees represent reasonable compensation for
services rendered. See the discussion above under "--Standard
Securities--Recharacterization of Servicing Fees." Although not free from doubt,
for purposes of reporting to securityholders of Stripped Securities, the
servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"--Standard Securities--General," subject to the limitation described in that
section.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that the stripped
interest is purchased. Although the treatment of Stripped Securities for federal
income tax purposes is not clear in some respects, particularly where Stripped
Securities are issued with respect to a Mortgage Pool containing variable-rate
mortgage loans, in the opinion of Stroock & Stroock & Lavan LLP, (1) the Grantor
Trust Fund will be treated as a grantor trust under subpart E, Part I of
subchapter J of the Code and not as an association taxable as a corporation or a
"taxable mortgage pool" within the meaning of Code Section 7701(i), and (2) each
Stripped Security should be treated as a single installment obligation for
purposes of calculating original issue discount and gain or loss on disposition.
This treatment is based on the interrelationship of Code Section 1286, Code
Sections 1272 through 1275, and the OID Regulations. Although it is possible
that computations for Stripped Securities could be made in one of the ways
described below under "--Possible Alternative Characterizations," the OID
Regulations state, in general, that two or more debt instruments issued by a
single issuer to a single investor in a single transaction should be treated as
a single debt instrument. Accordingly, for original issue discount purposes, all
payments on any Stripped Securities should be totaled and treated as though they
were made on a single debt instrument. The pooling and servicing agreement will
require that the trustee make and report all computations described below using
the approach described in this paragraph, unless substantial legal authority
requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under these
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of that Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of that Stripped Security will be required to account for any discount
as market discount rather than original issue discount if either (1) the initial
discount for the Stripped Security was treated as zero under the de minimis
rule, or (2) no more than 100 basis points in excess of reasonable servicing is
stripped off the related mortgage loans. That market discount would be
reportable as described above under "--REMICs--Taxation of Owners of Regular
Securities--Market Discount," without regard to the de minimis rule in that
section, assuming that a prepayment assumption is employed in that computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the mortgage loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the mortgage loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Stripped Security that is
a Subordinate Security, may deduct losses incurred for the Stripped Security as
described above under "--Standard Securities General."
STATUS OF STRIPPED SECURITIES
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the mortgage loans. Although the issue is not free from doubt, in the opinion
of Stroock & Stroock & Lavan LLP, except for a trust fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation [ s ] . . . principally
secured by an interest in real property which is . . . . residential real
estate" within the meaning of Code Section 860G(a)(3)(A), and "loans . . .
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Securities should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B), provided that in each case the mortgage loans and interest
on those mortgage loans qualify for that treatment. The application of those
Code provisions to Buydown Mortgage Loans is uncertain. See "--Standard
Securities--Tax Status" above.
TAXATION OF STRIPPED SECURITIES
ORIGINAL ISSUE DISCOUNT. Except as described above under "--General," each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount for a Stripped
Security must be included in ordinary income as it accrues, in accordance with a
constant yield method that takes into account the compounding of interest, which
may be before the receipt of the cash attributable to that income. Based in part
on the issue discount required to be included in the income of a holder of a
Stripped Security in any taxable year likely will be computed generally as
described above under "--REMICs-- Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities."
However, with the apparent exception of a Stripped Security qualifying as a
market discount obligation as described above under "--General," the issue price
of a Stripped Security will be the purchase price paid by each holder of the
Stripped Security, and the stated redemption price at maturity will include the
total amount of the payments to be made on the Stripped Security to that
securityholder, presumably under the Prepayment Assumption, other than qualified
stated interest.
If the mortgage loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of that
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by that securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in the Stripped Security to recognize a
loss (which may be a capital loss) equal to that portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the mortgage loans are prepaid could lead to the interpretation that
these interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, these regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of these principles could lead to the characterization of gain on
the sale of contingent interest Stripped Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Securities.
SALE OR EXCHANGE OF STRIPPED SECURITIES. Sale or exchange of a Stripped
Security before its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the securityholder's
adjusted basis in that Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code Section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, the subsequent
purchaser will be required for federal income tax purposes to accrue and report
that excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a securityholder other than an original securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED SECURITIES. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes those Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
POSSIBLE ALTERNATIVE CHARACTERIZATION. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the securityholder may be treated
as the owner of
(1) one installment obligation consisting of the Stripped Security's
pro rata share of the payments attributable to principal on each mortgage
loan and a second installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to interest on each
mortgage loan;
(2) as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each mortgage loan; or
(3) a separate installment obligation for each mortgage loan,
representing the Stripped Security's pro rata share of payments of
principal and/or interest to be made with respect to the mortgage loan.
Alternatively, the holder of one or more Classes of Stripped Securities may be
treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that a Stripped Security, or Classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each mortgage loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Treasury regulations regarding original issue discount on stripped
obligations make the foregoing interpretations less likely to be applicable. The
preamble to these regulations states that they are premised on the assumption
that an aggregation approach is appropriate for determining whether original
issue discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The trustee will furnish, within a reasonable time after the end of each
calendar year, to each securityholder at any time during that year, information
(prepared on the basis described above) necessary to enable the securityholder
to prepare its federal income tax returns. This information will include the
amount of original issue discount accrued on Securities held by persons other
than securityholders exempted from the reporting requirements. However, the
amount required to be reported by the trustee may not be equal to the proper
amount of original issue discount required to be reported as taxable income by a
securityholder, other than an original securityholder who purchased at the issue
price. In particular, in the case of Stripped Securities, the reporting will be
based upon a representative initial offering price of each Class of Stripped
Securities except as set forth in the prospectus supplement. The trustee will
also file the original issue discount information with the Internal Revenue
Service. If a securityholder fails to supply an accurate taxpayer identification
number or if the Secretary of the Treasury determines that a securityholder has
not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "--REMICs--Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in mortgage loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or any applicable lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the securityholder on the sale or exchange
of that Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in mortgage loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and these persons will
be subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
For each series of Partnership Securities or Debt Securities, Stroock &
Stroock & Lavan LLP will deliver its opinion that the trust fund will not be a
taxable mortgage pool or an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion will be based on
the assumption that the terms of the related Agreement and related documents
will be complied with, and on counsel's opinion that the nature of the income of
the trust fund will exempt it from the rule that some publicly traded
partnerships are taxable as corporations.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP SECURITIES AND DEBT
SECURITIES
For federal income tax purposes, (1) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (2) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
TAXATION OF DEBT SECURITYHOLDERS
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Stroock & Stroock & Lavan LLP will deliver
its opinion that the Debt Securities will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this characterization
of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
Partnership Trust, and the timing and amount of income allocable to holders of
those Debt Securities may be different than as described in the following
paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (1) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (2) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "--REMICs--Taxation of
Owners of Regular Securities" and "--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the prospectus supplement, the depositor will agree, and
the securityholders will agree by their purchase of Securities, to treat the
Partnership 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 Partnership
Trust Fund, the partners of the partnership being the securityholders (including
the depositor), and the Debt Securities (if any) being debt of the partnership.
However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Securities, the Debt Securities, and the
depositor is not clear, because there is no authority on transactions closely
comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have some features
characteristic of debt, the Partnership Securities might be considered debt of
the depositor or the Partnership Trust Fund. This characterization would not
result in materially adverse tax consequences to securityholders as compared to
the consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each securityholder will be required to separately take into
account that holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the mortgage
loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "--Grantor Trust
Funds--Standard Securities--General," and "--Premium and Discount" and any gain
upon collection or disposition of mortgage loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreement and related documents). The Agreement will provide, in general, that
the securityholders will be allocated taxable income of the Partnership Trust
Fund for each Due Period equal to the sum of:
(1) the interest that accrues on the Partnership Securities in
accordance with their terms for that Due Period, including interest
accruing at the applicable Interest Rate for that Due Period and interest
on amounts previously due on the Partnership Securities but not yet
distributed;
(2) any Partnership Trust Fund income attributable to discount on the
mortgage loans that corresponds to any excess of the principal amount of
the Partnership Securities over their initial issue price; and
(3) any other amounts of income payable to the securityholders for
that Due Period.
This allocation will be reduced by any amortization by the Partnership
Trust Fund of premium on mortgage loans that corresponds to any excess of the
issue price of Partnership Securities over their principal amount. All remaining
taxable income of the Partnership Trust Fund will be allocated to the depositor.
Based on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the Internal Revenue
Service would not require a greater amount of income to be allocated to
securityholders. Moreover, even under the foregoing method of allocation,
securityholders may be allocated income equal to the entire Interest Rate plus
the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Securities on the accrual basis and securityholders may become liable for taxes
on Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay those taxes.
Part or all of the taxable income allocated to a securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
master servicer but not interest expense) allocable to an individual, estate or
trust securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--Grantor Trust Funds--Standard
Securities--General." Accordingly, those deductions might be disallowed to the
individual in whole or in part and might result in that holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to that
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization for each mortgage loan would be
calculated in a manner similar to the description above under "--Grantor Trust
Funds--Standard Securities--General" and "--Premium and Discount."
Notwithstanding that description, it is intended that the Partnership Trust Fund
will make all tax calculations relating to income and allocations to
securityholders on a total basis for all mortgage loans held by the Partnership
Trust Fund rather than on a mortgage loan-by-mortgage loan basis. If the
Internal Revenue Service were to require that these calculations be made
separately for each mortgage loan, the Partnership Trust Fund might be required
to incur additional expense, but it is believed that there would not be a
material adverse effect on securityholders.
(3) Discount and Premium
It is not anticipated that the mortgage loans will have been issued with
original issue discount and, therefore, the Partnership Trust Fund should not
have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the mortgage loans may be greater or less than the
remaining principal balance of the mortgage loans at the time of purchase. If
so, the mortgage loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on a total basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis.)
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If that termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Those interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
specific technical requirements that might apply when the constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
tax penalties and may incur additional expenses if it is required to comply with
those requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data.
(5) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A securityholder's
tax basis in an Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includible in
income) and decreased by any distributions received with respect to that
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single total adjusted tax basis in those
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of that total tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to those special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a securityholder is required to recognize a total amount of income (not
including income attributable to disallowed itemized deductions described above)
over the life of the Partnership Securities that exceeds the total cash
distributions with respect to the Partnership Securities, that excess will
generally give rise to a capital loss upon the retirement of the Partnership
Securities.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of that Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the securityholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
(7) Section 731 Distributions
In the case of any distribution to a securityholder, no gain will be
recognized to that securityholder to the extent that the amount of any money
distributed for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a securityholder, no
loss will be recognized except upon a distribution in liquidation of a
securityholder's interest. Any gain or loss recognized by a securityholder will
be capital gain or loss.
(8) Section 754 Election
If a securityholder sells its Partnership Securities at a profit (loss),
the purchasing securityholder will have a higher (lower) basis in the
Partnership Securities than the selling securityholder had. The tax basis of the
Partnership Trust Fund's assets would not be adjusted to reflect that higher (or
lower) basis unless the Partnership Trust Fund were to file an election under
Section 754 of the Code. To avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Partnership Trust Fund will not make
that election. As a result, securityholder might be allocated a greater or
lesser amount of Partnership Trust Fund income than would be appropriate based
on their own purchase price for Partnership Securities.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. These books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The trustee will file a
partnership information return (Form 1065) with the Internal Revenue Service for
each taxable year of the Partnership Trust Fund and will report each
securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The trustee
will provide the Schedule K-1 information to nominees that fail to provide the
Partnership Trust Fund with the information statement described below and these
nominees will be required to forward that information to the beneficial owners
of the Partnership Securities. Generally, holders must file tax returns that are
consistent with the information return filed by the Partnership Trust Fund or be
subject to penalties unless the holder notifies the Internal Revenue Service of
all those inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing information on
the nominee, the beneficial owners and the Partnership Securities so held. This
information includes (1) the name, address and taxpayer identification number of
the nominee and (2) as to each beneficial owner
(a) the name, address and identification number of that person,
(b) whether that 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
(c) information on Partnership Securities that were held, bought or sold
on behalf of that person throughout the year.
In addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish that
information statement to the Partnership Trust Fund. The information referred to
above for any calendar year must be furnished to the Partnership Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Partnership Trust Fund with the information described
above may be subject to penalties.
Unless another designation is made, the depositor will be designated as the
tax matters partner in the pooling and servicing agreement and, as the tax
matters partner, will be responsible for representing the securityholders in any
dispute with the Internal Revenue Service. 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 until three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the Partnership Trust Fund by the appropriate taxing authorities could result in
an adjustment of the returns of the securityholders, and, under some
circumstances, a securityholder may be precluded from separately litigating a
proposed adjustment to the items of the Partnership Trust Fund. An adjustment
could also result in an audit of a securityholder's returns and adjustments of
items not related to the income and losses of the Partnership Trust Fund.
(10) Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership 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 Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this prospectus. Although it is not expected that the Partnership
Trust Fund would be engaged in a trade or business in the United States for
those purposes, the Partnership Trust Fund will withhold as if it were so
engaged to protect the Partnership Trust Fund from possible adverse consequences
of a failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to securityholders who are
Non-U.S. Persons pursuant to Section 1446 of the Code, as if that income were
effectively connected to a U.S. trade or business, at a rate of 35% for Non-U.S.
Persons that are taxable as corporations and 39.6% for all other foreign
holders. Amounts withheld will be deemed distributed to the Non-U.S. Person
securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Partnership Trust Fund may rely on Form W-8, Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each Non-U.S. Person holder 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 Partnership Trust Fund's income. Each Non-U.S.
Person holder must obtain a taxpayer identification number from the Internal
Revenue Service and submit that number to the Partnership Trust Fund on Form W-8
to assure appropriate crediting of the taxes withheld. A Non-U.S. Person holder
generally would be entitled to file with the Internal Revenue Service a claim
for refund for taxes withheld by the Partnership Trust Fund, taking the position
that no taxes were due because the Partnership Trust Fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
securityholder who is a Non-U.S. Person generally will be considered guaranteed
payments to the extent that those payments are determined without regard to the
income of the Partnership Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest may not be considered
"portfolio interest." As a result, securityholders who are Non-U.S. Persons may
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 that
case, a Non-U.S. Person holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld for the
guaranteed payments.
(11) Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
31% if, in general, the securityholder fails to comply with specific
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Securities and Debt
Securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Securities offered under this prospectus. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors for the various tax consequences of investments in the Securities
offered under this prospectus.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose specific requirements on employee benefit plans and on some
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which these plans, accounts or arrangements are invested, that are
subject to Title I of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries for those Plans in connection with the investment of
Plan assets. Some employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not subject
to ERISA requirements. Therefore, assets of these plans may be invested in
Securities without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal, state and local law. Any of these
plans that is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries general fiduciary requirements,
including those of investment prudence and diversification and the requirement
that a Plan's investments be made in accordance with the documents governing the
Plan. In addition, ERISA and the Code prohibit a broad range of transactions
involving assets of a Plan and persons ("Parties in Interest") who have
specified relationships to the Plan unless a statutory or administrative
exemption is available. Some Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transactions generally are set forth in Sections 406
and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the mortgage loans, Agency
Securities, Mortgage Securities and other assets included in a related trust
fund to be deemed Plan assets. Section 2510.3-101 of the regulations of the
United States Department of Labor ("DOL") provides that when a Plan acquires an
equity interest in an entity, the Plan's assets include both an equity interest
and an undivided interest in each of the underlying assets of the entity, unless
exceptions not applicable here apply, or unless the equity participation in the
entity by "benefit plan investors" (i.e., Plans and employee benefit plans not
subject to ERISA) is not "significant," both as defined in of these regulations.
For this purpose, in general, equity participation by benefit plan investors
will be "significant" on any date if 25% or more of the value of any class of
equity interests in the entity is held by benefit plan investors. To the extent
the Securities are treated as equity interests for purposes of DOL regulations
Section 2510.3-101, equity participation in a trust fund will be significant on
any date if immediately after the most recent acquisition of any Security, 25%
or more of any class of Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice for those assets for a fee, is a fiduciary of the investing Plan. If the
mortgage loans, Agency Securities, Mortgage Securities and other assets included
in a trust fund constitute Plan assets, then any party exercising management or
discretionary control regarding those assets, such as the servicer or master
servicer, may be deemed to be a Plan "fiduciary" and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code for the investing Plan. In addition, if the mortgage loans,
Agency Securities, Mortgage Securities and other assets included in a trust fund
constitute Plan assets, the purchase of Securities by a Plan, as well as the
operation of the trust fund, may constitute or involve a prohibited transaction
under ERISA and the Code.
The DOL issued an individual exemption (the "Exemption"), to DBSI that
generally exempts from the application of the prohibited transaction provisions
of Sections 406(a) and 407 of ERISA, and the excise taxes imposed on those
prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
particular transactions, among others, relating to the servicing and operation
of mortgage pools and the purchase, sale and holding of Securities underwritten
by an underwriter, that (1) represent a beneficial ownership interest in the
assets of a trust fund and entitle the holder the pass-through payments of
principal, interest and/or other payments made with respect to the assets of the
trust fund or (2) are denominated as a debt instrument and represent an interest
in a REMIC, provided that conditions set forth in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term "underwriter"
will include
(a) DBSI,
(b) any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with DBSI, and
(c) any member of the underwriting syndicate or selling group of which a
person described in (a) or (b) is a manager or co-manager for a class
of Securities.
The Exemption sets forth six general conditions that must be satisfied for
a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief under the Exemption:
(1) The acquisition of Securities by a Plan must be on terms 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 Exemption only applies to Securities evidencing rights and
interests not subordinated to the rights and interests evidenced by the
other Securities of the same series.
(3) The Securities at the time of acquisition by the Plan must be
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating
Co. ("DCR") or Fitch IBCA, Inc. ("Fitch").
(4) The trustee cannot be an affiliate of any member of the
"Restricted Group," which consists of the underwriter, the depositor, the
trustee, the master servicer, any servicer, any insurer and any obligor on
Assets constituting more than 5% of the total unamortized principal balance
of the Assets in the related trust fund as of the date of initial issuance
of the Securities.
(5) The sum of all payments made to and retained by the underwriter(s)
must represent not more than reasonable compensation for underwriting the
Securities; the sum of all payments made to and retained by the depositor
pursuant to the assignment of the Assets to the related trust fund must
represent not more than the fair market value of those obligations; and the
sum of all payments made to and retained by the servicer must represent not
more than reasonable compensation for that person's services under the
related Agreement and reimbursement of that person's reasonable expenses in
connection with the related Agreement.
(6) The investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities Act
of 1933, as amended.
In addition, the trust fund must meet the following requirements:
(1) the assets of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
(2) securities evidencing interests in those other investment pools must
have been rated in one of the three highest generic rating categories
by S&P, Moody's, DCR, or Fitch for at least one year before the Plan's
acquisition of the securities; and
(3) securities evidencing interests in those other investment pools must
have been purchased by investors other than Plans for at least one
year before any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied for
that Security. However, to the extent Securities are subordinate, the Exemption
will not apply to an investment by a Plan. In addition, any Securities
representing a beneficial ownership interest in Revolving Credit Line Loans will
not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 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, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Securities 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
Security on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of that
Excluded Plan. For purposes of the Securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If specific conditions of the Exemption are also satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(b)(1) and
(2) of ERISA and the taxes imposed by Sections 4975(a) and (b) of the Code by
reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in
the initial issuance of Securities between the depositor or an underwriter
and a Plan when the person who has discretionary authority or renders
investment advice with respect to the investment of Plan assets in the
Securities is (a) an obligor with respect to 5% or less of the fair market
value of the Assets or (b) an affiliate of that person;
(2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan; and
(3) the holding of Securities by a Plan.
Further, if specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 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. The
depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied for the Securities so that the Exemption would
provide an exemption from the restrictions imposed by Sections 406(a) and (b) of
ERISA (as well as the excise 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 Mortgage Pools, provided
that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if those restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having specified relationships to that person) solely
as a result of the Plan's ownership of Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
Securities ("Non-Equity Securities") would not cause the assets included in a
related trust fund to be deemed Plan assets. However, the depositor, the
servicer, the trustee, or underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because these parties may receive
benefits in connection with the sale of Non-Equity Securities, the purchase of
Non-Equity Securities using Plan assets over which any of these parties has
investment authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be available.
Accordingly, Non-Equity Securities may not be purchased using the assets of any
Plan if any of the depositor, the servicer, the trustee or underwriter has
investment authority for those assets.
In addition, affiliates of the depositor might be considered or might
become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to some Plans,
including but not limited to Plans sponsored by that holder. In either case, the
acquisition or holding of Non-Equity Securities by or on behalf of that Plan
could be considered to give rise to an indirect prohibited transaction within
the meaning of ERISA and the Code, unless it is subject to one or more statutory
or administrative exemptions such as Prohibited Transaction Class Exemption
("PTCE") 84-14, which exempts transactions effected on behalf of a Plan by a
"qualified professional asset manager," PTCE 90-1, which exempts transactions
involving insurance company pooled separate accounts, PTCE 91-38, which exempts
transactions involving bank collective investment funds, PTCE 95-60, which
exempts transactions involving insurance company general accounts, or PTCE
96-23, which exempts transactions effected on behalf of a Plan by "in-house"
asset managers. It should be noted, however, that even if the conditions
specified in one or more of these exemptions are met, the scope of relief
provided by these exemptions may not necessarily cover all acts that might be
construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to that investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection with the Exemption. In
particular, a Plan fiduciary that proposes to cause a Plan to purchase
Securities representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, a Plan fiduciary should consider
the applicability of PTCE 83-1, which provides exemptive relief for transactions
involving mortgage pool investment trusts. The prospectus supplement for a
series of Securities may contain additional information regarding the
application of the Exemption, PTCE 83-1 or any other exemption, with respect to
the Securities offered by the prospectus supplement. In addition, any Plan
fiduciary that proposes to cause a Plan to purchase Strip Securities should
consider the federal income tax consequences of that investment.
Any Plan fiduciary considering whether to purchase a Security 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 that investment.
The sale of Securities to a Plan is in no respect a representation by the
depositor or the underwriter that this investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
PRE-FUNDING ACCOUNTS
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which extends exemptive relief to some mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows Assets
supporting payments to securityholders, and having a value equal to no more than
25% of the total initial Security Balance of the related Securities, to be
transferred to the trust fund within the Pre-Funding Period, instead of
requiring that all the Assets be either identified or transferred on or before
the Closing Date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Securities being offered (the
"Pre-Funding Limit") must not exceed 25%.
(2) All Subsequent Assets must meet the same terms and conditions for
eligibility as the original Assets used to create the trust fund, which
terms and conditions have been approved by at least one rating agency.
(3) The transfer of the Subsequent Assets to the trust fund during the
Pre-Funding Period must not result in the Securities that are to be covered
by the Exemption receiving a lower credit rating from a rating agency upon
termination of the Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the Securities by the trust fund.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Assets 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 Assets transferred to the
trust fund on the Closing Date.
(5) In order to ensure that the characteristics of the Subsequent
Assets are substantially similar to the original Assets that were
transferred to the trust fund,
o the characteristics of the Subsequent Assets must be monitored by
an insurer or other credit support provider that is independent
of the depositor; or
o an independent accountant retained by the depositor must provide
the depositor with a letter (with copies provided to each rating
agency rating the Securities, the underwriter and the trustee)
stating whether or not the characteristics of the Subsequent
Assets conform to the characteristics described in the related
prospectus supplement and/or pooling and servicing agreement. In
preparing this letter, the independent accountant must use the
same type of procedures as were applicable to the Assets
transferred to the trust fund 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 some circumstances) if the
Pre-Funding Account falls below the minimum level specified in the pooling
and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to the Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in Permitted Investments.
(8) The prospectus or prospectus supplement must describe:
o the Pre-Funding Account and/or Capitalized Interest Account
used in connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding Limit
for the trust fund; and
o that the amounts remaining in the Pre-Funding Account at the
end of the Pre-Funding Period will be remitted to
securityholders as repayments of principal.
(9) The Agreement must prescribe the permitted investments for the
Pre-Funding Account and/or Capitalized Interest Account and, if not
disclosed in the prospectus supplement, the terms and conditions for
eligibility of Subsequent Assets.
LEGAL INVESTMENT
The prospectus supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"). Generally, only
classes of Offered Securities that (1) are rated in one of the two highest
rating categories by one or more rating agencies and (2) are part of a series
representing interests in, or secured by, a trust fund consisting of loans
secured by first liens on real property and originated by particular types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
Those classes of Offered Securities qualifying as "mortgage related
securities" will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, state chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality of the United States constitute legal investments for those
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut-off for those enactments, limiting to varying
extents the ability of some entities (in particular, insurance companies) to
invest in mortgage related securities secured by liens on residential, or mixed
residential and commercial, properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in these securities, and national
banks may purchase these securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
ss.24 (Seventh), subject in each case to regulations that the applicable federal
regulatory authority may prescribe. In this connection, the Office of the
Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. ss.1.5), some "Type IV securities,"
defined in 12 C.F.R. ss.1.2(l) to include some "residential mortgage related
securities." As so defined, "residential mortgage-related security" means, in
relevant part, "mortgage related security" within the meaning of SMMEA. The
National Credit Union Administration ("NCUA") has adopted rules, codified at 12
C.F.R. Part 703, which permit federal credit unions to invest in "mortgage
related securities" under some limited circumstances, other than stripped
mortgage related securities, residual interests in mortgage related securities,
and commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140. Thrift institutions that are subject to the
jurisdiction of the Office of Thrift Supervision (the "OTS") should consider the
OTS' Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk,
Investment Securities, and Derivatives Activities," before investing in any of
the Offered Securities.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and by the
NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Securities offered pursuant to this prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
classes under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase these Offered Securities,
may be subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Securities, as some classes or subclasses may be deemed unsuitable investments,
or may otherwise be restricted, under those rules, policies or guidelines (in
some instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Securities issued in
book-entry form, provisions that may restrict or prohibit investments in
securities that are issued in book-entry form.
Except as to the status of some classes of Offered Securities as "mortgage
related securities," no representation is made as to the proper characterization
of the Offered Securities for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Securities under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Offered Securities) may adversely affect the liquidity of the Offered
Securities.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Securities of any class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to that investor.
METHODS OF DISTRIBUTION
The Securities offered by this prospectus and by the supplements to this
prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If
specified in the prospectus supplement, the Securities will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securities Inc. ("DBSI") acting as
underwriter with other underwriters, if any, named in the underwriting
agreement. In that event, the prospectus supplement may also specify that the
underwriters will not be obligated to pay for any Securities agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The prospectus supplement
will describe any compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by DBSI acting as agent or in some cases as principal with
respect to Securities that it has previously purchased or agreed to purchase. If
DBSI acts as agent in the sale of Securities, DBSI will receive a selling
commission for each series of Securities, depending on market conditions,
expressed as a percentage of the total principal balance of the related mortgage
loans as of the Cut-off Date. The exact percentage for each series of Securities
will be disclosed in the prospectus supplement. To the extent that DBSI elects
to purchase Securities as principal, DBSI may realize losses or profits based
upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Securities
of that series.
The depositor will indemnify DBSI and any underwriters against particular
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBSI and any underwriters may be required to make in
respect of these civil liabilities.
In the ordinary course of business, DBSI and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of those mortgage loans or interests in those mortgage loans, including the
Securities. DBSI performs management services for the depositor.
The depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of those purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. securityholders should consult
with their legal advisors in this regard before any reoffer or sale of
Securities.
As to each series of Securities, only those classes rated in one of the
four highest rating categories by any rating agency will be offered by this
prospectus. Any lower rated or unrated class may be initially retained by the
depositor, and may be sold by the depositor at any time to one or more
institutional investors.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the
Securities (the "Registration Statement"). This prospectus, which forms a part
of the Registration Statement, omits some of the information contained in the
Registration Statement pursuant to the rules and regulations of the Commission.
The Registration Statement and the exhibits to the Registration Statement can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at Regional
Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits to
the Registration Statement, through the EDGAR system and therefore these
materials should be available by logging onto the Commission's web site. The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae certificates
and Fannie Mae's annual report and quarterly financial statements as well as
other financial information are available from the Director of Investor
Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The Depositor did not participate in the preparation of Fannie
Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates as
well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac may
be obtained by writing or calling the Investor Inquiry Department of Freddie Mac
at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-3672; within Washington, D.C. metropolitan
area, telephone 703-759-8160). The Depositor did not participate in the
preparation of Freddie Mac's Offering Circular, Information Statement or any
supplement to the Information Statement or any quarterly report of the
Information Statement and, accordingly, makes no representation as to the
accuracy or completeness of the information in those documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund referred
to in the 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 that trust
fund will 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 those documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference in this prospectus will be deemed to be modified or superseded for all
purposes of this prospectus to the extent that a statement contained in this
prospectus (or in the prospectus supplement) or in any other subsequently filed
document that also is or is deemed to be incorporated by reference modifies or
replaces that statement. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
The Trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, upon request, 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 the exhibits are specifically incorporated by
reference into the information that this prospectus incorporates). Requests for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
securityholders of an investment in the Securities of a series, will be passed
upon for the depositor by Stroock & Stroock & Lavan LLP, Washington, D.C.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of Securities and no trust
fund will engage in any business activities or have any assets or obligations
before the issuance of the related series of Securities. Accordingly, financial
statements for a trust fund will generally not be included in this prospectus or
in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Securities, they
must not be rated lower than investment grade; that is, they must be rated in
one of the four highest rating categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by securityholders of all distributions on the
underlying mortgage loans. These ratings address the structural, legal and
issuer-related aspects associated with the Securities, the nature of the
underlying assets and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates, mortgage-backed notes and other asset backed
securities do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped interest
certificates in extreme cases might fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
<PAGE>
INDEX OF DEFINED TERMS
1986 Act......................................................................84
1998 Policy Statement........................................................134
Accrual Period................................................................15
Accrual Securities............................................................22
Accrued Security Interest.....................................................25
Adjustable Rate Assets.........................................................2
Agency Securities..............................................................2
Agreemen......................................................................36
ARM Loans......................................................................5
Asset Conservation Act........................................................74
Asset Group...................................................................22
Asset Seller...................................................................2
Assets.........................................................................2
Available Distribution Amount.................................................23
Balloon Payment Assets.........................................................3
Bankruptcy Code...............................................................72
Beneficial Owner..............................................................31
Bi-weekly Assets...............................................................3
Book-Entry Securities.........................................................22
borrower......................................................................63
Buy Down Assets................................................................2
Buydown Funds.................................................................83
Buydown Mortgage Loans........................................................19
Buydown Period................................................................19
Capitalized Interest Account..................................................13
Cash Flow Agreement...........................................................14
Clearstream Luxembourg........................................................31
CERCLA........................................................................73
Certificates..................................................................21
Charter Act....................................................................9
Code..........................................................................78
Collection Account............................................................40
Commission.....................................................................6
contract borrower.............................................................65
contract lender...............................................................65
Convertible Assets.............................................................3
Cooperative...................................................................64
Cooperative Corporation.......................................................32
Cooperative Loans.............................................................64
Cooperatives...................................................................4
Covered Trust.................................................................60
CPR...........................................................................17
credit support................................................................14
Crime Control Act.............................................................78
Cut-off Date...................................................................5
DBS..........................................................................135
DCR..........................................................................129
Debt Securities...............................................................79
defective obligation..........................................................81
Definitive Securities.........................................................22
Determination Date............................................................23
Disqualified Holder..........................................................110
Disqualified Organization.....................................................98
Distribution Date.............................................................15
DOL..........................................................................128
DTC...........................................................................31
Due Period....................................................................23
EDGAR........................................................................136
Eligible Corporation.........................................................110
ERISA........................................................................127
Euroclear.....................................................................31
Euroclear Operator............................................................32
European Depositaries.........................................................33
excess servicing.............................................................115
Exchange Act..................................................................31
Excluded Plan................................................................130
Exemption....................................................................128
Fannie Mae.....................................................................2
FASIT.........................................................................79
FASIT Ownership Security.....................................................106
FASIT Provisions..............................................................79
FASIT Regular Securities.....................................................106
FASIT Securities..............................................................79
FDIC..........................................................................40
FFIEC........................................................................134
FHA............................................................................5
Financial Intermediary........................................................33
Fitch........................................................................129
Freddie Mac....................................................................2
Freddie Mac Act...............................................................10
Freddie Mac Certificate Group.................................................10
Garn-St. Germain Act..........................................................75
GEM Assets.....................................................................3
Ginnie Mae.....................................................................2
GPM Assets.....................................................................3
Grantor Trust Fund............................................................79
Grantor Trust Securities......................................................79
Home Equity Loans..............................................................4
Housing Act....................................................................7
HUD...........................................................................48
Increasing Payment Asset.......................................................3
Indirect Participants.........................................................31
Insurance Proceeds............................................................23
Interest Rate.................................................................24
Interest Reduction Assets......................................................3
land sale contract............................................................65
Land Sale Contracts............................................................4
Level Payment Assets...........................................................2
Liquidation Proceeds..........................................................23
Loan-to-Value Ratio............................................................5
Lock-out Date..................................................................6
Lock-out Period................................................................6
Mark to Market Regulations...................................................101
Mortgage Securities............................................................2
Mortgaged Properties...........................................................4
Mortgages......................................................................4
NCUA.........................................................................134
new partnership..............................................................123
New Regulations..............................................................104
Non-Equity Securities........................................................130
Non-Pro Rata Security.........................................................85
Nonrecoverable Advance........................................................27
Non-U.S. Person..............................................................104
Notes.........................................................................21
OCC..........................................................................133
Offered Securities............................................................22
OID Regulations...........................................................80, 84
old partnership..............................................................123
Participants..................................................................31
Parties in Interest..........................................................127
Partnership Securities........................................................79
Partnership Trust Fund........................................................79
Pass-Through Entity...........................................................99
PCBs..........................................................................73
Permitted Investments.........................................................40
Plans........................................................................127
pooling and servicing agreement...............................................36
Pre-Funded Amount.............................................................13
Pre-Funding Account...........................................................13
Pre-Funding Limit............................................................132
Pre-Funding Period............................................................13
prepayment....................................................................17
Prepayment Assumption.........................................................86
PTCE.........................................................................131
Purchase Price................................................................38
RCRA..........................................................................74
Record Date...................................................................23
Refinance Loans................................................................5
Registration Statement.......................................................136
Regular Securities............................................................80
Regular Securityholder........................................................84
Related Proceeds..............................................................27
Relevant Depositary...........................................................33
Relief Act....................................................................78
REMIC.........................................................................79
REMIC Pool....................................................................79
REMIC Regulations.............................................................80
REMIC Securities..............................................................36
REO Property..................................................................28
Residual Securities...........................................................80
Restricted Group.............................................................129
Retained Interest.............................................................50
Revolving Credit Line Loans....................................................7
RICO..........................................................................78
Rules.........................................................................33
S&P..........................................................................129
SBJPA of 1996.................................................................83
secured-creditor exemption....................................................73
Securities....................................................................21
Security Balance..............................................................25
Senior Securities.............................................................22
Servicemen's Readjustment Act.................................................13
Servicing Standard............................................................44
Single Family Property.........................................................4
SMMEA........................................................................133
SPA...........................................................................17
Special servicer..............................................................52
Standard Securities..........................................................112
Startup Day...................................................................80
Step-up Rate Assets............................................................3
Strip Securities..............................................................22
Stripped Agency Securities....................................................11
Stripped Securities..........................................................112
Subordinate Securities........................................................22
Subsequent Assets.............................................................13
Superliens....................................................................73
super-premium.................................................................85
Taxable Mortgage Pools........................................................80
Terms and Conditions..........................................................32
thrift institutions...........................................................97
Tiered REMICs.................................................................84
Title V.......................................................................76
Title VIII....................................................................77
U.S. Person..................................................................100
UCC...........................................................................31
UST...........................................................................74
VA.............................................................................5
VA Guaranty Policy............................................................49
Value..........................................................................5
Warranting Party..............................................................38
Yield Considerations..........................................................25
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS SUPPLEMENT (to prospectus date [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
ACE SECURITIES CORP. CARD ACCOUNT
MASTER LOAN TRUST [ ]-[ ]
ASSET BACKED CERTIFICATES
[ ]
Seller
[ ]
Servicer
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The certificates will represent interests in the trust fund only and will
not represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the certificates
only if accompanied by the prospectus.
The sources for payment of the certificates are among other assets, a portfolio
of [consumer] [corporate] [revolving] [credit card] [charge card][debit card]
receivables generated or to be generated from time to time in a portfolio of
[consumer] [corporate] [revolving] [credit card] [charge card][debit card]
accounts [owned by the Seller]. Interest [and principal] on the certificates are
scheduled to be paid [monthly] on the [ ] day of the month. The first scheduled
distribution will be made in [ ]. The Trust will issue:
PRINCIPAL FINAL SCHEDULED
CERTIFICATES BALANCE CERTIFICATE RATE DISTRIBUTION DATE
------------ --------- ---------------- -----------------
A $[ ] [ ]% [ ]
B $[ ] [ ]% [ ]
Deutsche Banc Alex. Brown will purchase the certificates from the trust at
approximately [ ]% of the principal amount of the certificates. Deutsche Banc
Alex. Brown will offer the certificates from time to time in negotiated
transactions or at varying prices which will be determined at the time of sale.
The aggregate proceeds to the trust, before deducting expenses payable by or on
behalf of the trust estimated at $[ ], will be approximately $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
____________________
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
____________________
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
Table of Contents
PROSPECTUS SUPPLEMENT
Summary.......................................................................S-
Risk Factors..................................................................S-
Maturity Considerations.......................................................S-
Master Trust Considerations...................................................S-
The Identified Pool...........................................................S-
Use of Proceeds...............................................................S-
The Seller....................................................................S-
The Servicer..................................................................S-
The Depositor.................................................................S-
Description of the Certificates...............................................S-
Erisa Considerations..........................................................S-
Legal Investment Considerations...............................................S-
Underwriting..................................................................S-
Legal Matters.................................................................S-
Rating........................................................................S-
Index of Defined Terms........................................................S-
PROSPECTUS
Risk Factors....................................................................
The Trusts......................................................................
Trust Assets....................................................................
Series Enhancement..............................................................
Servicing of Receivables........................................................
Certain Matters Regarding the Service...........................................
Description of the Notes........................................................
Description of the Certificates.................................................
Certain Information Regarding the Securities....................................
Description of the Trust Agreements or
Pooling and Servicing Agreements..............................................
Certain Legal Aspects of the Receivables........................................
The Depositor...................................................................
Use of Proceeds.................................................................
Material Federal Income Tax Consequences........................................
Certain State and Local Tax Considerations......................................
ERISA Considerations............................................................
Plan of Distribution............................................................
Legal Matters...................................................................
Index of Defined Terms..........................................................
Annex I.........................................................................
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
ISSUER
ACE Securities Corp. Card Account Master Trust [ ].
SELLER AND ORIGINATOR
[ ].
DEPOSITOR
ACE Securities Corp., a special purpose Delaware corporation. ACE
Securities Corp. will sell the home equity loans to the issuing trust.
SERVICER
[ ].
TRUSTEE
[ ].
CLOSING DATE
[ ].
CUT-OFF DATE
The close of business on [ ]
DISTRIBUTION DATE
The [ ] day of each [month] [quarter] [semi-annual period] or if it is not
a business day, then the next succeeding business day. The first distribution
date for interest will be in [ ]. The first distribution date with respect to
principal is expected to occur in [ ].
RECORD DATE
With respect to any distribution date, the last business day of the month
immediately preceding the calendar month in which a distribution date occurs.
THE CERTIFICATES
GENERAL
On the closing date, the trust will issue the certificates. Each
certificate represents an undivided ownership interest in the trust.
DENOMINATION
The certificates will be offered for purchase in denominations of $[ ] and
multiples thereof.
BOOK-ENTRY REGISTRATION
We will issue the certificates in book-entry form. You will hold your
interests through a depository. While the certificates are book-entry they will
be registered in the name of the applicable depository, or in the name of the
nominee of the depository. Transfers within any depository system will be in
accordance with the usual rules and operating procedures of that system.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
GENERAL
You will be entitled to receive payments of interest on each distribution
date. The amount of principal you will be entitled to receive will vary. If you
hold a certificate on the applicable record date, you will be entitled to
receive payments on the related distribution date.
INTEREST
The interest rate on any distribution date for a certificate will be the
interest rate set forth in this prospectus supplement.
You can use the following formula to calculate your current interest
payment on any distribution date:
N x IR x PB = your interest payment
---
360
N= [30], [the number of days from the last distribution date (or in the case of
the initial distribution date, from [ ]) until the current distribution date].
IR= the applicable per annum interest rate.
PB= the principal balance of immediately prior to any distributions on each
distribution date.
PRINCIPAL
On each distribution date, the trustee will distribute principal of the
classes of certificates depending on the amortization period and in the manner
and priority discussed under the caption "Description of the Certificates -
Distributions" in this prospectus supplement.
AMORTIZATION PERIOD
[CONTROLLED AMORTIZATION PERIOD
Unless a rapid amortization period begins, the certificates will have a
controlled amortization period. During a controlled amortization period,
collections of principal receivables that are allocable to the percentage
interest of a series of certificates will be used to make principal
distributions in scheduled amounts to the certificateholders entitled to those
distributions. The amount to be distributed on any distribution date during the
controlled amortization period will be limited to:
o an amount equal to [ ], plus
o any existing deficit controlled amortization amount arising from prior
payment dates.
The controlled amortization period will commence at the close of business
on [ ] and continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[PRINCIPAL AMORTIZATION PERIOD
Unless a rapid amortization period begins, the certificates will have an
amortization period during which collections of principal receivables allocable
to the percentage interest of the certificates will be used on each payment date
to make principal distributions to the holders of the certificates then entitled
to distributions. The principal amortization period will commence at the close
of business on [ ] and continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[ACCUMULATION PERIOD
Unless a rapid amortization period begins, the certificates will have an
accumulation period. During an accumulation period, collections of principal
receivables allocable to the percentage interest of such certificates will be
deposited on the business day immediately prior to each payment date in a
principal funding account. The principal funding account is established for the
benefit of the holders of the certificates. Amounts on deposit in the principal
funding account will be used to make distributions of principal to the holders
on the scheduled payment date. The amount to be deposited in the principal
funding account on any transfer date will be limited to an amount equal to [ ].
The accumulation period will commence at the close of business on [ ] and
continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[RAPID AMORTIZATION PERIOD
The rapid amortization period shall run from the day on which an
amortization event has occurred, to the earlier of the date on which
certificates have been paid in full or the related series termination date.
During the rapid amortization period, collections of principal receivables
allocable to the percentage interest of a series of certificates will be
distributed as principal payments to the holders of the certificates on each
payment date. During the rapid amortization period, distributions of principal
to holders of the certificates will not be subject to any controlled deposit
amount or controlled distribution amount. In addition, upon the commencement of
the rapid amortization period, any funds on deposit in a principal funding
account will be paid to the holders of certificates on the first payment date in
the rapid amortization period.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o among other assets, a portfolio of [consumer] [corporate] [revolving]
[credit card] [charge card] [debit card] receivables generated or to
be generated from time to time in a portfolio of [consumer]
[corporate] [revolving] [credit card] [charge card] [debit card]
accounts [owned by the seller];
o payments on the receivables after the cut-off date (other than
payments of interest due on or prior to [ ]);
o certain rights of the depositor under a loan purchase agreement;
o amounts on deposit in the accounts specified in this prospectus
supplement; and
o proceeds of the foregoing.
THE RECEIVABLES
On the closing date, the trust will purchase receivables having an
aggregate principal balance of approximately $[ ] as of the initial cut-off
date, from the depositor pursuant to the agreement. On and after the closing
date, pursuant to the agreement, the depositor will sell, if available, and the
trust will purchase, additional receivables from time to time during the funding
period specified in this prospectus supplement. We expect the amount of
additional receivables to be purchased with moneys in the pre-funding account to
have an aggregate principal balance equal to approximately $[ ].
The statistical information presented in this prospectus supplement is with
respect to the initial receivables as of the initial cut-off date. Certain of
the initial receivables may not be purchased by the trust and other receivables
may be purchased by the trust on the closing date.
The initial receivables have been selected, and the subsequent receivables
will be selected, from the receivables owned or originated by the seller based
on the criteria specified in the pooling and servicing agreement and described
in this prospectus supplement.
After the transfer of subsequent receivables to the trust, the
characteristics of the entire pool of receivables included in the trust may vary
significantly from those of the initial receivables.
The initial receivables will have the following characteristics as of the
cut-off date:
o number of receivables: [ ]
o aggregate principal balance: $[ ]
o average principal balance: $[ ]
o maximum principal balance: $____
o minimum principal balance: $[ ]
o latest maturity date: [ ]
o weighted average current interest rate:
o current interest rates range: [ ]% to [ ]%
o weighted average gross margin: [ ]% (approximate)
o gross margin range: [ ]% to [ ]%
o weighted average maximum interest rate:
o maximum interest rate range: [ ]% to [ ]%
o weighted average minimum interest rate:
o minimum interest rate range: [ ]% to [ ]%
o weighted average remaining term: vmonths (approximate)
o remaining term range: [ ]months to [ ] months
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
holders of certain classes of certificates against losses due to defaults by the
borrowers under the home equity loans.
The certificates have the benefit of [four] types of credit enhancement:
o [a cash collateral account],
o [ ]
o [ ]
o with respect to the class A certificates, subordination of the class B
certificates; and
OPTIONAL TERMINATION
On any date when the adjusted invested amount is less than or equal to [ ]%
of the invested amount on the closing date and to the extent certain conditions
specified in the agreement are satisfied, the [depositor] [seller] will have the
right to purchase the invested amount from the trust.
FEDERAL TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP has acted as counsel to the depositor and is
of the opinion that:
o The certificates will be treated as indebtedness of the seller that is
secured by the receivables.
ERISA CONSIDERATIONS
An employee benefit plan subject to the requirements of the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, or the provisions of Section 4975 of the Internal
Revenue Code of 1986 as amended, contemplating the purchase of the class A
certificates should consult its counsel before making a purchase, and the
fiduciary and such legal advisors should consider whether the class A
certificates will satisfy all of the requirements of the "publicly offered
securities" exemption described herein and the possible application of other
ERISA prohibited transaction exemptions described herein. Although the depositor
expects that the "publicly offered securities" exemption or the other ERISA
prohibited transaction exemptions will apply to certain purchases of the class A
certificates by employee benefit plans, there can be no assurance that such
exemption will apply to all purchases of the class A certificates by such plans.
The class B certificates are not eligible for purchase by plans.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
CERTIFICATE RATING
Before the certificates can be issued, the trust must obtain the following
ratings:
CLASS A CERTIFICATES
o [the highest rating category by [ ]]
CLASS B CERTIFICATES
o [One of the four highest rating category by [ ]]
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE NOTES.
YOU MAY HAVE DIFFICULTY SELLING
YOUR CERTIFICATES...................... The certificates will not be listed on
any securities exchange. As a result, if
you wish to sell your certificates, you
will have to find a purchaser that is
willing to purchase your certificates.
The underwriter intends to make a
secondary market for the offered
certificates. The underwriter may do so
by offering to buy the offered
certificates from investors that wish to
sell. However, the underwriter will not
be obligated to make offers to buy the
offered certificates and may stop making
offers at any time. In addition, the
prices offered, if any, may not reflect
prices that other potential purchasers,
were they to be given the opportunity,
would be willing to pay. There have been
times in the past where there have been
very few buyers of similar asset backed
securities, and there may be times again
in the future. As a result, you may not
be able to sell your certificates when
you wish to do so or you may not be able
to obtain the price you wish to receive.
[GEOGRAPHIC CONCENTRATION MAY AFFECT
PERFORMANCE............................ Discuss any geographic risks, if
applicable]
[CONCENTRATION OF CREDIT RISK.......... Discuss impact on Certificateholders of
material concentration of credit risk,
if applicable.]
THE SUBORDINATED CERTIFICATES HAVE
A GREATER RISK OF LOSS THAN THE
OTHER CERTIFICATES..................... The class B certificates will not be
paid any distributions of interest until
the class A certificates receive their
interest distributions and will not
receive any distributions of principal
until the class A certificates receive
their principal distributions. If the
available funds are insufficient to make
all of the required distributions on the
class A, and class B certificates, the
class B certificates will not receive
all of their distributions. In addition,
losses due to defaults by [ ], will be
allocated first to the class B
certificates to the extent not covered
by excess interest at that time. Any
allocation of a loss to class B
certificates will reduce the amount of
interest and, to the extent not
reimbursed from future excess interest,
principal they will receive. As a result
of the foregoing, the class B
certificates will be affected to a
larger degree by any losses on the
receivables. In addition, following the
exercise of the clean-up call, the class
B certificates and consequently, may not
receive amounts with respect to any
losses allocated to the class B
certificates that have not been
previously reimbursed.
THE TRUST ASSETS ARE THE ONLY SOURCE
OF PAYMENTS ON THE CERTIFICATES........ All distributions on the certificates
will be made from payments by borrowers
under the receivables. The trust has no
other assets [other than [ ]] to make
distributions on the certificates. The
receivables are NOT insured or
guaranteed by any person. The trust is
the only person that is obligated to
make distributions on the certificates.
The certificates are NOT insured by any
governmental agency.
CERTIFICATE RATING..................... The rating of the certificates will
depend on an assessment by the rating
agencies of the receivables. The rating
by the rating agencies of the
certificates is not a recommendation for
you to purchase, hold or sell the
certificates, and the rating does not
comment as to the market price or
suitability for a particular investor.
There is no assurance that the ratings
will remain in place for any given
period of time or that the ratings will
not be lowered or withdrawn by the
rating agencies. The ratings do not
address the possibility that offered
certificateholders might realize a lower
than anticipated yield. The ratings of
the offered certificates do not address
the possibility of the imposition of
United States withholding tax with
respect to non-U.S. persons. No rating
of the originator, the servicer or the
company is required to maintain the
rating of the offered certificates.
THE CERTIFICATES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS.......... The certificates are not suitable
investments for any investor that
requires a regular or predictable
schedule of payments or payment on any
specific date. The offered certificates
are complex investments that should be
considered only by investors who, either
alone or with their financial, tax and
legal advisors, have the expertise to
analyze the prepayment, reinvestment,
default and market risk, the tax
consequences of an investment, and the
interaction of these factors.
[THE RECEIVABLES, THE PRE-FUNDING
ACCOUNT AND THE RISK OF PREPAYMENT..... On the closing date, the depositor will
transfer to the trust the approximately
$[ ] of initial receivables and the
approximately $[ ] pre-funded amount on
deposit in the pre-funding account. If
the principal amount of eligible
receivables originated by [seller] and
acquired by the depositor during the
funding period is less than the
pre-funded amount, the depositor will
have insufficient receivables to sell to
the trust on the subsequent transfer
dates, resulting in a prepayment of
principal to the Certificateholders as
described in the following paragraph.
[To the extent that amounts on deposit
in the pre-funding account have not been
fully applied to the conveyance of
subsequent receivables to the trust by
the end of the funding period, you will
receive, on the distribution date on or
immediately following the last day of
the funding period, a prepayment of
principal from amounts remaining in the
pre- funding account. We anticipate that
the principal amount of subsequent
receivables sold to the trust will not
be exactly equal to the amount on
deposit in the pre-funding account and
that therefore there will be at least a
nominal amount of principal prepaid to
you.]
[RISKS ATTENDANT TO INVESTMENTS IN
INTEREST-ONLY OR PRINCIPAL-ONLY
CERTIFICATES........................... [If certificates are interest-only or
principal-only certificates, discuss
risks attendant to these types of
certificates.]]
<PAGE>
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement (the "Agreement") and the series
supplement to the Agreement (the "Series Supplement" or a "Supplement") provide
that holders of Class A Certificates (the "Class A Certificateholders") will not
receive payments of principal until the first Distribution Date with respect to
the Controlled Amortization Period, which is the [ ] Distribution Date, unless a
Pay Out Event shall occur. Class A Certificateholders will receive payments of
principal on the [ ] day of each [month] [quarter] [semi-annual period] or if it
is not a business day, then the next succeeding business day (the "Distribution
Date") following the Monthly Period in which a Pay Out Event occurs (each
Distribution Date following a Pay Out Event, a "Special Payment Date") until the
Class A Invested Amount has been paid in full or until [ ] (the "Termination
Date"). The "Monthly Period" is [the calendar month preceding the Distribution
Date]. The holders of Class B Certificates (the "Class B Certificateholders",
and together with the Class A Certificateholders, the "Certificateholders"))
will not begin to receive payments of principal until the final principal
payment on the Class A Certificates has been made.
On each Distribution Date with respect to the Class A Accumulation
Period, amounts equal to the lesser of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the sum of the applicable Controlled Accumulation Amount for the
Monthly Period and any applicable Deficit Controlled Accumulation
Amount, (the "Controlled Deposit Amount") and
o the Class A Adjusted Invested Amount
will be deposited in the Principal Funding Account until the Principal Funding
Account Balance is equal to the Class A Invested Amount.
After the Class A Invested Amount has been paid in full, on each Distribution
Date with respect to the Class B Accumulation Period amounts equal to the lesser
of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the applicable Controlled Deposit Amount, and
o the Class B Adjusted Invested Amount
will be deposited in the Principal Funding Account until the Principal Funding
Account Balance equals the Class B Invested Amount.
See "DESCRIPTION OF THE CERTIFICATES -- Principal Payments" for a discussion of
circumstances under which the commencement of an Accumulation Period may be
delayed.
On each Distribution Date during the Controlled Amortization Period,
the Certificateholders will be entitled to receive monthly payments of
principal, until the Certificates have been paid in full, in an amount equal to
the lesser of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the sum of the applicable Controlled Distribution Amount and any
applicable Deficit Controlled Amortization Amount, and
o the Invested Amount.
The [Seller] [Depositor] may, at or after the time at which the
[Controlled Amortization Period] [Accumulation Period] commences for Series 200[
]- [ ] cause the Trust to issue another Series, or some portion of another
Series, to the extent that the full principal amount of the other Series is not
otherwise outstanding at that time, as a Paired Series with respect to Series
200[ ]- [ ] to be used to finance the increase in the Seller's Interest caused
by the accumulation of principal in the Principal Funding Account with respect
to Series 200[ ]- [ ]. No assurances can be given as to whether the other Series
will be issued and, if issued, the terms of the newly issued Series. Because the
terms of the Certificates may vary from the terms of the other series, the Pay
Out Events with respect to the series may vary from the Pay Out Events with
respect to Series 200[ ]- [ ] and may include Pay Out Events which are unrelated
to the status of the Seller, or the Servicer or the Receivables, such as Pay Out
Events related to the continued availability and rating of specific providers of
enhancement to the other Series. If a Pay Out Event does occur with respect to
any Paired Series prior to the payment in full of the Certificates, the final
payment of principal to the Certificateholders may be delayed.
Should a Pay Out Event occur with respect to the Certificates and the
Rapid Amortization Period commence,
o any amount on deposit in the Principal Funding Account will be paid to
the Certificateholders on the first Special Payment Date, and the
Certificateholders will be entitled to receive Available Principal
Collections on each Distribution Date with respect to the Rapid
Amortization Period or following the Expected Final Payment Date, as
the case may be, as described in this prospectus supplement until the
Class A Invested Amount and Class B Invested Amount are paid in full
or until the Termination Date occurs, and
o any amount on deposit in the Excess Funding Account will be released
and treated as Shared Principal Collections to the extent needed to
cover principal payments due to or for the benefit of any Series
entitled to the benefits of Shared Principal Collections.
In addition, on the first Special Payment Date following the occurrence of a Pay
Out Event, after giving effect to any payment of principal on that date,
(a) an amount equal to the lesser of:
(i) the Available Shared Collateral Amount, after giving effect
to any withdrawal from the Cash Collateral Account on that date
of amounts to fund the Class A Required Amount and the Class B
Required Amount, and
(ii) the unpaid principal amount of the Class A Certificates,
less the Principal Funding Account Balance allocable to the Class
A Certificates, will be withdrawn from the Cash Collateral
Account and distributed to the Class A Certificateholders as a
payment of principal of the Class A Certificates, and
(b) an amount equal to the lesser of:
(i) the remainder of the Available Cash Collateral Amount, and
(ii) the unpaid principal amount of the Class B Certificates,
less the Principal Funding Account Balance, if any, allocable to
the Class B Certificates, will be withdrawn from the Cash
Collateral Account and distributed to the Class B
Certificateholders as a payment of principal of the Class B
Certificates.
The ability of Certificateholders to receive payments of principal on
the applicable Expected Final Payment Date on each Distribution Date during the
Controlled Amortization Period depends on the payment rates on the Receivables,
the amount of outstanding Receivables, delinquencies, charge-offs and new
borrowings on the Accounts, the potential issuance by the Trust of additional
Series and the availability of Shared Principal Collections. The amount of
outstanding Receivables and the delinquencies, charge-offs and new borrowings on
the Accounts may vary from month to month due to seasonal variations, the
availability of other sources of credit, legal factors, general economic
conditions and spending and borrowing habits of individual accountholders.
Monthly payment rates on the Receivables may vary because, among other things,
accountholders may fail to make a required minimum payment, may only make
payments as low as the minimum required amount or may make payments as high as
the entire outstanding balance. Monthly payment rates may also vary due to
seasonal purchasing and payment habits of accountholders and to changes in any
terms of rebate programs in which accountholders participate. The Depositor
cannot predict, and no assurance can be given, as to the accountholder monthly
payment rates that will actually occur in any future period, as to the actual
rate of payment of principal of the Certificates or whether the terms of any
previously or subsequently issued Series might have an impact on the amount or
timing of any payment of principal. The foregoing factors will affect both the
Class A Certificates and the Class B Certificates.
There can be no assurance that collections of Principal Receivables
with respect to the Trust, and thus the rate at which Certificateholders could
expect to receive payments of principal on the Certificates during the Rapid
Amortization Period or the rate at which the Principal Funding Account could be
funded during the Accumulation Period, or the rate at which payments of
principal will be made during the Controlled Amortization Period, will be
similar to the historical experience set forth in the "Accountholder Monthly
Payment Rates for the Identified Pool" table under "The Identified Pool" in this
prospectus supplement. The Depositor may shorten the Class A Accumulation Period
and, in that event, there can be no assurance that there will be sufficient time
to accumulate all amounts necessary to pay the Class A Invested Amount on the
Class A Expected Final Payment Date.
The Trust, as a master trust, may issue additional Series from time to
time, and there can be no assurance that the terms of any additional Series
might not have an impact on the timing or amount of payments received by
Certificateholders. Further, if a Pay Out Event occurs, the average life and
maturity of the Class A Certificates and Class B Certificates, respectively,
could be significantly reduced.
Due to the reasons set forth above, there can be no assurance that
deposits in the Principal Funding Account will be made in accordance with the
applicable Controlled Accumulation Amount that payments of principal will be
made in accordance with the applicable Controlled Amortization Amount or that
the actual number of months elapsed from the date of issuance of the Class A
Certificates and the Class B Certificates to their respective final Distribution
Dates will equal the expected number of months.
MASTER TRUST CONSIDERATIONS
IMPACT OF ADDITIONAL SERIES. The Trust, as a master trust, may issue
additional Series from time to time. While the terms of any Series will be
specified in a Supplement, the provisions of a Supplement and, therefore, the
terms of any additional Series, will not be subject to prior review by, or
consent of, holders of the Certificates of any previously issued Series. These
terms may include methods for determining applicable investor percentages and
allocating collections, provisions creating different or additional security or
other credit enhancement for the Series ("Series Enhancement"), provisions
subordinating the Series to another Series or other Series, if the Supplement
relating to the Series so permits, to the Series, and any other amendment or
supplement to the Agreement which is made applicable only to the Series. The
obligation of the Trustee to issue any new Series is subject to the following
conditions, among others:
o the [Seller] [Depositor] shall have received written notice that the
new issuance will not result in any Rating Agency's reducing or
withdrawing its rating of the Certificates of any outstanding Series
(any reduction or withdrawal is referred to in this prospectus
supplement as a "Ratings Effect"), and
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the new issuance will not at the time of its occurrence
cause a Pay Out Event or an event that, after the giving of notice or
the lapse of time, would constitute a Pay Out Event, to occur with
respect to any Series.
There can be no assurance, however, that the terms of any other Series,
including any Series later issued, might not have an impact on the timing or
amount of payments received by a Certificateholder.
IMPACT OF DISCOUNT OPTION. Pursuant to the Agreement, the [Seller]
[Depositor] has the option from time to time to designate a fixed or variable
percentage of Receivables that otherwise would be treated as Principal
Receivables to be treated as Finance Charge Receivables. Any designation would
result in an increase in the amount of Finance Charge Receivables and a slower
payment rate of collections in respect of Principal Receivables than otherwise
would occur. Pursuant to the Agreement, the [Seller] [Depositor] can make a
designation without notice to or the consent of Certificateholders.
Subsequently, pursuant to the Agreement, the [Seller] [Depositor] may, without
notice to or the consent of Certificateholders, reduce or eliminate the
percentage of Receivables subject to this designation. The [Seller] [Depositor]
must provide 30 days prior written notice to the Servicer, the Trustee, any
provider of Series Enhancement and each Rating Agency of any designation or
reduction of Principal Receivables to be treated as Finance Charge Receivables,
and the designation or reduction will become effective only if:
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the designation or reduction would not at the time of its
occurrence cause a Pay Out Event or an event that, after the giving of
notice or the lapse of time would constitute a Pay Out Event, to occur
with respect to any Series,
o the [Seller] [Depositor] shall have received written notice from each
Rating Agency that the designation or reduction will not have a
Ratings Effect, and
o in the case of a reduction or withdrawal, the [Seller] [Depositor]
shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, in the reasonable belief of the [Seller]
[Depositor], the reduction or withdrawal shall not have adverse
regulatory implications for the [Seller] [Depositor].
IMPACT OF ADDITION OF TRUST ASSETS. The [Seller] [Depositor] expects,
and in some cases will be obligated to designate additional Accounts, the
Receivables in which will be conveyed to the Trust. These additional Accounts
may include accounts originated using criteria different from those which were
applied to the Accounts previously included in the Trust because the additional
Accounts were originated at a different date or were part of a portfolio of
accounts which were not part of the Seller's portfolio at the time Accounts were
previously conveyed to the Trust or which were acquired from other institutions.
Moreover, additional Accounts may or may not be accounts of the same type as
those previously included in the Trust. Consequently, there can be no assurance
that the additional Accounts will be of the same credit quality as the Accounts
previously included in the Trust. In addition, the additional Accounts may
consist of accounts which have characteristics different from the
characteristics of Accounts previously included in the Trust, including lower
periodic rate finance charges and other fees and charges, which may have the
effect of reducing the average yield on the portfolio of Accounts included in
the Trust, different payment rates and higher loss or delinquency experience,
which may have the effect of reducing the average yield on the portfolio of
accounts included in the Trust. The designation of additional Accounts will be
subject to the satisfaction of particular conditions, including that:
o the [Seller] [Depositor] shall have received written notice from each
Rating Agency that the addition will not have a Ratings Effect, and
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the addition will not at the time of its occurrence cause
a Pay Out Event or an event that, after the giving of notice or the
lapse of time, would constitute a Pay Out Event, to occur with respect
to any Series.
Although the addition of participations will require an amendment to the Pooling
and Servicing Agreement, no consent of Certificateholders will be required for
any amendment.
THE IDENTIFIED POOL
A pool of [consumer] [corporate] [revolving] [credit] [charge] [debit]
card accounts owned by the Seller was identified (the "Identified Pool"), from
which the Accounts included in the Trust as of the Cut-Off Date (the "Trust
Portfolio") were selected based on the eligibility criteria specified in the
Agreement. Set forth below is certain information with respect to the Identified
Pool. There can be no assurance that the yield, loss and delinquency experience
with respect to the Receivables will be comparable to that set forth below with
respect to the entire Identified Pool.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth the delinquency and loss experience for
the Identified Pool for each of the periods shown. Because the Trust Portfolio
is only a portion of the Identified Pool, actual delinquency and loss experience
with respect to the Receivables is expected to be different from that set forth
below for the Identified Pool.
Delinquency as Percentage of the Identified Pool
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
Number of At Month End
Delinquent Days _____ 31, 2000 1999 1998 1997
--------------- -------------------------- --------------------------- -------------------------- ------------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 to 59 Days........
60 to 80 days........
90 Days or Greater...
Totals...............
</TABLE>
Loss Experience for the Identified Pool
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
Three Months Ended Three Months Ended -------------------------------------------
, 2000 , 2000 1999 1998 1997
------------------ ------------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average Receivables
Outstanding............
Gross Losses.............
Gross Losses as a
Percentage of Average
Receivables
Outstanding............
Recoveries...............
Net Losses...............
Net Losses as a
Percentage of Average
Receivables
Outstanding............
</TABLE>
REVENUE EXPERIENCE
The following table sets forth the revenues from the Finance Charges
and Fees billed and Interchange received with respect to the Identified Pool for
each of the periods shown.
Revenue Experience for the Identified Pool
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
Three Months Ended Three Months Ended -------------------------------------------
, 2000 , 2000 1999 1998 1997
------------------ ------------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average Receivables
Outstanding Finance
Charges and Fees.......
Yield from Finance
Charges and Fees.......
Interchange..............
Yield from Interchange...
Yield from Finance
Charges Fees and
Interchange............
</TABLE>
There can be no assurance that the yield experience with respect to
the Receivables will be comparable to that set forth above for the Identified
Pool. In addition, revenue from the Receivables will depend on the types of fees
and charges assessed on the Accounts, and could be adversely affected by future
changes made by the Seller in such fees and charges or by other factors.
PAYMENT RATES
The following table sets forth the highest and lowest accountholder
monthly payment rates for the Identified Pool during any single month in each of
the periods shown and the average accountholder monthly payment rates for all
months during each of the periods shown, in each case calculated as a percentage
of average monthly account balances during the periods shown. Monthly payment
rates shown in the table are based on amounts which would be payments of
Principal Receivables and Finance Charge Receivables with respect to the
Accounts.
VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively.
1 [private label] [other] credit card accounts, of which [ ]% were
standard accounts and [ ]% were premium accounts.
The following tables summarize the Trust Portfolio by various criteria
as of [ ]. References to "Receivables Outstanding" in the following tables
include both Finance Charge Receivables and Principal Receivables. Because the
future composition of the Trust Portfolio may change over time, these tables are
not necessarily indicative of the composition of the Trust Portfolio at any
subsequent time.
Composition by Account Balance
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
-------------------------
Credit Balance................
No Balance....................
More than $0 and less than or
equal to $1,500.............
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
Composition by Credit Limit
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
-------------------------
Less than or equal to
$1,500......................
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
Composition by Payment Status
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
-------------------------
Current to 29 days............
Past due 30 - 59 days.........
Past due 60 - 89 days.........
Past due 90+ days.............
Total.........................
Composition by Account Age
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
-------------------------
Not more than 6 months........
Over 6 months to 12 months....
Over 1 year to 2 years........
Over 2 years to 3 years.......
Over 3 years to 4 years.......
Over 4 years..................
Total.........................
Composition by Accountholder Billing Address
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Location
--------
Alaska.........................
Arizona........................
Arkansas.......................
California.....................
Colorado.......................
Connecticut....................
Delaware.......................
District of Columbia...........
Florida........................
Georgia........................
Hawaii.........................
Idaho..........................
Illinois.......................
Indiana........................
Iowa...........................
Kansas.........................
Kentucky.......................
Louisiana......................
Maine..........................
Maryland.......................
Massachusetts..................
Michigan.......................
Minnesota......................
Mississippi....................
Missouri.......................
Montana........................
Nebraska.......................
Nevada.........................
New Hampshire..................
New Jersey.....................
New Mexico.....................
New York.......................
North Carolina.................
North Dakota...................
Ohio...........................
Oklahoma.......................
Oregon.........................
Pennsylvania...................
Rhode Island...................
South Carolina.................
South Dakota...................
Tennessee......................
Texas..........................
Utah...........................
Vermont........................
Virginia.......................
Washington.....................
West Virginia..................
Alabama........................
Wyoming........................
Other..........................
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be paid to the
Depositor. The Depositor will use the net proceeds to pay the Seller the
purchase price of the Receivables [and the Seller will use the net proceeds for
general corporate purposes.]
THE SELLER
The "Seller" is [ ]. [Insert description of the Seller.]
THE SERVICER
The "Servicer" is [ ]. [Insert description of the Servicer, if
different from the Seller.]
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in loans and
other financial assets, collections on the loans and related assets; and to
engage in any acts that are incidental to, or necessary, suitable or convenient
to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE CERTIFICATES
Pursuant to the Agreement and the Series Supplement, ACE Securities
Corp. Card Account Master Trust [ ]- [ ] (the "Trust") will issue Class A
Certificates (the "Class A Certificates") and Class B Certificates (the "Class B
Certificates", and together with the Class A Certificates, the "Certificates" or
the "Securities") which are a separate series (the "Series") of securities
issued under the Prospectus. The following summary describes the material terms
of the Certificates, the Agreement and the Series Supplement. The summaries do
not purport to be complete descriptions of all of the terms of the Certificates,
the Agreement and the Series Supplement and therefore are subject to, and
qualified in their entirety by reference to, all the provisions of the
Certificates, the Agreement and the Series Supplement. Reference should be made
to the Prospectus for additional information concerning the Certificates, the
Agreement and the Series Supplement.
The final expected Payment Date for the Class A Certificates is [ ]
(the "Class A Expected Final Payment Date") and the final expected Payment Date
for the Class B Certificates is [ ] (the "Class B Expected Final Payment Date"
and together with the Class A Expected Final Payment Date, the "Expected Final
Payment Date").
Interest Payments
Interest on the Class A Certificates and the Class B Certificates will
accrue from the [Issuance Date] [Closing Date] on the Class A Invested Amount
and Class B Invested Amount, respectively, at the Class A Certificate Rate and
Class B Certificate Rate, respectively. ").] Interest with respect to the
Certificates will be distributed on the [ ] day of each [month] [quarter]
[semi-annual period] (an "Interest Period") (or if such a day is not a business
day, the next succeeding business day) commencing on [ ] and on each [ ]
thereafter (each a "Distribution Date"). The "Class A Certificate Rate" for an
Interest Period will be a rate per annum equal to [insert Class A Certificate
Rate formula] for a period of [one] [three] [six] months [or following a Pay Out
Event, for a period of one month]. The "Class B Certificate Rate" for an
Interest Period will be a rate per annum equal to [insert Class B Certificate
Rate formula] for a period of [one] [three] [six] months [or following a Pay Out
Event, for a period one month.]. Interest will be distributed on [ ] the [ ] day
of each month (the "Interest Payment Date"), and on each subsequent Interest
Payment Date, or if any of these days is not a business day, the next succeeding
business day, commencing on the [ ] Distribution Date, to Certificateholders in
whose names the Certificates were registered at the close of business on the
last day of the calendar month preceding the date of payment (a "Record Date").
Interest for any Interest Payment Date or Special Payment Date will accrue from
and including the preceding Interest Payment Date or Special Payment Date, or in
the case of the first Interest Payment Date, from and including the [Issuance
Date] [Closing Date], to but excluding the Interest Payment Date or Special
Payment Date.
Interest payments or deposits with respect to the Class A Certificates
for each Distribution Date will be calculated on the Class A Invested Amount as
of the preceding Record Date, or in the case of the initial Distribution Date,
on the initial Class A Invested Amount, based upon the Class A Certificate Rate.
Interest payments or deposits with respect to each Distribution Date will be
calculated on the basis of [the actual number of days in the period from and
including the preceding Distribution Date, or in the case of the initial
Distribution Date the Closing Date, to but excluding the Distribution Date and a
360-day year] [a 360-day year of twelve 30-day months]. On each Distribution
Date, Class A Monthly Interest and Class A Monthly Interest previously due but
not deposited in the Interest Funding Account or distributed in respect of Class
A Certificates will be:
a) paid to Class A Certificateholders from Class A Available Funds if the
Distribution Date is an Interest Payment Date or Special Payment Date,
or
b) deposited in an Eligible Deposit Account in the name of the [ ] (the
"Trustee") and for the benefit of the Certificateholders (the
"Interest Funding Account"), if the Distribution Date is not an
Interest Payment Date or a Special Payment Date.
"Eligible Deposit Account" means either:
o a segregated account with an eligible institution, or
o a segregated trust account with the corporate trust department of a
depository institution organized under the laws of the United States
or any one of the states of the United States or the District of
Columbia, or any domestic branch of a foreign bank, having corporate
trust powers and acting as trustee for funds deposited in the account,
so long as any of the securities of the depository institution have a
credit rating from each Rating Agency in one of its generic rating
categories which signifies investment grade.
To the extent Class A Available Funds allocated to the Class A
Certificateholders' Interest for the Monthly Period are insufficient to pay the
interest, Excess Spread and Excess Finance Charges allocated to Series 200[ ]- [
], amounts, if any, on deposit in the Cash Collateral Account up to the
Available Shared Collateral Amount and Reallocated Principal Receivables will be
used to make these payments.
"Class A Available Funds" means, with respect to any Monthly Period,
an amount equal to the sum of:
a) the Class A Floating Percentage of collections of Finance Charge
Receivables allocated to the Certificates with respect to the Monthly
Period, including any investment earnings and other amounts that are
to be treated as collections of Finance Charge Receivables in
accordance with the Agreement and the Series Supplement, but excluding
the portion of collections of Finance Charge Receivables attributable
to Interchange that is allocable to Servicer Interchange;
b) [if the Monthly Period relates to a Distribution Date that occurs
prior to the Class B Principal Commencement Date,] the Principal
Funding Investment Proceeds, if any, with respect to the related
Distribution Date; [and]
c) amounts, if any, to be withdrawn from the Reserve Account which are
required to be included in Class A Available Funds pursuant to the
Series Supplement with respect to the Distribution Date; [and
d) Excess Spread, if any, for the Monthly Period.]
[Interest payments on the Class B Certificates for each Payment Date
will be calculated on the Class B Invested Amount as of the preceding Record
Date, or in the case of the initial Interest Payment Date, on the initial Class
B Invested Amount, based upon the Class B Certificate Rate. Interest will be
calculated on the basis of [the actual number of days in the period from and
including the preceding Distribution Date or in the case of the initial
Distribution Date the Closing Date, to but excluding the Distribution Date and
360-day year] [a 360-day year of twelve 30-day months]. On each Distribution
Date, Class B Monthly Interest and Class B Monthly Interest previously due but
not distributed to Class B Certificateholders will be paid from Class B
Available Funds for the related Distribution Date and, if necessary, from Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and amounts,
if any, on deposit in the Cash Collateral Account up to the Available Cash
Collateral Amount.
["Class B Available Funds" (together with the Class A Available Funds,
the "Available Funds") means, with respect to any Monthly Period, an amount
equal to the sum of:
a) the Class B Floating Percentage of collections of Finance Charge
Receivables allocated to the Certificates with respect to the Monthly
Period, including any investment earnings and other amounts that are
to be treated as collections of Finance Charge Receivables in
accordance with the Agreement, but excluding the portion of
collections of Finance Charge Receivables attributable to Interchange
that is allocable to Servicer Interchange;
b) if the Monthly Period relates to a Distribution Date that occurs on or
after the Class B Principal Commencement Date, the Principal Funding
Investment Proceeds, if any, with respect to the related Distribution
Date; [and]
c) amounts, if any, to be withdrawn from the Reserve Account which are
required to be included in Class B Available Funds pursuant to the
Series Supplement with respect to the Distribution Date; [and
d) Excess Spread, if any, for the Monthly Period].]
Principal Payments
The "Revolving Period" begins on the close of business on [ ] (the
"Cut-Off Date"), and ends on the day before the commencement of the [Controlled
Amortization Period] [Accumulation Period] or, if earlier, the Rapid
Amortization Period. During the Revolving Period no principal payments will be
made to Certificateholders.
[On each Distribution Date during the Revolving Period, unless a
reduction in the Required Cash Collateral Amount has occurred, collections of
Principal Receivables allocable to the Certificateholders' Interest and the
Collateral Indebtedness Interest will, subject to limitations, including the
allocation of any Reallocated Principal Collections with respect to the related
Monthly Period to pay the Required Amount, be paid to the Seller to purchase
additional Receivables in order to maintain the Invested Amount, and if
necessary, be treated as Shared Principal Collections. If a reduction in the
Required Cash Collateral Amount has occurred, collections of Principal
Receivables allocable to the Collateral Indebtedness Amount will be applied in
accordance with a collateral agreement to reduce the Collateral Indebtedness
Amount to the Required Cash Collateral Amount.]
[Unless a Pay Out Event occurs and the Rapid Amortization Period
commences, the Certificates will have an accumulation period (the "Accumulation
Period"), which will commence at the close of business on [ ]; provided, that
subject to the conditions set forth in this prospectus supplement, the day on
which the Revolving Period ends and the Accumulation Period begins may be
delayed to no later than the close of business on [ ]. The Accumulation Period
will end on the earliest of:
(a) the commencement of the Rapid Amortization Period,
(b) payment in full of the Invested Amount, and
(c) the Termination Date.
During the Accumulation Period, until the Certificates are paid in full,
collections of Principal Receivables and certain other amounts allocable to the
Certificateholders' Interest will be deposited on each Distribution Date in a
trust account (the "Principal Funding Account") and used to make principal
distributions to the Certificateholders when due.]
[During the Accumulation Period, on or prior to the respective
Expected Final Payment Dates, principal will be deposited in the Principal
Funding Account as described below and on the Class A Expected Final Payment
Date will be distributed to Class A Certificateholders up to the Class A
Invested Amount [and then to Class B Certificateholders on the Class B Expected
Final Payment Date up to the Class B Invested Amount]. During any Rapid
Amortization Period, which will begin upon the occurrence of a Pay Out Event,
and until the Termination Date occurs, principal will be paid [first] to the
Class A Certificateholders until the Class A Invested Amount has been paid in
full[, and then to the Class B Certificateholders until the Class B Invested
Amount has been paid in full].]
The "Controlled Amortization Period" is scheduled to commence at the
close of business on the last day of the [ ]. The Controlled Amortization Period
will end on the earliest of"
(a) the commencement of the Rapid Amortization Period,
(b) the payment in full of the Invested Amount, or
(c) the Termination Date.
[During the Controlled Amortization Period, which is scheduled to
begin on [ ], and during any Rapid Amortization Period, which will begin upon
the occurrence of a Pay Out Event, and until the Termination Date, principal
will be paid to the Certificateholders on each Distribution Date until the
Invested Amount has been paid in full.]
[On each Distribution Date during the Controlled Amortization Period,
unless a Rapid Amortization Period commences, the Certificateholders will be
entitled to receive [for each related Monthly Period since the previous Interest
Payment Date] the lesser of:
o collections of Principal Receivables received during each Controlled
Amortization Period allocated to the Series 200[ ]- [ ] Certificates
[Shared Principal Collections allocated to Series 200[ ]- [ ]], [and
o miscellaneous payments allocated to Series 200[ ]- [ ] other
amounts].]
[On each Distribution Date with respect to the "Class A Accumulation
Period", amounts equal to the least of:
o Available Investor Principal Collections for the related Distribution
Date on deposit in the Collection Account,
o the applicable Controlled Deposit Amount for the Distribution Date,
and
o the Class A Adjusted Invested Amount, will be deposited in the
Principal Funding Account until the Principal Funding Account Balance
is equal to the Class A Invested Amount.
Amounts on deposit in the Principal Funding Account will be paid to the Class A
Certificateholders on the Class A Expected Final Payment Date. [After the Class
A Invested Amount has been paid in full, on each Distribution Date with respect
to the "Class B Accumulation Period" an amount equal to the least of:
o Available Investor Principal Collections for the related Distribution
Date on deposit in the Collection Account, minus the portion of
Available Investor Principal Collections applied to Class A Monthly
Principal on the Distribution Date,
o the applicable Controlled Deposit Amount for the Monthly Period, and
o the Class B Adjusted Invested Amount will be deposited in the
Principal Funding Account until the Principal Funding Account Balance
equals the Class B Invested Amount.
Amounts on deposit in the Principal Funding Account in respect of the Class B
Certificates will be paid to the Class B Certificateholders on the Class B
Expected Final Payment Date].]
[If a Pay Out Event occurs with respect to Series 200[ ]- [ ] during
the Accumulation Period, the Rapid Amortization Period will commence and any
amount on deposit in the Principal Funding Account will be paid [first] to the
Class A Certificateholders on the first Special Payment Date [and then, to the
extent the Class A Invested Amount is paid in full, to the Class B
Certificateholders]. If, on any Expected Final Payment Date, monies on deposit
in the Principal Funding Account are insufficient to pay the scheduled principal
amount, a Pay Out Event will occur and the Rapid Amortization Period will
commence. [After payment in full of the Class A Invested Amount, the Class B
Certificateholders will be entitled to receive an amount equal to the Class B
Invested Amount].]
The "Rapid Amortization Period" is the period beginning with the
occurrence of any Pay Out Event and ending on the earlier of:
(a) the day after the Payment Date on which the Invested Amount has
been paid in full, and
(b) the Termination Date.
"Available Principal Collections" means, with respect to any Monthly
Period, an amount equal to [the sum of:
a) ]an amount equal to the Principal Allocation Percentage of all
collections of Principal Receivables received during the Monthly
Period, minus the amount of Reallocated Principal Collections with
respect to the Monthly Period used to fund the Class A Required
Amount, [plus
b) the amount of miscellaneous payments, if any, for the Monthly Period
allocated to Series 200[ ]- [ ],] [plus
c) any Shared Principal Collections with respect to other Series that are
allocated to Series 200[ ]- [ ],] [plus
d) any other amounts which pursuant to the Series Supplement are to be
treated as Available Investor Principal Collections with respect to
the related Distribution Date].
[The Accumulation Period is scheduled to commence at the close of
business on [ ]; however, the [Depositor] [Seller] may, upon notice to [the
Trustee,] [the Seller,] [the Servicer,] [the Depositor,] [each Rating Agency]
[and the Cash Collateral Holder] elect to postpone the commencement of the
Accumulation Period, and extend the length of the Revolving Period. The
Depositor may make an election only if the Accumulation Period Length
(determined as described below) is less than [ ]. On each Determination Date
until the Accumulation Period begins, the [Depositor] [Seller] [Servicer] will
determine the "Accumulation Period Length"), which is the number of months
expected to be required to fully fund the Principal Funding Account no later
than the Expected Final Payment Date, based on:
o expected Monthly Period collections of Principal Receivables expected
to be distributable to the Certificateholders of all Series, excluding
other Series, assuming a principal payment rate no greater than the
lowest Monthly Principal payment rate on the Receivables for the
preceding twelve months, and
o the amount of principal expected to be distributable to
Certificateholders of all Series, excluding other Series, which are
not expected to be in their revolving period during the Accumulation
Period.
If the Accumulation Period Length is less than [ ], the [Depositor] [Seller]
may, at its option, postpone the commencement of the Accumulation Period so that
the number of months included in the Accumulation Period will be equal to or
exceed the Accumulation Period Length. The effect of the foregoing calculation
is to permit the reduction of the length of the Accumulation Period based on the
Invested Amounts of other Series which are expected to be in their revolving
periods during the Accumulation Period or on increases in the principal payment
rate occurring after the Series Issuance Date. The [Depositor] [Seller] may not
postpone or further postpone the commencement date of the Accumulation Period
after a Pay Out Event, as defined with respect to each other outstanding Series,
shall have occurred and is continuing with respect to any other outstanding
Series. The length of the Accumulation Period will not be less than one month.
If the commencement of the Accumulation Period is delayed in accordance with the
foregoing, and if a Pay Out Event occurs after the date originally scheduled as
the commencement of the Accumulation Period, then it is probable that the
Certificateholders would receive some of their principal later than if the
Accumulation Period had not been delayed.]
On each Distribution Date with respect to the Rapid Amortization
Period until the Class A Invested Amount has been paid in full or the
Termination Date occurs, the Class A Certificateholders will be entitled to
receive Available Investor Principal Collections in an amount up to the Class A
Invested Amount. [After payment in full of the Class A Invested Amount, the
Class B Certificateholders will be entitled to receive on each Distribution
Date, Available Principal Collections until the earlier of the date on which the
Class B Invested Amount is paid in full or the Termination Date.] In addition,
on the first Special Payment Date following the occurrence of a Pay Out Event,
after giving effect to any payment of principal on that date, principal payments
will be made to the Class A Certificateholders [and the Class B
Certificateholders] from amounts on deposit in the Cash Collateral Account.
[On the Distribution Date following the Class A Expected Final Payment
(the "Class B Principal Commencement Date"), unless a Pay Out Event has
occurred, a withdrawal will be made from the Cash Collateral Account to pay
principal with respect to the Class B Certificates to the extent that the amount
initially invested in Class B (the "Class B Initial Invested Amount") minus the
sum of the aggregate amount of principal payments previously distributed to
Class B Certificateholders or deposited in the Principal Funding Account in
respect of the Class B Certificates exceeds the Class B Invested Amount on the
last day of the related Monthly Period, determined after giving effect to any
change made to the Class B Invested Amount as a result of unreimbursed
charge-offs on the following Distribution Date.]
[During the Rapid Amortization Period, collections of Principal
Receivables allocable to the Collateral Indebtedness will be deposited in the
Cash Collateral Account. Amounts will be retained in the Cash Collateral Account
at its required level and be made available to cover shortfalls with respect to
the Certificates. [In addition, on the first Special Payment Date following the
occurrence of any Pay Out Event, after giving effect to any payment of principal
on that date as described under "Application of Collections--Payments of
Principal," principal payments will be made to the Certificateholders from
amounts on deposit in the Cash Collateral Account as described under "Cash
Collateral Account" below.]]
[Subordination of the Class B Certificates]
[The Class B Certificateholders' Interest will be subordinated, other
than with respect to the Initial Class B Collateral Amount, to the extent
necessary to fund specified payments with respect to the Class A Certificates.
Some principal payments otherwise allocable to the Class B Certificateholders
may be reallocated to the Class A Certificateholders and the Class B Invested
Amount may be decreased. To the extent the Class B Invested Amount is reduced,
the percentage of collections of Finance Charge Receivables allocated to the
Class B Certificateholders in subsequent Monthly Periods will be reduced.
Moreover, to the extent the amount of the reduction in the Class B Invested
Amount is not reimbursed, the amount of principal and interest distributable to
the Class B Certificateholders will be reduced.]
Allocation Percentages
Pursuant to the Agreement, the [Seller] [Servicer] will allocate among
the Certificateholders' Interest, the certificateholders' interest for all other
Series of certificates issued and outstanding and the Seller's Interest [and the
Collateral Interest], all collections of Finance Charge Receivables and
Principal Receivables and the Defaulted Amount with respect to each Monthly
Period.
Collection of Finance Charge Receivables and the Defaulted Amount with
respect to any Monthly Period will be allocated to Series 200[ ]- [ ] based on
the Floating Allocation Percentage. The "Floating Allocation Percentage" means,
with respect to any Monthly Period, the percentage equivalent, which percentage
shall never exceed 100%, of a fraction, the numerator of which is the sum of the
Adjusted Invested Amount and the Collateral Invested Amount, if any, as of the
last day of the preceding Monthly Period, or with respect to the first Monthly
Period, the Initial Invested Amount as of the Issuance Date, and the denominator
of which is the sum of the total amount of the Principal Receivables in the
Trust as of the day, or with respect to the first Monthly Period, the total
amount of Principal Receivables in the Trust on the Cut-Off Date, and the
principal amount on deposit in an account (the "Excess Funding Account"), the
[Seller] [Servicer] [Depositor] will establish and maintain in the name of the
Trustee, on behalf of the Trust as an Eligible Account held for the benefit of
the Certificateholders. [These amounts so allocated will be further allocated
between the Class A Certificateholders and the Class B Certificateholders in
accordance with the Class A Floating Percentage and the Class B Floating
Percentage, respectively. The "Class A Floating Percentage" means, with respect
to any Monthly Period, the percentage equivalent, which percentage shall never
exceed 100%, of a fraction, the numerator of which is equal to the Class A
Adjusted Investment Amount as of the close of business on the last day of the
preceding Monthly Period, or with respect to the first Monthly Period, as of the
Issuance Date, and the denominator of which is equal to the Adjusted Invested
Amount as of the close of business on the day, or with respect to the first
Monthly Period, the Initial Invested Amount. The "Class B Floating Percentage"
means, with respect to any Monthly Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of which is
equal to the Class B Adjusted Invested Amount as of the close of business on the
day, or with respect to the first Monthly Period, the Initial Invested Amount.]
Collections of Principal Receivables will be allocated to Series 200
[]- [ ] based on the Principal Allocation Percentage. The "Principal Allocation
Percentage" means, with respect to any Monthly Period, the percentage
equivalent, which percentage shall never exceed 100%, of a fraction, the
numerator of which is:
(a) during the Revolving Period, the Invested Amount as of the
last day of the immediately preceding Monthly Period, or, in the case
of the first Monthly Period, the Issuance Date, and
(b) during the [Controlled Amortization Period] [Accumulation
Period] or the Rapid Amortization Period, the Invested Amount as of
the last day of the Revolving Period, and the denominator of which is
the greater of:
(1) the sum of the total amount of Principal Receivables in
the Trust as of the last day of the immediately preceding Monthly
Period and the principal amount on deposit in the Excess Funding
Account as of the last day, or, in the case of the first Monthly
Period, the Cut-Off Date, and
(2) the sum of the numerators used to calculate the
principal allocation percentages for all Series outstanding as of
the date as to which a determination is being made;
provided, however, that because the Certificates offered by this prospectus
supplement are subject to being paired with a future Series, if a Pay Out Event
occurs with respect to the Paired Series during the [Controlled Amortization
Period] [Accumulation Period] with respect to Series 200[ ]- [ ], [the
Depositor] [the Seller] [the Servicer] may, by written notice delivered to [the
Trustee] [and] [the Seller] [and] [the Servicer], designate a different
numerator for the foregoing fraction, provided that the numerator is not less
than the Adjusted Invested Amount as of the last day of the revolving period for
the Paired Series and [the Depositor] [the Seller] [the Servicer] shall have
received written notice from each Rating Agency that the designation will not
have a Ratings Effect, and [the Depositor] [the Seller] [the Servicer] shall
have delivered to the Trustee a certificate of an authorized officer to the
effect that, based on the facts known to the officer at the time, in the
reasonable belief of [the Depositor] [the Seller] [the Servicer], the
designation will not cause a Pay Out Event or an event that, after the giving of
notice or the lapse of time, would constitute a Pay Out Event, to occur with
respect to Series 200[ ]- [ ].
[Amounts so allocated to the Certificateholders will be further
allocated between the Class A Certificateholders and the Class B
Certificateholders based on the Class A Principal Percentage and the Class B
Principal Percentage, respectively. The "Class A Principal Percentage" means,
with respect to any Monthly Period:
o during the Revolving Period, the percentage equivalent, which shall
never exceed 100%, of a fraction, the numerator of which is equal to
the Class A Invested Amount as of the last day of the immediately
preceding Monthly Period, or, in the case of the first Monthly Period,
the amount initially invested in Class A (the "Class A Initial
Invested Amount"), and the denominator of which is equal to the
Invested Amount as of the day, or, in the case of the first Monthly
Period, the Initial Invested Amount, and
o during the [Controlled Amortization Period] [Accumulation Period] or
the Rapid Amortization Period, the percentage equivalent, which shall
never exceed 100%, of a fraction, the numerator of which is the Class
A Invested Amount as of the last day of the Revolving Period, and the
denominator of which is the Invested Amount as of the last day.
The "Class B Principal Percentage" means, with respect to any Monthly Period,
o during the Revolving Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of
which is the Class B Invested Amount as of the last day of the
immediately preceding Monthly Period, or, in the case of the first
Monthly Period, the Class B Initial Invested Amount, and the
denominator of which is the Invested Amount as of that day, or, in the
case of the first Monthly Period, the Initial Invested Amount, and
o during the [Controlled Amortization Period] [Accumulation Period] or
the Rapid Amortization Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of
which is the Class B Invested Amount as of the last day of the
Revolving Period, and the denominator of which is the Invested Amount
as of that last day.]
As used in this prospectus supplement, the following terms have the
meanings indicated:
"Class A Invested Amount" for any date means an amount equal to:
(a) the Class A Initial Invested Amount, minus
(b) the aggregate amount of principal payments made to the Class
A Certificateholders on or prior to the date, minus
(c) the excess, if any, of the aggregate amount of Class A
Investor Charge-Offs for all prior Distribution Dates over the
aggregate amount of any reimbursements of Class A Investor Charge-Offs
for all Distribution Dates prior to that date.
["Class B Invested Amount" for any date means an amount equal to:
(a) the Initial Class B Invested Amount, minus
(b) the aggregate amount of principal payments made to Class B
Certificateholders on or prior to the date, other than principal
payments made from the proceeds of amounts received from the Cash
Collateral Account for the purpose of reimbursing previous reductions
in the Class B Invested Amount, minus
(c) the excess, if any, of the aggregate amount of Class B
Investor Charge-Offs for all prior Distribution Dates over the
aggregate amount of any reimbursement of Class B Investor Charge-Offs
for all Distribution Dates preceding the date, minus
(d) the amount of Reallocated Principal Receivables for all prior
Distribution Dates which have been used to fund the Class A Required
Amount with respect to the Distribution Dates, excluding any
Reallocated Principal Receivables that have resulted in a reduction of
the Collateral Invested Amount, minus
(e) an amount equal to the amount by which the Class B Invested
Amount has been reduced to fund the Class A Default Amount on all
prior Distribution Dates as described under "Class A Investor
Charge-Offs ", plus
(f) the amount of Excess Spread and Excess Finance Charges
allocated to Series 200[ ]- [ ] and available on all prior
Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clauses (c), (d) and (e).]
"Class A Adjusted Invested Amount", for any date of determination,
means an amount equal to:
(a) then current Class A Invested Amount, minus
(b) the funds on deposit in the Principal Funding Account of the
date.
["Class B Adjusted Invested Amount"(together with the Class A Adjusted
Invested Amount, the "Adjusted Invested Amount"), for any date of determination,
means:
(a) if the date occurs prior to the Class B Principal
Commencement Date, an amount equal to the Class B Invested Amount, and
(b) if the date occurs on or after the Class B Principal
Commencement Date, an amount equal to the Class B Invested Amount
minus the funds on deposit in the Principal Funding Account on the
date.]
["Collateral Indebtedness Amount" means an amount equal to:
(a) the initial Collateral Indebtedness Amount, minus
(b) the aggregate amount of deposits made to the Cash Collateral
Account from Principal Collections, minus
(c) the aggregate amount of Reallocated Principal Collections
allocable to the Collateral Indebtedness Amount for all prior
Distribution Dates which have been used to fund the Required Amount,
minus
(d) an amount equal to the aggregate amount by which the
Collateral Indebtedness Amount has been reduced to fund the Investor
Default Amount on all prior Distribution Dates as described under "--
Defaulted Receivables; Investor Charge-Offs", minus
(e) an amount equal to the product of the Collateral Floating
Percentage and the Investor Default Amount (the "Collateral Defaulted
Amount") with respect to any Distribution Date that is not funded out
of Available Funds [and Excess Finance Charges allocated to Series
200[ ]- [ ] and available for the purpose on the related Distribution
Date], plus
(f) the aggregate amount of Available Funds [and Excess Finance
Charges] allocated and available to reimburse amounts deducted
pursuant to the foregoing clauses (c), (d) and (e) provided, however,
that the Collateral Indebtedness Amount may not be reduced below
zero.]
["Collateral Invested Amount" means for any date, an amount equal to:
(a) the amount withdrawn from the Cash Collateral Account and
applied to the payment of principal of the Certificates on the first
Special Payment Date following an Pay Out Event, minus
(b) the aggregate amount of principal payments made to the
Collateral Interest Holder prior to the date, minus
(c) the amount by which the Collateral Invested Amount has been
reduced to fund the Class A Default Amount [and the Class B Default
Amount] on all prior Distribution Dates as described below, minus
(d) the amount by which the Collateral Invested Amount has been
reduced by Reallocated Principal Receivables applied to reimburse the
Required Amount, plus
(e) the aggregate amount of Excess Spread and Excess Finance
Charges allocated to Series 200[ ]- [ ] and available on all prior
Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clauses (c) and (d).
In the absence of the occurrence of a Pay Out Event and a related withdrawal
from the Cash Collateral Account to pay principal of the Certificates, the
Collateral Invested Amount will be zero.]
["Invested Amount", for any date, means an amount equal to the sum of:
(a) the Class A Invested Amount,
(b) the Class B Invested Amount,] and
(c) [the Collateral Invested Amount].]
(d) [Principal Funding Account]
[The [Seller] [Servicer] [Depositor] will establish and maintain in
the name of the Trustee, on behalf of the Trust, the Principal Funding Account,
as an Eligible Account held for the benefit of the Certificateholders. During
the Accumulation Period, the Servicer will transfer collections from one or more
accounts, established and maintained on behalf of the related Certificateholders
and, into which payments are made on or with respect to the related Receivables
(each, a "Collection Account"), in respect of Principal Receivables, Shared
Principal Collections allocated to Series 200[ ]- [ ], [miscellaneous payments
allocated to Series 200[ ]- [ ]] and other amounts described in this prospectus
supplement, to be treated in the same manner as collections of Principal
Receivables, to the Principal Funding Account.
[Unless a Pay Out Event has occurred with respect to the Certificates,
all amounts on deposit in the Principal Funding Account (the "Principal Funding
Account Balance") on any Distribution Date, after giving effect to any deposits
to, or withdrawals from the Principal Funding Account to be made on the
Distribution Date, will be invested until the following Distribution Date by the
Trustee at the direction of [the Seller] [the Servicer] [the Depositor] in
investments specified in the Pooling and Servicing Agreement and limited to
investments which meet the criteria of each Rating Agency from time to time as
being consistent with its then-current ratings of the Certificates (the
"Eligible Investments"). On each Distribution Date with respect to the
Accumulation Period [, on or prior to the Class B Expected Final Payment Date,]
the interest and other investment income, net of investment expenses and losses,
earned on the investments (the "Principal Funding Investment Proceeds") will be
withdrawn from the Principal Funding Account and will be treated as a portion of
Class A Available Funds, [prior to the Class B Principal Commencement Date and,
after, as a portion of Class B Available Funds]. If the investments with respect
to any Distribution Date yield less than the applicable Certificate Rate, the
Principal Funding Investment Proceeds with respect to the Distribution Date will
be less than the Covered Amount for the following Distribution Date. It is
intended that any shortfall will be funded from Class A Available Funds [or
Class B Available Funds, as the case may be], including a withdrawal from the
Reserve Account, if necessary, [or a withdrawal from the Cash Collateral
Account] [other sources]. The Available Reserve Account Amount at any time will
be limited and there can be no assurance that sufficient funds will be available
to fund any shortfall.
The "Covered Amount" shall mean:
(a) for any Distribution Date with respect to the Class A Accumulation
Period or the first Special Payment Date, [if the related Special
Payment Date occurs prior to the Class B Principal Commencement Date,]
an amount equal to one [twelfth] [quarter] [half] of the product of,
(1) the Class A Certificate Rate, and
(2) the Principal Funding Account Balance, if any, as of the
preceding Distribution Date, [and
(b) for any Distribution Date with respect to the Class B Accumulation
Period or the first Special Payment Date, if this Special Payment Date
occurs on or after the Class B Principal Commencement Date, an amount
equal to one [twelfth] [quarter] [half] of the product of,
(1) the Class B Certificate Rate, and
(2) the Principal Funding Account Balance, if any, as of the
preceding Distribution Date].
[Reserve Account]
The [Seller] [Servicer] [Depositor] will establish and maintain in the
name of the Trustee, on behalf of the Trust, an Eligible Deposit Account for the
benefit of the Certificateholders (the "Reserve Account"). The Reserve Account
is established to assure the subsequent distribution of interest on the
Certificates as provided in this prospectus supplement during the Accumulation
Period. On each Distribution Date from and after the Reserve Account Funding
Date, but prior to the termination of the Reserve Account, the Trustee, acting
pursuant to the [Servicer's] [Seller's] [Depositor's] instructions, will apply
Excess Spread and Excess Finance Charges allocated to Series 200[ ]-[ ] (to the
extent described below under "Application of Collections--Payment of Interest,
Fees and Other Items") to increase the amount on deposit in the Reserve Account,
to the extent the amount is less than the Required Reserve Account Amount. [In
addition, on each Distribution Date, the [Seller] [Depositor] will have the
option, but will not be required, to make a deposit in the Reserve Account, to
the extent that the amount on deposit in the Reserve Account is less than the
Required Reserve Account Amount.]
[The "Reserve Account Funding Date" will be the Distribution Date with
respect to the Monthly Period which commences no later than three months prior
to the Distribution Date with respect to the Monthly Period which commences the
Class A Accumulation Period or an earlier date as the Servicer may designate.
The "Required Reserve Account Amount" for any Distribution Date on or after the
Reserve Account Funding Date will be equal to the product of [ ]% of the Class A
Invested Amount as of the preceding Distribution Date and the Reserve Account
Factor as of the Distribution Date, or a lower amount approved by each Rating
Agency. On each Distribution Date, after giving effect to any deposit to be made
to, and any withdrawal to be made from, the Reserve Account on the Distribution
Date, the Trustee will withdraw from the Reserve Account an amount equal to the
excess, if any, of the amount on deposit in the Reserve Account over the
Required Reserve Account Amount and shall distribute the excess to, or at the
direction of, [the Seller] [the Depositor]. The "Reserve Account Factor for any
Distribution Date will be equal to the percentage, not to exceed 100%,
equivalent of a fraction, the numerator of which is the number of Monthly
Periods scheduled to be included in the Accumulation Period, which may have been
postponed at the option of the [Seller] [Depositor] [Servicer], as of the
Distribution Date and the denominator of which is [ ] .]
[Provided that the Reserve Account has not terminated as described
below, all amounts on deposit in the Reserve Account on any Distribution Date,
after giving effect to any deposits to, or withdrawals from, the Reserve Account
to be made on the Distribution Date, will be invested until the following
Distribution Date by the Trustee at the direction of the [Seller] [Servicer]
[Depositor] in Eligible Investments. The interest and other investment income,
net of investment expenses and losses, earned on the investments will be
retained in the Reserve Account, to the extent the amount on deposit in the
Reserve Account is less than the Required Reserve Account Amount, or deposited
in the Collection Account and treated as collections of Finance Charge
Receivables.]
[On or before each Distribution Date with respect to the Accumulation
Period, on or prior to the Class A Expected Final Payment Date, and on the first
Special Payment Date, a withdrawal will be made from the Reserve Account, and
the amount of the withdrawal will be deposited in the Collection Account and
included in Class A Available Funds, prior to the Class B Principal Commencement
Date, and, then, in Class B Available Funds,] in an amount equal to the lesser
of:
(a) the Available Reserve Account Amount with respect to the
Distribution Date or Special Payment Date, and
(b) the excess, if any, of the Covered Amount with respect to the
Distribution Date or Special Payment Date over the Principal Funding
Investment Proceeds with respect to the Distribution Date or Special
Payment Date;
provided that the amount of the withdrawal shall be reduced to the extent that
funds otherwise would be available to be deposited in the Reserve Account on the
Distribution Date or Special Payment Date. On each Distribution Date, the amount
available to be withdrawn from the Reserve Account (the "Available Reserve
Account Amount") will be equal to the lesser of the amount on deposit in the
Reserve Account, before giving effect to any deposit to be made to the Reserve
Account on the Distribution Date, and the Required Reserve Account Amount for
the Distribution Date.]
[The Reserve Account will be terminated following the earlier to occur
of:
(a) the termination of the Trust pursuant to the Agreement,
(b) the date on which the Certificates are paid in full, and
(c) if the Accumulation Period has not commenced, the occurrence of a
Pay Out Event with respect to Series 200[ ]- [ ] or, if the
Accumulation Period has commenced, the earlier of the first Special
Payment Date and the [Class B] Expected Final Payment Date.
Upon the termination of the Reserve Account, all amounts on deposit in the
Reserve Account, after giving effect to any withdrawal from the Reserve Account
on the date as described above, will be distributed to, or at the direction of,
the Depositor. Any amounts withdrawn from the Reserve Account and distributed
to, or at the direction of, the Depositor as described above will not be
available for distribution to the Certificateholders.]
Reallocation of Cash Flows; Class B Invested Amount
With respect to each Distribution Date, on each Determination Date,
the Servicer will determine the "Class A Required Amount," which will be equal
to the amount, if any, by which, the sum of:
(a) Class A [Monthly] [Quarterly] [Semi-Annual] Interest for the
Distribution Date,
(b) any Class A [Monthly] [Quarterly] [Semi-Annual] Interest
previously due but not paid to Class A Certificateholders on a
prior Distribution Date,
(c) any Class A additional Interest,
(d) the Class A Servicing Fee for the Distribution Date and any
unpaid Class A Servicing Fee, and
(e) the Class A Default Amount, if any, for the Distribution
Date,
exceeds the Class A Available Funds. If the Class A Required Amount is greater
than zero, Excess Spread and Excess Finance Charges allocated to Series 200[ ]-
[ ] and available for that purpose will be used to fund the Class A Required
Amount with respect to the Distribution Date. If the Excess Spread and Excess
Finance Charges available with respect to the Distribution Date are less than
the Class A Required Amount, then amounts, if any, on deposit in the Cash
Collateral Account available to pay amounts in respect of the Class A
Certificates will then be used to fund the remaining Class A Required Amount.
[If the Excess Spread and Excess Finance Charges and amounts available from the
Cash Collateral Account are insufficient to fund the Class A Required Amount,
then collections of Principal Receivables allocable to the Class B Certificates
for the related Monthly Period will then be used to fund the remaining Class A
Required Amount ("Reallocated Principal Receivables").] If Reallocated Principal
Receivables with respect to the related Monthly Period, together with Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and amounts
available from the Cash Collateral Account, are insufficient to fund the Class A
Required Amount for the related Monthly Period, then the Collateral Invested
Amount, if any, will be reduced by the amount of the excess, but not by more
than the Class A Default Amount for the Distribution Date. In the event that the
reduction would cause the Collateral Invested Amount to be a negative number,
the Collateral Invested Amount will be reduced to zero, and the Class B Invested
Amount will be reduced by the amount by which the Collateral Invested Amount
would have been reduced below zero, but not by more than the excess of the Class
A Default Amount, if any, for the Distribution Date over the amount of the
reduction, if any, of the Collateral Invested Amount with respect to the
Distribution Date. In the event that the reduction would cause the Class B
Invested Amount to be a negative number, then the Class B Invested Amount will
be reduced to zero, and the Class A Invested Amount will be reduced by the
amount by which the Class B Invested Amount would have been reduced below zero,
but not by more than the excess, if any, of the Class A Default Amount for the
Distribution Date over the amount of the reductions, if any, of the Collateral
Invested Amount and the Class B Invested Amount with respect to the Distribution
Date as described above. Any reduction in the Class A Invested Amount will have
the effect of slowing or reducing the return of principal and interest to the
Class A Certificateholders. In this case, the Class A Certificateholders will
bear directly the credit and other risks associated with their undivided
interest in the Trust.
[The "Class B Required Amount" (and together with the Class A Required
Amount, the "Required Amount") means, with respect to any Distribution Date, the
amount, if any, by which the sum of:
(a) current and overdue Class B Monthly Interest,
(b) current and overdue Class B Additional Interest,
(c) current and overdue Class B Servicing Fee, and
(d) the Class B Default Amount
exceeds Class B Available Funds. If the Class B Required Amount is greater than
zero, then Excess Spread and Excess Finance Charges allocable to the Series 200[
]- [ ], and not required to pay the Class A Required Amount or reimburse Class A
Charge-Offs, will be applied to fund the deficiency. [If Excess Spread and
Excess Finance Charges allocable to Series 200[ ]-[ ] with respect to the
Distribution Date and not required to pay the Class A Required Amount are less
than the Class B Required Amount, then the amounts, if any, on deposit in the
Cash Collateral Account and available to make payments with respect to the Class
B Certificates with respect to that Distribution Date will be withdrawn and
applied to fund the Class B Required Amount.] If [amounts, if any, in deposit in
the Cash Collateral Account and available to make payments with respect to the
Class B Certificates with respect to the Distribution Date (together with]
Excess Spread and Excess Finance Charges with respect to the Distribution Date
[)] are insufficient to fund the remaining Class B Required Amount, then the
[Collateral] Invested Amount, if any, will be reduced by the amount of the
deficiency, but not more than the Class B Default Amount for the relevant
Monthly Period. If the reduction would cause the [Collateral] Invested Amount to
be reduced below zero, then the Class B Invested amount will be reduced by the
amount by which the [Collateral] Invested Amount would have been reduced below
zero, but not by more than the excess of the Class B Default Amount for the
related Monthly Period over the reduction in the [Collateral] Invested Amount
with respect to the Monthly Period, (this reduction, a "Class B Charge-Off"). In
the event of a reduction of the Class B Invested Amount, the amount of principal
and interest available to fund payments with respect to the Class B Certificates
will be decreased.]
Reductions of the Class A or Class B Invested Amount shall
subsequently be reimbursed and the Class A [or Class B] Invested Amount will be
increased on each Distribution Date by the amount, if any, of Excess Spread and
Excess Finance Charges. See "APPLICATION OF COLLECTIONS -- Excess Spread; Excess
Finance Charges". When reductions of the Class A and Class B Invested Amount
have been fully reimbursed, reductions of the [Collateral] Invested Amount shall
be reimbursed and the [Collateral] Invested Amount increased in a similar
manner.
Application of Collections
Payment of Interest, Fees and Other Items. On each Distribution Date,
the Trustee, acting pursuant to the [Seller's] [Servicer's] instructions, will
apply the Class A Available Funds [and Class B Available Funds] (see "--Interest
Payments" above) on deposit in the Collection Account in the following priority:
(a) On each Distribution Date, an amount equal to the Class A
Available Funds with respect to the Distribution Date will be distributed in the
following priority:
(1) an amount equal to Class A Monthly Interest for the
Distribution Date, plus the amount of any Class A Monthly Interest
previously due but not distributed to the Class A Certificateholders
on a prior Distribution Date, plus any additional interest with
respect to interest amounts that were due but not distributed to the
Class A Certificateholders on a prior Distribution Date at a rate
equal to the Class A Certificate Rate [plus __% per annum ("Class A
Additional Interest"),] will be:
[(A)] distributed to Class A Certificateholders [if the
Distribution Date is an Interest Payment Date, or
(B) deposited in the Interest Funding Account, if the
Distribution Date is not an Interest Payment Date or Special
Payment Date for distribution to Class A Certificateholders on
the next Interest Payment Date or Special Payment Date];
(2) an amount equal to the Class A Servicing Fee for the
Distribution Date, plus the amount of any Class A Servicing Fee
previously due but not distributed to the Servicer on a prior
Distribution Date, will be distributed to the Servicer, unless the
amount has been netted against deposits to the Collection Account;
(3) an amount equal to the Class A Default Amount for the
Distribution Date will be treated as a portion of Available Investor
Principal Collections for the Distribution Date; and
(4) the balance, if any, shall constitute Excess Spread and shall
be allocated and distributed as described under "--Excess Spread;
Excess Finance Charges" below.
[(b) On each Distribution Date, an amount equal to the Class B
Available Funds with respect to the Distribution Date will be distributed in the
following priority:]
[(1) an amount equal to Class B Monthly Interest for the
Distribution Date, plus the amount of any Class B Monthly Interest
previously due but not distributed to the Class B Certificateholders
on a prior Distribution Date, plus any additional interest with
respect to interest amounts that were due but not distributed to the
Class B Certificateholders on a prior Distribution Date at a rate
equal to the Class B Certificate Rate plus __% per annum ("Class B
Additional Interest"), will be:]
[(A)] distributed to Class B Certificateholders [if the
Distribution Date is an Interest Payment Date, or
(B) deposited in the Interest Funding Account, if the
Distribution Date is not an Interest Payment Date or Special
Payment Date for distribution to Class B Certificateholders on
the next Interest Payment Date or Special Payment Date];]
[(2) an amount equal to the Class B Servicing Fee for the
Distribution Date, plus the amount of any Class B Servicing Fee
previously due but not distributed to the Servicer on a prior
Distribution Date, will be distributed to the Servicer, unless the
amount has been netted against deposits to the Collection Account;
and]
[(3) the balance, if any, shall constitute Excess Spread and
shall be allocated and distributed as described under "--Excess
Spread; Excess Finance Charges" below.]
"Class A Monthly Interest" means, with respect to any Distribution
Date, an amount equal to the product of:
(a) a fraction, the numerator of which is the actual number of
days in the period from and including the prior Distribution Date
to but excluding Distribution Date and the denominator of which
is 360,
(b) the Class A Certificate Rate, and
(c) the Class A Invested Amount as of the preceding Record Date.
["Class B Monthly Interest" means, with respect to any Distribution
Date, an amount equal to the product of:
(a) a fraction, the numerator of which is the actual number of days in
the period from and including the prior Distribution Date to but
excluding that Distribution Date and the denominator of which is 360,
(b) the Class B Certificate Rate, and
(c) the Class B Invested Amount as of the preceding Record Date.]
"Excess Spread" means, with respect to any Distribution Date, an
amount equal to the sum of the amounts described in clause (a)(4) above [and
clause (b)(3) above,] [in the definition of Class A Monthly Interest [and Class
B Monthly Interest]].
Excess Spread; Excess Finance Charges. On each Distribution Date, the
Trustee, acting pursuant to the Servicer's instructions, will apply Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] with respect
to the related Monthly Period to make the following distributions in the
following priority to the extent funds are available:
[(a)] an amount equal to the Class A Required Amount, if any, with
respect to the Distribution Date will be used to fund any deficiency
pursuant to clauses (a) (1), (2) and (3) above in the order of
priority;
[(b)] [an amount equal to the aggregate amount of Class A Investor
Charge-Offs which have not been previously reimbursed, after giving
effect to the allocation on the Distribution Date of other amounts
applied for that purpose, will be treated as a portion of Available
Investor Principal Collections for the Distribution Date as described
under "--Payments of Principal" below;]
[(c)] [an amount equal to the Class B Required Amount, if any, with
respect to the Distribution Date will be used first;
(1) to fund any deficiency pursuant to clauses (b) (1) and
(2) above under "--Payment of Interest, Fees and Other Items" in
the order of priority, and
(2) second to pay any Class B Default Amount with respect to
the Distribution Date];
[(d)] [an amount equal to the aggregate by which the Class B
Invested Amount has been reduced pursuant to clauses (4), (5) and (6)
of the definition of "Class B Invested Amount" under "--Allocation
Percentages" above, but not in excess of the aggregate amount of the
reductions which have not been previously reimbursed, shall be treated
as a portion of Available Investor Principal Collections for the
Distribution Date;]
[(e)] [an amount equal to the "Cash Collateral Fee" as described
in the [Loan] Agreement among the [Depositor] [Seller], [ ] (the "Cash
Collateral Depositor") and the Trustee for the Distribution Date shall
be distributed to the Cash Collateral Depositor for application in
accordance with the [Loan] Agreement;]
[(f)] [an amount equal to the aggregate amount by which the
Collateral Invested Amount has been reduced pursuant to clauses (c)
and (d) of the definition of "Collateral Invested Amount" under
"--Allocation Percentages" above, but not in excess of the aggregate
amount of the reductions which have not been previously reimbursed,
shall be treated as a portion of Available Principal Collections for
the Distribution Date;]
[(g)] [an amount equal to the Monthly Servicing Fee due but not
paid to the Servicer on the Distribution Date or a prior Distribution
Date shall be paid to the Servicer;]
[(h)] [an amount up to the excess, if any, of the Required Cash
Collateral Amount over the remaining Available Cash Collateral Amount
shall be deposited into the Cash Collateral Account;]
[(i)] [on each Distribution Date from and after the Reserve
Account Funding Date, but prior to the date on which the Reserve
Account terminates, an amount up to the excess, if any, of the
Required Reserve Account Amount over the Available Reserve Account
Amount shall be deposited into the Reserve Account;]
[(j)] [an amount equal to the aggregate of any other amounts then
due to the Collateral Interest Holder pursuant to the [Loan]
Agreement, to the extent these amounts are payable pursuant to the
[Loan] Agreement out of Excess Spread and Excess Finance Charges,
shall be distributed to the Collateral Interest Holder for application
in accordance with the [Loan] Agreement; and
[(k)] the balance, if any, will constitute a portion of Excess
Finance Charges for the Distribution Date and will be available for
allocation to other Series in the Group __ or to the [Seller]
[Depositor] as described in "Description of the Certificates --
Sharing of Excess Finance Charges" in the Prospectus.
Payments of Principal. On each Distribution Date, the Trustee, acting
pursuant to the [Seller's] [Servicer's] instructions, will distribute Available
Principal Collections (see "--Principal Payments" above) on deposit in the
Collection Account in the following priority:
(a) on each Distribution Date with respect to the Revolving Period,
all Available Principal Collections will be distributed [or deposited]
in the following priority:
[(1)] [an amount equal to the excess, if any, of the Collateral
Invested Amount over the Required Collateral Invested Amount will
be paid to the Collateral Interest Holder; and]
[(2)] [the balance] [these Available Principal Collections] will
be treated as Shared Principal Collections and applied in
accordance with the Agreement and the Series Supplement.]
(b) on each Distribution Date with respect to the [Controlled
Amortization Period] [Accumulation Period] or the Rapid Amortization
Period, all Available Principal Collections will be distributed [or
deposited] in the following priority:
[(1)] [an amount equal to Class A Monthly Principal, up to the
Class A Adjusted Invested Amount on the Distribution Date will be
distributed to Class A Certificateholders [if the Distribution
Date is a Principal Distribution Date or deposited in the
Principal Funding Account if the Distribution Date is not a
Principal Distribution Date], during the Class A Accumulation
Period, or distributed to the Class A Certificateholders, during
the Rapid Amortization Period[; and]]
[(2) for each Distribution Date after the Class A Adjusted
Invested Amount has been paid in full, an amount equal to Class B
Monthly Principal, up to the Class B Adjusted Invested Amount on
the Distribution Date, will be distributed to Class B
Certificateholders if the Distribution Date is a Principal
Distribution Date or deposited in the Principal Funding Account
if the Distribution Date is not a Principal Distribution Date,
during the Class B Accumulation Period, or distributed to the
Class B Certificateholders, during the Rapid Amortization
Period;]
[(c)] [an amount equal to Class A Monthly Principal, up to the Class A
Adjusted Invested Amount on the Distribution Date will be deposited in
the Principal Funding Account, during the Class A Accumulation Period,
or distributed to the Class A Certificateholders, during the Rapid
Amortization Period;]
[(d)] [for each Distribution Date beginning on the Class B Principal
Commencement Date, an amount equal to Class B Monthly Principal for
the Distribution Date, up to the Class B Adjusted Invested Amount on
that Distribution Date, will be deposited in the Principal Funding
Account, during the Class B Accumulation Period, or distributed to the
Class B Certificateholders, during the Rapid Amortization Period;]
(e) for each Distribution Date with respect to the Rapid Amortization
Period, beginning with the Distribution Date on which the Invested
Amount is paid in full, an amount equal to the balance, if any, of the
Available Principal Collections then on deposit in the Collection
Account, to the extent of the Collateral Invested Amount, if any,
shall be distributed to the Collateral Interest Holder for application
in accordance with the [Loan] Agreement; and
(f) for each Distribution Date, after giving effect to paragraphs (c),
(d) and (e) above, an amount equal to the balance, if any, of the
Available Principal Collections will be allocated to Shared Principal
Collections and applied in accordance with the Agreement.
"Class A Monthly Principal" with respect to any Distribution Date
relating to the Class A [Controlled Amortization Period] [Accumulation Period]
or the Rapid Amortization Period will equal the lesser of:
(a) the Available Principal Collections on deposit in the Collection
Account with respect to the Distribution Date,
(b) for each Distribution Date with respect to the Class A [Controlled
Amortization Period] [Accumulation Period], [and on or prior to the
Class A Expected Final Payment Date,] the [Controlled Distribution
Amount] [Controlled Deposit Amount] for the Distribution Date, and
(c) the Class A Adjusted Invested Amount on that Distribution Date.
["Class B Monthly Principal" with respect to any Distribution Date
relating to the Class B [Controlled Amortization Period] [Accumulation Period]
or the Rapid Amortization Period, after the Class A Certificates have been paid
in full, will equal the lesser of:
(a) the Available Principal Collections on deposit in the Collection
Account with respect to the Distribution Date, minus the portion of
the Available Principal Collections applied to Class A Monthly
Principal on the Distribution Date,
(b) for each Distribution Date with respect to the Class B [Controlled
Amortization Period] [Accumulation Period], [and on or prior to the
Class B Expected Final Payment Date,] the [Controlled Distribution
Amount] [Controlled Deposit Amount] for the Distribution Date, and
(c) the Class B Adjusted Invested Amount on the Distribution Date.]
["Controlled Accumulation [Amortization] Amount" means:
[(a)] for any Distribution Date with respect to the Class A
Accumulation Period, $ [ ] ; provided, however, that, if the commencement of the
Class A Accumulation Period is delayed as described above under "--Principal
Payments", the Accumulation Amount for each Distribution Date may be different
for each Distribution Date with respect to the Class A Accumulation Period and
will be determined by the [Seller] [Servicer] [Depositor] in accordance with the
[Agreement] [and the Series Supplement] based on the principal payment rates for
the Accounts and on the Invested Amounts of other Principal Sharing Series that
are scheduled to be in their revolving periods and then scheduled to create
Shared Principal Collections during the Class A Accumulation Period[; and
(b) for any Distribution Date with respect to the Class B Accumulation
Period, an amount equal to $ [ ] [the Class B Invested Amount] as of the Class B
Principal Commencement Date].]
["Deficit Controlled Accumulation Amount" means:
(a) on the first Distribution Date with respect to the Class A
Accumulation Period [or the Class B Accumulation Period,] the excess, if any, of
the Controlled Accumulation Amount for the Distribution Date over the amount
[deposited in the Principal Funding Account on the Distribution Date]
[distributed from the Collection Account as Class A Monthly Principal [or Class
B Monthly Principal, as the case may be,] for the Distribution Date, and
(b) on each subsequent Distribution Date with respect to the Class A
Accumulation Period [or the Class B Accumulation Period,] the excess, if any, of
the Controlled Deposit Amount for a subsequent Distribution Date plus any
Deficit Controlled Accumulation Amount for the prior Distribution Date over the
amount [deposited in the Principal Funding Account on the Distribution Date]
[distributed from the Collection Account as Class A Monthly Principal [or Class
B Monthly Principal, as the case may be,] for the subsequent Distribution
Date].]]
"Controlled Distribution Amount") is equal to the sum of the
Controlled Amortization Amount and any existing Deficit Controlled Amortization
Amount.
["Controlled Deposit Amount" means, for any Distribution Date with
respect to the Accumulation Period, an amount equal to the sum of:
(a) the Controlled Accumulation Amount for the Distribution Date, and
(b) any Deficit Controlled Accumulation Amount for the immediately
preceding Distribution Date.]
["Shared Principal Collections" means, Collections of Principal
Receivables and certain other amounts otherwise allocable to other Series, to
the extent such collections are not needed to make payments to or deposits for
the benefit of the certificateholders of such other Series, [will] [may] be
applied to cover principal payments due to or for the benefit of the holders of
the Certificates.]
[Cash Collateral Account]
[The Trust will have the benefit of the Cash Collateral Account for
the benefit of the Certificateholders [and the Collateral Interest Holder], as
their interests appear in the Series Supplement, and in the case of the
Collateral Interest Holder, in the [Loan] Agreement, which interest, in the case
of the Collateral Interest Holder, will be subordinated to the interests of the
Certificateholders as provided in the Series Supplement. The "Cash Collateral
Account" will be one or more Eligible Deposit Accounts. Funds on deposit in the
Cash Collateral Account will be invested in specified Eligible Investments that
mature on or before the business day immediately preceding the next
Distribution[, accrued since the preceding Distribution Date on funds on deposit
in the Cash Collateral Account shall be paid to the Collateral Interest Holder
for application in accordance with the [Loan] Agreement].]
[The Cash Collateral Account will be funded on the Issuance Date in
the amount of $[ ] (the "Initial Cash Collateral Amount"), [of which not less
than $[ ] (the "Initial Shared Collateral Amount") will be for the benefit of
both the Class A Certificates and the Class B Certificates and the remaining $[
] (the "Initial Class B Collateral Amount") will be for the exclusive benefit of
the Class B Certificates], which amount will include the proceeds of an advance
to be made by one or more lenders to be selected by the [Depositor] (the lender
or lenders, the "Collateral Interest Holders"). The advance will be repaid
pursuant to the [Loan] Agreement. The Cash Collateral Account will be terminated
following the earliest to occur of:
(a) the date on which the Certificates are paid in full,
(b) the date on which the entire Available Cash Collateral Amount is
distributed to the Certificateholders as a result of the occurrence of any Pay
Out Event,
(c) the Termination Date, and
(d) the termination of the Trust pursuant to the Agreement.]
[On each Distribution Date, the amount available to be withdrawn from
the Cash Collateral Account (the "Available Cash Collateral Amount") will be
equal to the lesser of the amount on deposit in the Cash Collateral Account,
before giving effect to any deposit to be made to, or withdrawal from, the Cash
Collateral Account on the related Distribution Date, or the Required Cash
Collateral Amount.]
[The "Required Cash Collateral Amount" means, with respect to any
Distribution Date, the lesser of:
(a) [the sum of] [the Required Shared Collateral Amount] [and] [the
Initial Class B Collateral Amount] as of the Distribution Date, and
(b) the adjusted Invested Amount as of the Distribution Date.]
[The "Required Shared Collateral Amount means, with respect to any
Distribution Date, the product of:
(a) the Adjusted Invested Amount as of the Distribution Date after
taking into account distributions made on that date, and
(b) [ ]% or any higher percentage specified by each Rating Agency;
provided, however, that:
(1) if there are any withdrawals from the Cash Collateral Account
to fund the Class A Required Amount [or the Class B Required Amount,] or a
Pay Out Event occurs with respect to Series 200[ ]- [ ], then the Required
Shared Collateral Amount for any Distribution Date shall equal the Required
Shared Collateral Amount on the Distribution Date immediately preceding a
withdrawal from the Cash Collateral Account or Pay Out Event, and
(2) notwithstanding the foregoing, the Required Shared Collateral
Amount with respect to any Distribution Date will not be less than $[ ].]
[The Required Shared Collateral Amount [and the Initial Class B
Collateral Amount] may be reduced without the consent of the Certificateholders,
if the [Depositor] [Seller] shall have received written notice from each Rating
Agency that the reduction will not have a Ratings Effect and the [Depositor]
[Seller] shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, based on the facts known to the officer at the time,
in the reasonable belief of the [Depositor] [Seller], the reduction will not
cause a Pay Out Event or an event that, after the giving of notice of the lapse
of time, would constitute a Pay Out Event, to occur with respect to Series 200
[]- [ ].]
[On each Distribution Date, one or more withdrawals will be made from
the Cash Collateral Account in an amount up to the Available Shared Collateral
Amount, to fund the following amounts in the following priority:]
[(a)] the excess, if any, of the Class A Required Amount with
respect to the related Distribution Date over the amount of Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and
available to fund the Class A Required Amount will be used first to
fund any deficiency in current Class A Monthly Interest, overdue Class
A Monthly Interest and any current or overdue Class A Additional
Interest, second to fund any deficiency in the Class A Servicing Fee
and any overdue Class A Servicing Fee and third to pay the Class A
Default Amount, if any, for the Distribution Date[; and]
[(b) the excess, if any, of the Class B Required Amount with
respect to the related Distribution Date over the amount of Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and
available to fund the Class B Required Amount will be used first to
fund any deficiency in current Class B Monthly Interest, overdue Class
B Monthly Interest and any current or overdue Class B Additional
Interest, second to fund any deficiency in the Class B Servicing Fee
and any overdue Class B Servicing Fee, and third to pay the Class B
Default Amount, if any, for the Distribution Date.]
On each Distribution Date, the "Available Shared Collateral Amount"
shall equal the lesser of:
(a) the Required Shared Collateral Amount, and
(b) the excess, if any, of the amount on deposit in the Cash
Collateral Account for the relevant Distribution Date over the Initial
Class B Collateral Amount.
On the first Special Payment Date following a Pay Out Event described
in clause (e) under "--Pay Out Events" after giving effect to any payment of
principal on the date described under "--Application of Collections - --
Payments of Principal", the Available Shared Collateral Amount, after giving
effect to any withdrawal from the Cash Collateral Account on the date to fund
the Required Amount, will be applied to pay principal of the Class A
Certificates [and the remainder of the Available Cash Collateral Amount will be
applied to pay principal of the Class B Certificates].
[On each Distribution Date commencing with the Class B Principal
Commencement Date, unless a Pay Out Event has occurred, a withdrawal will be
made from the Cash Collateral Account, to the extent of the Available Cash
Collateral Amount, in an amount equal to the excess, if any, of the Class B
Initial Invested Amount, minus the sum of the aggregate amount of principal
payments previously deposited to the Principal Funding Account or distributed in
respect of the Class B Certificates, over the Class B Invested Amount on the
last day of the related Monthly Period, determined after giving effect to any
changes to be made in the Class B Invested Amount pursuant to clauses (c), (d),
(e) or (f) of the definition of "Class B Invested Amount" under "--Allocation
Percentages" on the following Distribution Date.]
[In the event of:
(a) a sale of the Receivables and an early termination of the Trust
due to an Insolvency event,
(b) an optional repurchase of the Certificateholders' Interest by the
[Depositor] [Seller] [Servicer],
(c) a sale of a portion of the Receivables in connection with the
Termination Date,
(d) a repurchase or sale of the Certificateholders' Interest and the
certificateholders' interest of all other Series in connection with a Servicer
Default, or,
(e) a reassignment of the Certificateholders' Interest and the
certificateholders' interest of all other Series in connection with a breach by
the [Seller] [Depositor] [Servicer] of related representations and warranties,
any Available Cash Collateral Amount on the related Distribution Date, after
giving effect to all other withdrawals from the Cash Collateral Account on the
Distribution Date as described above, will be withdrawn from the Cash Collateral
Account and the proceeds withdrawn from the Cash Collateral Account will be
distributed to Class B Certificateholders to the extent of all previous
reductions of the Class B Invested Amount pursuant to clauses (c), (d) or (e) of
the definition of "Class B Invested Amount" under "--Allocation Percentages"
above.]
On each Distribution Date, the [Seller] [Servicer] or the Trustee,
acting pursuant to the [Seller's] [Servicer's] instructions, will apply Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] (to the extent
described above under "--Application of Collections -- Excess Spread; Excess
Finance Charges") to increase the amount on deposit in the Cash Collateral
Account to the extent that amount is less than the Required Cash Collateral
Amount. In addition, if on any Distribution Date the amount on deposit in the
Cash Collateral Account exceeds the Required Cash Collateral Amount, this excess
will be withdrawn and paid to the Collateral Interest Holder for application in
accordance with the [Loan] Agreement.
Defaulted Receivables Charge-Offs
On each Determination Date, the Servicer will calculate the Investor
Default Amount for the preceding Monthly Period. The term "Investor Default
Amount" means, for any Monthly Period, the product of:
(a) the Floating Allocation Percentage with respect to the
related Monthly Period, and
(b) the Defaulted Amount for that Monthly Period.
[A portion of the Investor Default Amount will be allocated to the Class A
Certificateholders (the "Class A Default Amount") on each Distribution Date in
an amount equal to the product of the Class A Floating Percentage applicable
during the related Monthly Period and the Investor Default Amount for that
Monthly Period.
A portion of the Investor Default Amount will be allocated to the Class B
Certificateholders (the "Class B Default Amount") in an amount equal to the
product of the Class B Floating Percentage applicable during the related Monthly
Period and the Investor Default Amount for that Monthly Period. An amount equal
to the Class A Default Amount for each Monthly Period will be paid from Class A
Available Funds, Excess Spread and Excess Finance Charges allocated to Series
200[ ]- [ ] or from amounts available under the Cash Collateral Account and
Reallocated Principal Receivables and applied as described above in
"--Application of Collections -- Payment of Interest, Fees and Other Items" and
"--Reallocation of Cash Flows; Class B Invested Amount". An amount equal to the
Class B Default Amount for each Monthly Period will be paid from Excess Spread
and Excess Finance Charges allocated to Series 200[ ]- [ ] or from amounts, if
any, available under the Cash Collateral Account and applied as described above
in "--Application of Collections -- Payment of Interest, Fees and Other Items".]
On each Distribution Date, if the Class A Required Amount for that
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charges
allocable to Series 200[ ]- [ ], then amounts, if any, on deposit in the Cash
Collateral Account up to the Available Shared Collateral Amount and Reallocated
Principal Receivables, the Collateral Invested Amount, if any, will be reduced
by the amount of the excess, but not by more than the Class A Default Amount for
the related Distribution Date. [In the event that a reduction would cause the
Collateral Invested Amount to be a negative number, the Collateral Invested
Amount will be reduced to zero, and the Class B Invested Amount will be reduced
by the amount by which the Collateral Invested Amount would have been reduced
below zero, but not by more than the excess, if any, of the Class A Default
Amount for the Distribution Date over the amount of the reduction, if any, of
the Collateral Invested Amount with respect to the Distribution Date. In the
event that a reduction would cause the Class B Invested Amount to be a negative
number, the Class B Invested Amount will be reduced to zero, and the Class A
Invested Amount will be reduced by the amount by which the Class B Invested
Amount would have been reduced below zero, but not by more than the excess, if
any, of the Class A Default Amount for the Distribution Date over the amount of
the reductions, if any, of the Collateral Invested Amount and the Class B
Invested Amount with respect to the Distribution Date as described above (a
"Class A Charge-Off"),] which will have the effect of slowing or reducing the
return of principal to the Class A Certificateholders.] If the Class A Invested
Amount has been reduced by the amount of any Class A Charge-Offs, it will
subsequently be increased on any Distribution Date, but not by an amount in
excess of the aggregate Class A Charge-Offs, by the amount of Excess Spread and
Excess Finance Charges allocated to Series 200[ ]- [ ] and available for that
purpose.
[On each Distribution Date, if the Class B Required Amount for that
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charges
allocable to Series 200[ ]- [ ] and not required to pay the Class A Required
Amount and amounts, if any, on deposit in the Cash Collateral Account which are
allocated and available to fund the amount, then the Collateral Invested Amount,
if any, will be reduced by the amount of any excess. In the event that a
reduction would cause the Collateral Invested Amount to be a negative number,
the Collateral Invested Amount will be reduced to zero, and the Class B Invested
Amount will be reduced by the amount by which the Collateral Invested Amount
would have been reduced below zero, but not by more than the excess, if any, of
the Class B Default Amount for the relevant Distribution Date over the amount of
the reduction, if any, of the Collateral Invested Amount with respect to the
Distribution Date.]
[If on any Distribution Date Reallocated Principal Receivables for
that Distribution Date are applied to fund the Required Amount, the Collateral
Invested Amount, if any, will be reduced by the amount of the Reallocated
Principal Receivables. In the event the reductions would cause the Collateral
Investment Amount to be a negative number, the Collateral Invested Amount shall
be reduced to zero, and the Class B Invested Amount will be reduced by the
amount by which the Collateral Invested Amount would have been reduced below
zero.]
[The Class B Invested Amount will subsequently be reimbursed, but not
in excess of the aggregate unreimbursed Class B Charge-Offs, on any Distribution
Date by the amount of Excess Spread and Excess Finance Charges allocated to
Series 200[ ]- [ ] and available for that purpose.]
[Any reductions of the Collateral Invested Amount shall subsequently
be reimbursed and the Collateral Invested Amount increased, but not by any
amount in excess of the aggregate reductions of the Collateral Invested Amount,
on any Distribution Date by the amount of Excess Spread and Excess Finance
Charges allocated to Series 200[ ]- [ ] and available for that purpose as
described under "--Application of Collections -- Payment of Interest, Fees and
Other Items".]
Issuance of Additional Certificates
The Series Supplement provides that from time to time during the
Revolving Period, the [Depositor] [Seller] may, subject to specific conditions
described below, cause the Trustee to issue additional Certificates, each an
"Issuance". When issued, the additional Certificates [of each class] will be
identical in all respects to the other outstanding Certificates [of that class]
and will be equally and ratably entitled to the benefits of the Agreement and
the Series Supplement without preference, priority or distinction.
In connection with each additional Issuance, the outstanding principal
amounts of the Class A Certificates [and the Class B Certificates] and the
aggregate amount of Credit Enhancement will all be increased pro rata. The
additional Credit Enhancement provided in connection with an additional Issuance
may take the form of an increase in the Required Cash Collateral Amount or
another form of Credit Enhancement, provided that the form and amount of
additional Credit Enhancement will not cause a Ratings Effect.
Following an additional Issuance, the [Controlled Amortization Amount]
[Controlled Accumulation Amounts] of each Class will be increased
proportionately to reflect the principal amount of additional Certificates.
Additional Certificates may be issued only upon the satisfaction of
specific conditions provided in the Series Supplement, including the following:
(a) on or before the fifth business day immediately preceding the date
on which the additional Certificates are to be issued, the [Depositor] [Seller]
shall have given the Trustee, [the Seller,] [the Servicer,] each Rating Agency
and any provider of Credit Enhancement written notice of the issuance and the
date upon which it is to occur;
(b) after giving effect to the additional Issuance, the total amount
of Principal Receivables shall be at least equal to the Required Principal
Balance;
(c) the [Depositor] [Seller] shall have delivered to the Trustee an
amended Series Supplement, executed by each of the parties to the agreement;
(d) the [Depositor] [Seller] shall have received written notice from
each Rating Agency that this additional Issuance will not have a Ratings Effect;
(e) the [Depositor] [Seller] shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, based on the facts
known to the officer at the time, in the reasonable belief of the [Depositor]
[Seller], the additional Issuance will not cause a Pay Out Event or an event
that, after the giving of notice or the lapse of time, would constitute a Pay
Out Event, to occur with respect to Series 200[ ]- [ ];
(f) as of the date of the additional Issuance and taking the
additional Issuance into account, the amount of Credit Enhancement with respect
to Series 200[ ]- [ ], together with any additional Credit Enhancement, shall
not be less than the amount required so that the additional issuance will not
result in a Ratings Effect;
(g) as of the date of the additional Issuance, all amounts due and
owing to the holders of Certificates shall have been paid, and there shall not
be any unreimbursed Class A Charge-Offs [or Class B Charge-Offs];
(h) the excess of the principal amount of the additional Certificates
over their issue price shall not exceed the maximum amount permitted under the
Code without the creation of original issue discount;
(i) the [Seller's] remaining interest in Principal Receivables shall
not be less than [ ]% of the total amount of Principal Receivables, in each case
as of the date upon which the additional Issuance is to occur after giving
effect to the issuance;
(j) the [Depositor] [Seller] shall have delivered to the Trustee, each
Rating Agency and any provider of Credit Enhancement, a Tax opinion with respect
to the additional Issuance;
(k) the [Depositor] [Seller] shall have obtained additional Credit
Enhancement for the benefit of the holders of Certificates, provided that the
ratio of the sum of the Required Cash Collateral Amount and the amount of the
additional Credit Enhancement to the Invested Amount, after giving effect to the
additional Issuance, shall be greater than or equal to the ratio of the Required
Cash Collateral Amount to the Invested Amount, before giving effect to the
additional Issuance;
(l) the [Depositor] [Seller] shall have delivered to each Rating
Agency:
(1) an opinion of counsel to the effect that the Issuance will
not violate applicable Federal Securities laws, and
(2) any other documents as the Rating Agencies may request; and
(m) the ratio of the [Controlled Amortization Amount] [Controlled
Accumulation Amount], after giving effect to the Additional Issuance, to the
Invested Amount, after giving effect to the Additional Issuance, shall be equal
to the ratio of the [Controlled Amortization Amount] [Controlled Accumulated
Amount], before giving effect to the Additional Issuance, to the Invested
Amount, before giving effect to the Additional Issuance.
There are no restrictions on the time or amount of any Additional
Issuance, provided that the conditions described above are met. As of the date
of any Additional Issuance, the Class A Invested Amount [and the Class B
Invested Amount] will be increased to reflect the initial principal balance of
the Additional Certificates of the respective classes.
[Paired Series]
[The Series 200[ ]- [ ] Certificates may be paired with one or more
other Series (each a "Paired Series"). Each Paired Series either will be
prefunded with an initial deposit to a prefunding account in an amount up to the
initial principal balance of each Paired Series and primarily from the proceeds
of the sale of the Paired Series or will have a variable principal amount. Any
prefunding account will be held for the benefit of the Paired Series and not for
the benefit of Certificateholders. As funds are accumulated in the Principal
Funding Account, either:
(a) in the case of a prefunded Paired Series, an equal amount of
funds on deposit in any prefunding account for that prefunded Paired
Series will be released, which funds will be distributed to the
Seller, or
(b) in the case of a Paired Series having a variable principal
amount, an interest in that variable Paired Series, in an equal or
lesser amount may be sold by the Trust, and the proceeds distributed
to the Seller, and, in either case, the Invested Amount in the Trust
of the Paired Series will increase by up to a corresponding amount.
Upon payment in full of Series 200[ ]- [ ], assuming that there have been no
unreimbursed charge-offs with respect to any related Paired Series, the
aggregate Invested Amount of the related Paired Series will have been increased
by an amount up to an aggregate amount equal to the Series 200[ ]- [ ] Invested
Amount paid to the Certificateholders. There can be no assurance, however, that
the terms of any Paired Series might not have an impact on the timing or amount
of payments received by Certificateholders. See "Maturity Considerations" in
this prospectus supplement.]
Required Principal Balance; Addition to Accounts
The obligation of the Trustee to authenticate certificates of a new
Series and to execute and deliver the related Series Supplement shall be subject
to the conditions described in the Prospectus and to the additional condition
that, as of the Series Issuance Date and after giving effect to the issuance,
the aggregate amount of Principal Receivables in the Trust equals or exceeds the
Required Principal Balance. The "Required Principal Balance means, as of any
date of determination, the sum of:
(a) the initial Invested Amount (see the relevant Supplement) of each
Series outstanding on that date, other than any Series or portion of a Series
(an "Excluded Series") which is designated in the relevant Supplement as then
being an Excluded Series, minus
(b) the principal amount on deposit in the Excess Funding Account on
that date;
provided, however, that if at any time the only Series outstanding are Excluded
Series and a Pay Out Event has occurred with respect to one or more Series, the
Required Principal Balance shall mean the sum of:
(a) the "Invested Amount" (see the relevant Supplement) of each
Excluded Series as of the earliest date on which any Pay Out Event is deemed to
have occurred, minus
(b) the principal amount on deposit in the Excess Funding Account;
and provided further that the Required Principal Balance may be reduced to a
lesser amount without the consent of the Certificateholders, if the [Depositor]
[Seller] shall have received written notice from each Rating Agency that the
reduction will not have a Ratings Effect.
If, as of the close of business on the last business day of any
Monthly Period, the aggregate amount of Principal Receivables in the Trust is
less than the Required Principal Balance on that date, the [Depositor] [Seller]
shall on or before the [ ] business day following that day, unless the amount of
Principal Receivables in the Trust equals or exceeds the Required Principal
Balance as of the close of business on any day after the last business day of
the Monthly Period and prior to the tenth business day, make an addition to the
Trust so that, after giving effect to the addition, the amount of Principal
Receivables in the Trust is at least equal to the Required Principal Balance.
Pay Out Events
The "Pay Out Events" with respect to the Certificates will include
each of the events specified in the Prospectus and the following:
(a) failure on the part of the [Depositor] [Seller] [Servicer],
(1) to make any payment or deposit required by it under the
Agreement or the Series Supplement within [ ] business days after
the day a payment or deposit is required to be made; or
(2) to observe or perform any of its other covenants or
agreements set forth in the Agreement or the Series Supplement,
which failure has a material adverse effect on the Series 200[ ]-
[ ] Certificateholders and which continues unremedied for a
period of [ ] days, or for a longer period, not in excess of [ ]
days, as may be reasonably necessary to remedy the failure;
provided that the failure is capable of remedy within [ ] days or
less and the [Seller] [Servicer] [Depositor] delivers an
officer's certificate to the effect that the [Seller] [Servicer]
[Depositor] has commenced, or will promptly commence and
diligently pursue, all reasonable efforts to remedy the failure,
after the earlier to occur of the discovery of the failure by the
[Seller] [Servicer] [Depositor] or written notice;
(b) any representation or warranty made by [Seller] [Servicer]
[Depositor] in the Agreement or the Series Supplement or any
information required to be given by the [Depositor] [Seller]
[Servicer] to the Trustee to identify the Accounts proves to have been
incorrect in any material respect when made and continues to be
incorrect in any material respect for a period of [ ] days, or for a
longer period, not in excess of [ ] days, as may be reasonably
necessary to remedy the breach; provided that the misrepresentation is
capable of remedy within [ ] days or less and the [Seller] [Servicer]
[Depositor] delivers an officer's certificate to the effect that the
[Seller] [Servicer] [Depositor] has commenced or will promptly
commence and diligently pursue, all reasonable efforts to remedy the
misrepresentation, after the earlier to occur of discovery of the
breach by the [Seller] [Servicer] [Depositor] or written notice and as
a result of which the interests of the Certificateholders are
materially and adversely affected; provided, however, that a Pay Out
Event shall not be deemed to occur if the [Seller] [Servicer]
[Depositor] has repurchased the related Receivables or all
Receivables, if applicable, during the period in accordance with the
provisions of the Agreement;
(c) a failure by the [Depositor] [Seller] to make an addition to
the Trust within five business days after the day on which it is
required to make an addition pursuant to the Agreement or the Series
Supplement;
(d) the occurrence of any Servicer Default with respect to the
Certificates;
(e) the average Portfolio Yield for any three consecutive Monthly
Periods is less than the average of the Base Rates with respect to
Series 200[ ]- [ ] for the Monthly Periods;
(f) the failure to pay in full the Class A Invested Amount on the
Class A Expected Final Payment Date[, or the Class B Invested Amount
on the Class B Expected Final Payment Date]; and
(g) the [Depositor] [Seller] is unable for any reason
to transfer Receivables to the Trust in accordance with the
Agreement or the Series Supplement.
Then, in the case of any event described in subparagraph (a), (b) or
(d), after the applicable grace period, if any, set forth in those
subparagraphs, either the Trustee or the holders of Certificates evidencing more
than 50% of the aggregate unpaid principal amount of Series 200[ ]- [ ] by
notice then given in writing to the [Seller] [Servicer] [Depositor], and to the
Trustee if given by the Certificateholders, may declare that a Pay Out Event has
occurred with respect to Series 200[ ]- [ ] as of the date of notice, and, in
the case of any event described in subparagraph (c), (e), (f) or (g), a Pay Out
Event shall occur with respect to Series 200[ ]- [ ], without any notice or
other action on the part of the Trustee immediately upon the occurrence of the
event.
For purposes of the Pay Out Event described in clause (e) above, the
terms "Base Rate" and "Portfolio Yield" will be defined as follows with respect
to the Certificates:
"Base Rate" means, with respect to any Monthly Period, the annualized
percentage equivalent of a fraction, the numerator of which is equal to the sum
of Class A Monthly Interest, [Class B Monthly Interest] and the Monthly
Servicing Fee with respect to Series 200[ ]- [ ] for the related Distribution
Date and the denominator of which is the Invested Amount as of the last day of
the preceding Monthly Period.
"Portfolio Yield" means, with respect to any Monthly Period, the
annualized percentage equivalent of a fraction, the numerator of which is equal
to:
(a) the Floating Allocation Percentage of collections of Finance
Charge Receivables, including any investment earnings and other
amounts that are to be treated as Finance Charge Receivables in
accordance with the Agreement, for the Monthly Period calculated on a
billed basis, plus
(b) the amount of Principal Funding Investment Proceeds for the
related Distribution Date, plus
(c) the amount of funds withdrawn from the Reserve Account and
which are required to be included as Class A Available Funds [or Class
B Available Funds], in each case for the Distribution Date with
respect to the relevant Monthly Period, minus
(d) the Investor Default Amount for the Distribution Date with
respect to the Monthly Period, and the denominator of which is the
Invested Amount as of the last day of the preceding Monthly Period.
If the proceeds of any sale of the Receivables following the
occurrence of an Insolvency event with respect to the [Depositor] [Seller]
[Servicer] allocated to the Class A Invested Amount and the proceeds of any
collections on the Receivables in the Collection Account are not sufficient to
pay in full the remaining amount due on the Class A Certificates, then the Class
A Certificateholders will suffer a corresponding loss [and no proceeds will be
available to the Class B Certificateholders].
Servicing Compensation and Payment of Expenses
The share of the Servicing Fee allocable to Series 200[ ]- [ ] with
respect to any Distribution Date (the "Monthly Servicing Fee") shall be equal to
one twelfth of the product of:
(a) [ ]% (the "Servicing Fee Rate"), and
(b) the sum of the Adjusted Invested Amount and the Collateral
Invested Amount, if any, as of the last day of the Monthly Period
preceding the Distribution Date (the amount calculated pursuant to
this clause (b) is referred to as the "Servicing Base Amount");
provided, however, that the Monthly Servicing Fee with respect to the first
Distribution Date will be $[ ] [equal to the Servicing Fee accrued on the
Initial Invested Amount at the Servicing Fee Rate for the period from the
Issuance Date to but excluding the first Distribution Date calculated on the
basis of the actual number of days in the period from the Issuance Date to the
first Distribution Date and a 360-day year]. On each Distribution Date, but only
if [ ] or the Trustee is the Servicer, Interchange with respect to the related
Monthly Period that is on deposit in the Collection Account shall be withdrawn
from the Collection Account and paid to the Servicer as payment of a portion of
the Monthly Servicing Fee with respect to the Monthly Period. The "Servicer
Interchange" for any Monthly Period for which [ ] or the Trustee is the Servicer
will be equal to the product of:
(a) the Floating Allocation Percentage for the Monthly Period,
and
(b) the portion of Finance Charge Receivables allocated to the
Trust with respect to the Monthly Period that is attributed to
Interchange; provided, however, that Servicer Interchange for a
Monthly Period shall not exceed one twelfth of the product of:
(1) the sum of the Invested Amount and the Collateral
Investment amount, if any, as of the last day of the Monthly Period,
and
(2) [ ]%.
In the case of any insufficiency of Servicer Interchange on deposit in the
Collection Account, a portion of the Monthly Servicing Fee with respect to the
Monthly Period will not be paid to the extent of that insufficiency and in no
event shall the Trust, the Trustee or the Certificateholders be liable for the
share of the Servicing Fee to be paid out of the Servicer Interchange.
[The share of the Monthly Servicing Fee allocable to the Class A
Certificateholders, after giving effect to the distribution of any Servicer
Interchange to the Servicer, with respect to any Distribution Date (the "Class A
Servicing Fee") shall be equal to one twelfth of the product of:
(a) the Class A Floating Percentage,
(b) [ ]%, or if [ ] or the Trustee is not the Servicer, [ ]% (the
"Net Servicing Fee Rate"), and
(c) the Servicing Base Amount;
provided, however, with respect to the first Distribution Date, the Class A
Servicing Fee shall be equal to the Class A Certificateholders' share of the
Monthly Servicing Fee for the period from the Issuance Date to but excluding the
first Distribution Date.
[The share of the Monthly Servicing Fee allocable to the Class B
Certificateholders, after giving effect to any distribution of Servicer
Interchange to the Servicer, with respect to any Distribution Date (the "Class B
Servicing Fee", and together with the Class A Servicing Fee, the "Servicing
Fee") shall be equal to one twelfth of the product of:
(a) the Class B Floating Percentage,
(b) the Net Servicing Fee Rate, and
(c) the Servicing Base Amount;
provided, however, with respect to the first Distribution Date, the Class B
Servicing Fee shall be equal to the Class B Certificateholders' share of the
Monthly Servicing Fee for the period from the Series Issuance Date to but
excluding the first Distribution Date.
The remainder of the Servicing Fee shall be paid by the [Depositor] [Seller] or
the certificateholders of other Series, as provided in the related Supplements,
or, to the extent of any insufficiency of the Servicer Interchange as described
above, not be paid and in no event shall the Trust, the Trustee or the
Certificateholders be liable for the share of the Servicing Fee to be paid by
the [Depositor] [the Seller] or the Certificateholders of any other Series or to
be paid out of the Servicer Interchange. The Class A Servicing Fee and the Class
B Servicing Fee shall be payable to the Servicer solely to the extent amounts
are available for distribution of the servicing fees.]
Series Termination
If on the Distribution Date which is two months prior to the
Termination Date, the Invested Amount or the Collateral Invested Amount, if any,
in each case after giving effect to all changes in these amounts on that date,
exceeds zero, the Servicer will, within the 40-day period beginning on that
date, solicit bids for the sale of interests in the Principal Receivables or
particular Principal Receivables, together in each case with the related Finance
Charge Receivables, in an amount equal to the sum of the Invested Amount and the
Collateral Invested Amount, if any, at the close of business on the last day of
the Monthly Period preceding the Termination Date, after giving effect to all
distributions required to be made on the Termination Date. The [Depositor]
[Seller], provided that the sum of the Invested Amount and the Collateral
Invested Amount, if any, is less than or equal to [ ]% of the Initial Invested
Amount, and the Collateral Interest Holder will be entitled to participate in,
and to receive notice of each bid submitted in connection with, the bidding.
Upon the expiration of the 40-day period, the Trustee will determine:
o which bid is the highest cash purchase offer (the "Highest Bid"),
and
o the amount (the "Available Final Distribution Amount") which
otherwise would be available in the Collection Account on the
Termination Date for distribution to the Certificateholders and the
Collateral Interest Holder.
The Servicer will sell the Receivables on the Termination Date to the bidder who
provided the Highest Bid and will deposit the proceeds of the sale in the
Collection Account for allocation, together with the Available Final
Distribution Amount, to the Certificateholders' Interest.
Reports
No later than the third business day prior to each Distribution Date,
the Servicer will forward to the Trustee, [the Collateral Interest Holder] [the
Cash Collateral Depositor] [the Depositor] the Paying Agent and each Rating
Agency a statement (the "Monthly Report") prepared by the Servicer setting forth
information with respect to the Trust and the Certificates, including:
(a) the aggregate amount of Principal Receivables and Finance Charge
Receivables in the Trust as of the end of the Monthly Period;
(b) the Class A Invested Amount [and] [the Class B Invested Amount]
[and] [the Collateral Invested Amount] at the close of business on the last day
of the preceding Monthly Period;
(c) the Floating Allocation Percentage and, during the [Controlled
Amortization Period] [Accumulation Period] or Rapid Amortization Period with
respect to the Series, the Principal Allocation Percentage with respect to the
Certificates;
(d) the amount of collections of Principal Receivables and Finance
Charge Receivables processed during the related Monthly Period and the portion
of these Receivables allocated to the Certificateholders' Interest;
(e) the aggregate outstanding balance of Accounts which were 30, 60,
and 90 days or more delinquent as of the end of the Monthly Period;
(f) the Defaulted Amount with respect to the Monthly Period and the
portion of this Defaulted Amount allocated to the Certificateholders' Interest
[and the Collateral Interest Holder];
(g) the amount, if any, of Class A Charge-Offs [and Class B
Charge-Offs];
(h) the Monthly Servicing Fees;
(i) the Portfolio Yield for the Monthly Period;
(j) the amount to be withdrawn from the Cash Collateral Account, if
any, to fund the Class A Required Amount [or the Class B Required Amount] for
the Distribution Date;
(k) the Available Cash Collateral Amount, the Available Shared
Collateral Amount and the Required Cash Collateral with respect to Series 200[
]- [ ], and
(l) Reallocated Principal Receivables.
ERISA CONSIDERATIONS
[State whether the Notes may be classified as indebtedness without
substantial equity features for ERISA purposes.]
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them.
UNDERWRITING
Subject to the terms and conditions set forth in the "Underwriting
Agreement" between the Depositor and the underwriters named below (the
"Underwriters"), the Depositor has agreed to sell to the Underwriters, and each
of the Underwriters has severally agreed to purchase, the principal amount of
the Class A Certificates [and Class B Certificates] set forth opposite its name
(the "Underwritten Certificates"):
Principal Amount Principal Amount
UNDERWRITER OF CLASS A CERTIFICATES OF CLASS B CERTIFICATES
----------- ----------------------- -----------------------
Deutsche Banc Alex. Brown...
[Other underwriter].........
Total.......................
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Underwritten Certificates are
subject to the approval of related legal matters by their counsel and to other
conditions. All of the Certificates offered by this prospectus supplement will
be issued if any are issued. Under the terms and conditions of the Underwriting
Agreement, the Underwriters are committed to take and pay for all the
Underwritten Certificates offered by this prospectus supplement, if any are
taken.
The Underwriters propose initially to offer the Class A Certificates
to the public at the price set forth on the cover page of this prospectus
supplement and to some dealers at price less concessions not in excess of [ ] %
of the principal amount of the Class A Certificates. The Underwriters may allow,
and dealers may reallow, concessions not in excess of [ ] % of the principal
amount of the Class A Certificates to specific brokers and dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Underwriters.
[The Underwriters propose initially to offer the Class B Certificates
to the public at the price set forth on the cover page of this prospectus
supplement and to some dealers at price less concessions not in excess of [ ]%
of the principal amount of the Class B Certificates. The Underwriters may allow,
and dealers may reallow, concessions not in excess of [ ]% of the principal
amount of the Class B Certificates to some brokers and dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Underwriters.]
The Depositor will indemnify the Underwriters against specific
liabilities, including liabilities under the Securities Act of 1933, or
contribute to payments the Underwriters may be required to make.
In the ordinary course of their respective businesses, the
Underwriters and their respective affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with the Depositor and
its affiliates.
If and to the extent required by applicable law or regulation, this
prospectus supplement and the Prospectus will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the offered Certificates in which the
Underwriter acts as principal. Sales will be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Some related legal matters with respect to the Certificates will be
passed upon by [ ], New York, New York.
RATINGS
It is a condition to issuance that the Class A Certificates be rated
in the highest rating category by [Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, Inc.] [Duff & Phelps Credit Rating Co.] [Moody's
Investors Service, Inc.], referred to as the "Rating Agencies". [It is a
condition to issuance that the Class B Certificates be rated in one of the three
highest rating categories by a Rating Agency.]
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Securities. The rating takes into
consideration the characteristics of the Securities and the structural, legal
and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however constitute statements regarding the possibility
that Certificateholders might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
<PAGE>
Index of Defined Terms
Accumulation Period......................................................S-27
Accumulation Period Length...............................................S-30
Adjusted Invested Amount.................................................S-36
Agreement................................................................S-13
Available Cash Collateral Amount.........................................S-50
Available Final Distribution Amount......................................S-64
Available Funds..........................................................S-27
Available Principal Collections..........................................S-30
Available Reserve Account Amount.........................................S-40
Available Shared Collateral Amount.......................................S-52
Base Rate................................................................S-61
Cash Collateral Account..................................................S-50
Cash Collateral Depositor................................................S-46
Cash Collateral Fee......................................................S-46
Certificateholders.......................................................S-13
Certificates.............................................................S-24
Class A Accumulation Period..............................................S-29
Class A Additional Interest..............................................S-43
Class A Adjusted Invested Amount.........................................S-35
Class A Available Funds..................................................S-26
Class A Certificate Rate.................................................S-25
Class A Certificateholders...............................................S-13
Class A Certificates.....................................................S-24
Class A Charge-Off.......................................................S-54
Class A Default Amount...................................................S-54
Class A Floating Percentage..............................................S-33
Class A Initial Invested Amount..........................................S-34
Class A Invested Amount..................................................S-35
Class A Investor Charge-Offs.............................................S-35
Class A Monthly Interest.................................................S-44
Class A Monthly Principal................................................S-48
Class A Principal Percentage.............................................S-34
Class A Required Amount..................................................S-41
Class A Servicing Fee....................................................S-62
Class B Accumulation Period..............................................S-29
Class B Additional Interest..............................................S-44
Class B Adjusted Invested Amount.........................................S-36
Class B Available Funds..................................................S-27
Class B Certificate Rate.................................................S-25
Class B Certificateholders...............................................S-13
Class B Certificates.....................................................S-24
Class B Charge-Off.......................................................S-42
Class B Default Amount...................................................S-54
Class B Floating Percentage..............................................S-33
Class B Initial Invested Amount..........................................S-31
Class B Invested Amount..................................................S-35
Class B Monthly Interest.................................................S-44
Class B Monthly Principal................................................S-48
Class B Principal Commencement Date......................................S-31
Class B Principal Percentage.............................................S-34
Class B Required Amount..................................................S-42
Class B Servicing Fee....................................................S-63
Collateral Defaulted Amount..............................................S-36
Collateral Indebtedness Amount...........................................S-36
Collateral Interest Holders..............................................S-50
Collateral Invested Amount...............................................S-37
Collection Account.......................................................S-37
Controlled Accumulation [Amortization] Amount............................S-49
Controlled Amortization Period...........................................S-28
Controlled Deposit Amount................................................S-49
Controlled Distribution Amount...........................................S-49
Covered Amount...........................................................S-38
Cut-Off Date.............................................................S-27
Deficit Controlled Accumulation Amount...................................S-49
Distribution Date....................................................S-13, 25
Eligible Investments.....................................................S-38
Excess Funding Account...................................................S-32
Excess Spread............................................................S-45
Excluded Series..........................................................S-58
Finance Charge Receivables...............................................S-17
Floating Allocation Percentage...........................................S-32
Highest Bid..............................................................S-64
Identified Pool..........................................................S-18
Initial Cash Collateral Amount...........................................S-50
Initial Class B Collateral Amount........................................S-50
Initial Shared Collateral Amount.........................................S-50
Interest Funding Account.................................................S-25
Interest Payment Date....................................................S-25
Interest Period..........................................................S-25
Invested Amount..........................................................S-37
Investor Default Amount..................................................S-53
Issuance.................................................................S-55
Monthly Period...........................................................S-13
Monthly Report...........................................................S-64
Monthly Servicing Fee....................................................S-61
Net Servicing Fee Rate...................................................S-62
Paired Series............................................................S-57
Pay Out Events...........................................................S-59
Portfolio Yield..........................................................S-61
Principal Allocation Percentage..........................................S-33
Principal Funding Account................................................S-28
Principal Funding Account Balance........................................S-38
Principal Funding Investment Proceeds....................................S-38
Rating Agencies..........................................................S-66
Ratings Effect...........................................................S-17
Reallocated Principal Receivables........................................S-41
Record Date..............................................................S-25
Required Amount..........................................................S-42
Required Cash Collateral Amount..........................................S-51
Required Principal Balance...............................................S-58
Required Reserve Account Amount..........................................S-39
Required Share Collateral Account........................................S-51
Reserve Account..........................................................S-39
Reserve Account Factor...................................................S-39
Reserve Account Funding Date.............................................S-39
Revolving Period.........................................................S-27
Securities...............................................................S-24
Seller...................................................................S-23
Series...................................................................S-24
Series Enhancement.......................................................S-16
Series Supplement........................................................S-13
Servicer.................................................................S-24
Servicing Base Amount....................................................S-62
Servicing Fee............................................................S-63
Servicing Fee Rate.......................................................S-61
Special Payment Date.....................................................S-13
Supplement...............................................................S-13
Termination Date.........................................................S-13
Trust....................................................................S-24
Trust Portfolio..........................................................S-18
Trustee..................................................................S-25
Underwriters.............................................................S-65
Underwriting Agreement...................................................S-65
Underwritten Certificates................................................S-65
<PAGE>
=============================================
$[ ]
CARD ACCOUNT
RECEIVABLES TRUSTS
$[ ] [ ]% Floating Rate
Adjustable Rate Variable Rate
Asset Backed Certificates, Class A
$[ ] [ ]% Floating Rate
Adjustable Rate Variable Rate
Asset Backed Certificates, Class B
ACE SECURITIES CORP.
(DEPOSITOR)
PROSPECTUS SUPPLEMENT
[ ]
DEUTSCHE BANC ALEX. BROWN
==============================================
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS
CARD RECEIVABLE
ASSET-BACKED CERTIFICATES AND ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
DEPOSITOR
THE TRUSTS:
Each trust will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each trust will generally consist of one or more
of the following:
1. One or more pools of:
o receivables arising from time to time in the ordinary course of
business in one or more portfolios of credit card, charge card or
other types of accounts,
o participation certificates evidencing participation interests in loans
similar to the types of loans described above,
o government securities,
o private securities evidencing ownership interests in or secured by
loans similar to the types of loans described above;
2. All monies due under the above assets (which may be net of amounts payable
to the servicer); and
3. Funds or accounts established for the related trust or one or more forms of
enhancement.
The assets in your trust are specified in the prospectus supplement for
that particular trust, while the types of assets that may be included in a
trust, whether or not in your trust, are described in greater detail in this
prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
The date of this Prospectus is [ ], 2000
The information in this prospectus supplement is not complete and may not be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
TABLE OF CONTENTS
PAGE
Risk Factors................................................................
The Trusts..................................................................
Trust Assets................................................................
Series Enhancement..........................................................
Servicing of Receivables....................................................
Certain Matters Regarding the Servicer......................................
Description of the Notes....................................................
Description of the Certificates.............................................
Certain Information Regarding the Securities................................
Description of the Trust Agreements or Pooling and Servicing Agreements.....
Certain Legal Aspects of the Receivables....................................
The Depositor...............................................................
Use of Proceeds.............................................................
Material Federal Income Tax Consequences....................................
Certain State and Local Tax Considerations..................................
ERISA Considerations........................................................
Plan of Distribution........................................................
Legal Matters...............................................................
Index of Defined Terms......................................................
Annex I; Global Clearance, Settlement and Tax Documentation Procedures......
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
LIMITED LIQUIDITY MAY RESULT IN
DELAYS IN YOUR ABILITY TO SELL
SECURITIES OR LOWER RETURNS There will be no market for the
securities of any series prior to their
issuance, and there can be no assurance
that a secondary market will develop. If
a secondary market does develop, there
can be no assurance that it will provide
holders with liquidity of investment or
that the market will continue for the
life of the securities of the related
series. Deutsche Banc Alex. Brown
presently expects to make a secondary
market in the securities, but has no
obligation to do so. Absent a secondary
market for the securities you may
experience a delay if you choose to sell
your securities or the price you receive
may be less than you would receive for a
comparable liquid security.
LIMITED ASSETS FOR PAYMENTS - NO
RECOURSE TO DEPOSITOR, SELLER OR
SERVICER The depositor does not have, nor is it
expected to have, any significant
assets. The securities of a series will
be payable solely from the assets of the
trust for that series. Except for any
related insurance policies or credit
support, there will be no recourse to
the depositor or any other person for
any default on the notes or any failure
to receive distributions on the
certificates with respect to any series.
Consequently, holders of securities of
each series must rely solely upon
payments with respect to the assets
constituting the trust fund for a series
of securities, including, if applicable,
any amounts available pursuant to any
enhancement for that series, for the
payment of principal of and interest on
the securities of that series.
The only obligations, if any, of the
depositor with respect to the securities
of any series will be with respect to
its breach of specific representations
and warranties. The depositor does not
have, and is not expected in the future
to have, any significant assets with
which to meet any obligation to
repurchase assets with respect to which
there has been a breach of any
representation or warranty. If, for
example, the depositor were required to
repurchase a receivable, its only
sources of funds to make the repurchase
would be from funds obtained from the
enforcement of a corresponding
obligation, if any, on the part of the
originator of the receivable, the
servicer or the seller, as the case may
be, or from a reserve fund established
to provide funds for repurchases. If the
depositor does not have sufficient
assets and no other party is obligated
to repurchase defective assets, you may
experience a loss.
LIMITS ON ENHANCEMENT MAY RESULT
IN LOSSES TO YOU Although we intend the enhancement for
the securities to reduce the risk of
delinquent payments or losses to holders
of a series of securities entitled to
the benefit of the enhancement, the
amount of the enhancement will be
limited, as set forth in the related
prospectus supplement. In addition, the
amount available will decline and could
be depleted prior to the payment in full
of the related series of securities, and
losses on the primary assets could
result in losses to holders of those
securities.
TIMING AND RATE OF PREPAYMENTS
MAY RESULT IN LOWER YIELD The yield to maturity experienced by a
holder of securities may be affected by
the rate and timing of payments of
principal of the receivables or of the
underlying loans relating to the private
securities. The receivables or
underlying receivables may be paid at
any time and we can not assure you that
there will be new receivables created in
the related accounts or that new
receivables will be added to the related
trust or underlying trust. The rate and
timing of principal payments of the
securities of a series will be affected
by a number of factors, including the
following:
o the extent of repayments,
o the manner of allocating principal
payments among the classes of
securities of a series as specified
in the related prospectus
supplement, and
o the exercise of any right of
optional termination.
Prepayments may also result from
repurchases of receivables or underlying
receivables, as applicable, due to
material breaches of the seller's or the
depositor's representations or
warranties.
Interest payable on the securities of a
series on a distribution date will
include all interest accrued during the
period specified in the related
prospectus supplement. In the event
interest accrues during the calendar
month prior to a distribution date, the
effective yield to holders will be
reduced from the yield that would
otherwise be obtainable if interest
payable on the security were to accrue
through the day immediately preceding
each distribution date, and the
effective yield at par to holders will
be less than the indicated coupon rate.
RISK OF EARLY AMORTIZATION The continuation of the revolving period
for any series will depend on the
continued generation of new receivable
for the related trust. A decline in the
amount of receivables may result in the
commencement of a rapid amortization
period with respect to the related
series. Receivables are generally
prepaid upon the retail sale of the
underlying consumer or commercial
product. In these events, you would bear
the risk of reinvestment of the
principal amount of your securities. The
seller's or depositor's interest will
need to be maintained at a minimum level
equal to an amount specified in the
related prospectus supplement. If it
falls below the minimum level, the
seller or depositor will be required to
transfer additional accounts to the
Trust. In addition, subject to some
exceptions, which if applicable, will be
set forth in the related prospectus
supplement, a rapid amortization period
will commence if the seller or depositor
fails to transfer these additional
accounts to the trust.
POSSIBLE ADVERSE IMPACT OF FUTURE
SERIES Each trust that is a master trust may
issue new series from time to time. The
terms of any new series will not be
subject to your prior review or consent.
The terms may include methods for
determining applicable investor
percentages and allocating collections,
provisions creating different or
additional security or other series
enhancements, provisions subordinating
the series to other series or
subordinating other series if the
supplement relating to this series so
permits) to the new series, and any
other amendment or supplement to the
transaction documents which is made
applicable only to the new series. The
obligation of the trustee to issue any
new series is subject to the condition
that the issuance will not result in any
rating agency reducing or withdrawing
its then existing rating of your
securities. You can not be certain,
however, that the issuance of any other
series, from time to time, might not
have an impact on the timing or amount
of payments received by you.
RISKS OF SUBORDINATED SECURITIES To the extent specified in the
applicable prospectus supplement,
distributions of interest on and
principal of one or more classes of
securities of a series may be
subordinated in priority of payment to
interest and principal due on one or
more other classes of securities of the
related series. Any subordinated
securities will be affected to a greater
degree by any losses on the mortgage
loans, contracts or of the underlying
loans relating to the private
securities.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST Issuance of the securities in book-entry
form may reduce the liquidity of these
securities in the secondary trading
market since investors may be unwilling
to purchase securities for which they
cannot obtain physical certificates.
Since transactions in the securities can
be effected only through The Depository
Trust Company and any other entities set
forth in the related prospectus
supplement, your ability to pledge a
security to persons or entities that do
not participate in The Depository Trust
Company or any other entities or
otherwise to take actions in respect of
the related securities may be limited
due to lack of a physical certificate
representing the securities.
You may experience some delay in the
receipt of distributions of interest and
principal on the securities since the
distributions will be forwarded by the
trustee to The Depository Trust Company
and The Depository Trust Company will
credit the distributions to the accounts
of its participants which will then
credit them to your account either
directly or indirectly through indirect
participants.
<PAGE>
THE TRUSTS
ACE Securities Corp., a Delaware corporation (the "Depositor") will
establish a trust or master trust (the "Trust") pursuant to a Trust Agreement or
a Master Trust Agreement (a "Trust Agreement"). The Trustee of each Trust will
be a commercial bank, savings and loan association or trust company identified
as the Trustee (the "Trustee") in the related prospectus supplement. The
property of the Trust will include Base Assets and may also include Series
Enhancements and other assets specified in the related prospectus supplement.
Each Trust will issue one or more series (each, a "Series") of asset
backed notes (the "Notes") and/or asset backed certificates (the "Certificates",
and together with the Notes, the "Securities"), that will include one or more
Classes of Certificates and may also include one or more Classes of Notes (each,
a "Class"). Any Notes included in a Series will be issued pursuant to an
indenture (the "Indenture") entered into between the related Trust and an
indenture trustee (the "Indenture Trustee"). The Indenture Trustee will also be
a commercial bank, savings and loan association or trust company identified as
the Indenture Trustee in the related prospectus supplement.
A form of Trust Agreement, a form of the Pooling and Servicing
Agreement and a form of the Series Supplement to the Pooling and Servicing
Agreement and a form of Indenture have each been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. If applicable, the
Trust Agreement, the Pooling and Servicing Agreement, the Series Supplement and
the Indenture (collectively the "Agreements"), relating to a particular Series
of Securities will be filed as an exhibit to a report on Form 8-K to be filed
with the Securities and Exchange Commission (the "Commission") within 15 days
following the issuance of this Series of Securities.
TRUST ASSETS
The assets of the Trust for a Series of Certificates will include some
or all of the Base Assets described below and may include Series Enhancements
with respect to these Series and other assets described in the related
prospectus supplement.
The "Base Assets" for a Series will consist of one or more of the
following types of assets:
(a) receivables arising from time to time in the ordinary course of
business in one or more portfolios of credit card, charge card or other types of
accounts (the "Receivables") and/or participations ("Participations") in
Receivables,
(b) securities backed by Receivables ("CRB Securities"),
(c) Government Securities; and
(d) Private Label Custody Receipt Securities.
The Base Assets for a Series may be purchased by the Depositor from the Seller
identified in the related prospectus supplement or, with respect to CRB
Securities, may be purchased by the Depositor in the open market or in privately
negotiated transactions, which may include transactions with affiliates of the
Depositor, and then, in each case, will be transferred by the Depositor to the
Trust in exchange for Securities issued by the Trust. Alternatively, the Trust
may purchase some or all of the Base Assets in the open market or in privately
negotiated transactions with cash obtained by the Trust in exchange for the
issuance of Securities of the Trust to the Depositor.
If so specified in the related prospectus supplement, the assets of
the Trust for a Series may include monies or government securities on deposit in
a Pre-Funding Account" established with the Trustee, or the Indenture Trustee,
which monies or government securities are to be used for the purchase of
additional Base Assets during a funding period specified in the related
prospectus supplement.
The following is a brief description of the Base Assets expected to be
included in Trusts. Specific information regarding the Base Assets with respect
to a Series of Securities will be provided in the related prospectus supplement
and, to the extent not contained in the related prospectus supplement, in a
report on Form 8-K to be filed with the Commission within 15 days after the
initial issuance of the Securities.
Receivables and Participations
The Base Assets for a Series may consist, in whole or in part, of
Receivables arising from time to time in the ordinary course of business in a
portfolio of consumer, corporate, revolving, credit card, charge and or debit
card accounts (collectively, the "Accounts"). The Receivables may be payable in
U.S. dollars or in any other foreign currency. The Accounts will consist of the
initial accounts (the "Initial Accounts") described below, as well as any
additional accounts (the "Additional Accounts") added to the Trust from time to
time as provided below, but will not include any Receivables in particular
Accounts removed from the Trusts (the "Removed Accounts") as provided below.
A seller or sellers designated in the related prospectus supplement
(collectively, the "Seller") will initially convey to the related Trust, or will
convey to the Depositor, which will promptly reconvey to the Trust all
Receivables existing on the series cut-off date specified in the related
prospectus supplement (the "Series Cut-Off Date") in the Initial Accounts,
together with all Receivables arising in these Initial Accounts from time to
time after the Series Cut-Off Date until the termination of the Trust. After the
Series Cut-Off Date, a Seller may convey to the related Trust, which conveyance
may be through the Depositor, Receivables arising in Additional Accounts, in
each case in accordance with the provisions of the applicable Pooling and
Servicing Agreement. In addition, pursuant to the related Pooling and Servicing
Agreement, a Seller in some circumstances will be obligated to designate
Additional Accounts, together with the Receivables arising in these Additional
Accounts, to convey to the related Trust. The Seller will convey to the Trust
all Receivables arising in any of the Additional Accounts, whether the
Receivables are then existing or later created. The addition to a Trust of
Receivables arising in Additional Accounts or Participations will be subject to
conditions set forth in the applicable Pooling and Servicing Agreement. Pursuant
to the related Pooling and Servicing Agreement and Series Supplement, the
Depositor will also have the right, subject to specified limitations and
conditions, but not the obligation, to remove the Receivables in any Account
that becomes a Removed Account. The amount of Receivables in a Trust will
fluctuate from day to day as new Receivables are generated or added to the Trust
and as existing Receivables are collected, charged-off as uncollectible, removed
or otherwise adjusted. If so specified in the related prospectus supplement, a
Seller will be able to include Participations in the related Trust in lieu of or
in addition to Receivables.
CREDIT CARD ACCOUNTS AND RECEIVABLES. "Credit Card Receivables" are
Receivables arising under credit card accounts ("Credit Card Accounts"),
including Finance Charge Receivables and Principal Receivables. In addition,
certain Interchange attributed to cardholder charges for merchandise and
services in the Accounts may be treated as Finance Charge Receivables.
Recoveries of charged-off Finance Charge Receivables will be treated as
collections of Finance Charge Receivables and recoveries of charged-off
Principal Receivables will be applied against charge-offs of Principal
Receivables. From time to time, subject to certain conditions, certain of the
amounts described above which are included in Principal Receivables may be
treated as Finance Charge Receivables. "Interchange" consists of certain fees
received by a credit card issuer from the VISA and MasterCard International
associations as partial compensation for taking credit risk, absorbing fraud
losses and funding receivables for a limited period prior to initial billing.
Under the VISA and MasterCard International systems, a portion of the
Interchange in connection with cardholder charges for merchandise and services
is passed from banks which clear the transactions for merchants to credit
card-issuing banks. VISA and MasterCard International may from time to time
change the amount of Interchange reimbursed to banks issuing their credit cards.
CHARGE CARD ACCOUNTS AND RECEIVABLES. "Charge Card Receivables" are
receivables arising under customer charge accounts ("Charge Card Accounts"), and
generally represent amounts charged on designated Accounts for merchandise and
services, and all annual membership fees and certain other administrative fees
billed to the designated Accounts. Receivables arising under Charge Card
Accounts are generally not subject to monthly finance charges.
There are distinctions between Credit Card Accounts and Charge Card
Accounts. Credit Card Accounts offer revolving credit plans to customers. Charge
Card Accounts generally have no pre-set spending limit and are designed for use
as a convenient method of payment for the purchase of merchandise and services.
Charge Card Accounts generally cannot be used as a means of financing such
purchases. Accordingly, the full balance of a month's purchases is billed to
cardmembers and is due upon receipt of the billing statement. By contrast,
revolving credit plans allow customers to make a minimum monthly payment and to
borrow the remaining outstanding balance from the credit card issuer up to a
predetermined limit. As a result of these payment requirement differences, the
Charge Card Accounts have a high monthly payment rate and balances which turn
over rapidly relative to their charge volume when compared to Credit Card
Accounts.
Another distinction between Charge Card Accounts and Credit Card
Accounts is that Charge Card Account balances are generally not subject to
monthly finance charges. As described above, the full Account balance is billed
monthly and is due upon receipt of the billing statement. Cardmembers do not
have the option of using their Charge Card Accounts to extend payment and to pay
a finance charge on the remaining outstanding balance. Credit Card Accounts, by
contrast, do allow customers to pay a specified minimum portion of an
outstanding amount and to finance the balance at a finance charge rate
determined by the credit card issuer. (Because Charge Card Account balances are
not assessed finance charges, for the purpose of providing yield to the Trust, a
portion of Collections on Receivables in Charge Card Accounts received in any
Monthly Period equal to the product of Collections and a yield factor which may
be specified in the related Prospectus Supplement (the "Yield Factor") will
generally be treated as Yield Collections). Each related Prospectus Supplement,
where applicable, will describe the Yield Calculation for a specific portfolio
of Charge Card Accounts.
Additional Information Relating to Receivables
The related prospectus supplement for each Series will provide
information with respect to any Receivables that constitute Base Assets as of
the Series Cut-off Date, including, among other things, the aggregate principal
balance of the Receivables and whether the Receivables are Credit Card
Receivables or Charge Card Receivables.
The eligibility criteria which shall apply with respect to the
inclusion of Receivables in the Base Assets for a Series will be specified in
the related prospectus supplement. The information provided in the related
prospectus supplement with respect to the Receivables will include, among other
things:
(a) underwriting criteria;
(b) the loss and delinquency experience for the portfolio of
Receivables;
(c) the composition of the portfolio by account balance; and
(d) the geographic distribution of Accounts and Receivables.
The related prospectus supplement will also specify any other limitations on the
types or characteristics of Receivables included in the Base Assets for a
Series.
If information of the nature described above respecting the
Receivables included in the Base Assets of a Series is not known to the Seller
at the time the Securities of the Series are initially offered, approximate or
more general information of the nature described above will be provided in the
related 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 Securities and to be filed with the Commission within 15 days
after the initial issuance of these Securities.
CRB Securities
Base Assets for a Series may consist, in whole or in part, of
receivables backed securities consisting of Certificates evidencing an undivided
interest in, or Notes or loans secured by, Receivables generated in Accounts.
These certificates, notes or loans will have previously been offered and
distributed to the public pursuant to an effective registration statement
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or will be so registered, offered and distributed concurrently with the offering
of the related Series of Securities. CRB Securities will have been issued
pursuant to a pooling and servicing agreement, a master pooling and servicing
agreement, a sale and servicing agreement, a trust agreement, indenture or
similar agreement (a "CRB Agreement"). The CRB Securities represent an undivided
interest in or obligation of a trust formed pursuant to a CRB Agreement (a "CRB
Trust"). The seller/servicer of the underlying Receivables will have entered
into the CRB Agreement with the trustee under this CRB Agreement (the "CRB
Trustee"). Receivables underlying a CRB Security will be serviced by a servicer
(the "CRB Servicer") directly or by one or more sub-servicers who may be subject
to the supervision of the CRB Servicer.
The issuer of the CRB Securities (the "CRB Issuer") will be a
financial institution, corporation or other entity engaged generally in the
business of issuing credit or charge cards; any form of store, merchandiser or
service provider that issues credit or charge card; or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling receivables to these trusts, and selling
beneficial interests in these trusts, or one of these trusts. If so specified in
the related prospectus supplement, the CRB Issuer may be an affiliate of the
Depositor. The obligations of the CRB Issuer will generally be limited to
representations and warranties with respect to the assets conveyed by it to the
related trust. The CRB Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the CRB Securities issued under the CRB
Agreement.
Distributions of principal and interest will be made on the CRB
Securities on the dates specified in the related prospectus supplement. The CRB
Securities may be entitled to receive nominal or no principal distributions or
nominal or no interest distributions. Principal and interest distributions will
be made on the CRB Securities by the CRB Trustee or the CRB Servicer. The CRB
Issuer or the CRB Servicer may have the right to repurchase assets underlying
the CRB Securities after a specified date or under other circumstances specified
in the related prospectus supplement.
UNDERLYING RECEIVABLES. The Receivables underlying the CRB Securities
will consist of Credit Card Receivables, Charge Card Receivables or other
specified types of Receivables.
CREDIT ENHANCEMENT RELATING TO CRB SECURITIES. Credit Enhancement in
the form of reserve funds, subordination of other CRB Securities, guarantees,
letters of credit, cash collateral accounts, insurance policies or other types
of Credit Enhancement may be provided with respect to the Receivables underlying
the CRB Securities or with respect to the CRB Securities themselves. The type,
characteristics and amount of Credit Enhancement will be a function of
characteristics of the Receivables and other factors and will have been
established for the CRB Securities on the basis of requirements of the
applicable Rating Agencies.
ADDITIONAL INFORMATION. The related prospectus supplement for a Series
whose Base Assets include CRB Securities will specify, to the extent relevant
and to the extent information is reasonably available to the Depositor, and to
the extent the Depositor reasonably believes the information to be reliable:
(a) the aggregate approximate principal amount and type of the CRB
Securities to be included in the Base Assets;
(b) characteristics of the Receivables which comprise the underlying
assets for the CRB Securities,
o whether the Receivables are Credit Card Receivables or other
types of Receivables,
o the fees and charges associated with the Receivables, and
o the servicing fee or range of servicing fees with respect to the
Receivables;
(c) the expected and final maturity of the CRB Securities;
(d) the interest rate of the CRB Securities;
(e) the CRB Issuer, the CRB Servicer, if other than the CRB Issuer,
and the CRB Trustee for the CRB Securities;
(f) characteristics of the credit enhancement, if any, relating to the
Receivables underlying the CRB Securities or relating to the CRB Securities
themselves;
(g) the terms on which the underlying Receivables for the CRB
Securities may be, or are required to be, purchased prior to their stated
maturity or the stated maturity of the CRB Securities; and
(h) the terms on which Receivables may be substituted for those
originally underlying the CRB Securities.
If information of the nature described above representing the CRB
Securities is not known to the Depositor at the time the related Series of
Securities are initially offered, approximate or more general information of the
nature described above will be provided in the related prospectus supplement and
the additional information, to the extent available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related Series of Securities and to be filed with the Commission within
15 days of the initial issuance of the Securities.
As a general rule, each CRB Issuer will be subject to the information
requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in
accordance with the Exchange Act, will file reports and other information with
the Commission. Reports and other information filed with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, 14th Floor, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of the material can be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of this site is (http://www.sec.gov). In the event that any CRB
Issuer is not subject to the information requirements of the Exchange Act on the
date of issuance of the Certificates of the related Series or ceases to be
subject to the information requirements after that date, the Depositor or the
Trustee will provide, or cause to be provided, or make available, or cause to be
made available, to holders of the Securities upon request, the information
contained in all periodic trustee reports, or similar reports, that are received
by the Trustee with respect to the related CRB Securities where the CRB
Securities represent 20% or more of the aggregate principal balance of the
related Base Assets.
Government Securities
If so specified in the applicable prospectus supplement, the Base Assets for a
Series may include any combination of:
o receipts or other instruments created under the Department of the
Treasury's Separate Trading of Registered Interest and Principal
of Securities, or STRIPS, program ("Treasury Strips"), which
interest and/or principal strips evidence ownership of specific
interest and/or principal payments to be made on specified United
States Treasury Bonds ("Treasury Bonds");
o Treasury Bonds; and
o other debt securities ("GSE Bonds") of United States government
sponsored enterprises ("GSEs", and together with Treasury Strips
and Treasury Bonds, the "Government Securities").
The Government Securities, if any, included in a Trust Fund are intended to
assure investors that funds will be available to make suggested payments of
principal and/or interest due on the related Securities. Accordingly, the
Government Securities, if any, included in a Trust are intended both to:
o support the ratings assigned to the related Securities, and
o perform a function similar to that described in this Prospectus
under "Series Enhancement".
A description of the respective general features of Treasury Bonds, Treasury
Strips and GSE Bonds is set forth below. The specific terms of the Government
Securities, if any, and the private label custody receipt securities, if any,
included in Base Assets will be set forth in the applicable prospectus
supplement.
Private Label Custody
RECEIPT SECURITIES. Private Label Custody Receipt Securities will
consist of any combination of:
o receipts or other instruments, other than Treasury Strips,
evidencing ownership of specific interest and/or principal
payments to be made on Treasury Bonds held by a custodian
("Private Label Custody Strips"), and
o receipts or other instruments evidencing ownership of specific
interest and/or principal payments to be made on Resolution
Funding Corporation ("REFCO") bonds ("REFCO Strips"; and together
with Private Label Custody Strips, "Private Label Custody Receipt
Securities", also referred to as "Receivables Pooling
Certificates").
The specific terms of the Private Label Custody Receipt Securities, if any,
included in a Trust will be set forth in the applicable prospectus supplement.
The prospectus supplement for each Series of Securities, the Base
Assets of which include Government Securities will contain information as to:
(a) the title and series, the aggregate principal amount, denomination
and form of each Government Security;
(b) the limit, if any, upon the aggregate principal amount of the
related Government Security;
(c) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the related Government Security will be
payable;
(d) the rate or rates, or the method of determination of the rate or
rates, at which the related Government Security will be payable;
(e) the date or dates from which interest will accrue, and the dates
on which interest will be payable;
(f) whether the related Government Security was issued at a price
lower than the principal amount of that Government Security;
(g) material events of default or restrictive covenants provided for
with respect to the related Government Security;
(h) the rating of the Government Security, if any;
(i) the issuer of each Government Security;
(j) the material risks, if any, posed by the related Government
Securities and the issuers of those Government Securities, which risks, if
appropriate, will be described in the "Risk Factors" section of the related
prospectus supplements; and
(k) any other material terms of the related Government Security.
With respect to Base Assets which include a pool of Government Securities, the
related prospectus supplement will, to the extent applicable, describe the
composition of the Government Securities' pool, material events of default or
restrictive covenants common to the Government Securities, and, on an aggregate,
percentage or weighted average basis, as applicable, the characteristics of the
pool with respect to the terms set forth in (d), (e), and (f) of the preceding
sentence and any other material terms regarding the related pool.
The Government Securities included in a Trust will be senior
unsecured, nonredeemable obligations of the issuer of the Government Securities,
will be denominated in United States dollars and, if rated, will be rated at
least investment grade by at least one nationally recognized rating agency (a
"Rating Agency"). In addition, the inclusion of Government Securities in the
Base Assets of a Series of Securities is conditioned upon their characteristics
being in form and substance satisfactory to the Rating Agency rating the related
series of Securities.
TREASURY BONDS. Treasury Bonds are issued by and are the obligations
of The United States of America. Accordingly, the payment of principal and
interest on each Treasury Bond will be guaranteed by the full faith and credit
of the United States of America. Interest is typically payable on the Bonds
semiannually. Treasury Bonds are issued in registered form in denominations of
$1,000, $5,000, $10,000, $100,000 and $1,000,000 and in book-entry form in
integral multiples of these amounts.
TREASURY STRIPS. In general, Treasury Strips are created by
separating, or "stripping", the principal and interest components of Treasury
Bonds that have an original maturity of 10 or more years from the date of issue.
A particular Treasury Strip evidences ownership of the principal payment or one
of the periodic interest payments, generally semiannual, due on the Treasury
Bond to which the Treasury Strip relates.
In 1985 the Department of the Treasury, announced that all new issues
of Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs (which
are described below under - "Private Label Custody Receipt Securities"), and
investment banks no longer sponsor new issues of custodial receipts.
Treasury Strips may be either "serial" or "callable". A serial
treasury strip (a "Serial Treasury Strip") evidences ownership of one of the
periodic interest payments to be made on a Treasury Bond. No payments are made
on the Treasury Strip, nor is it redeemable, prior to its maturity, at which
time the holder becomes entitled to receive a single payment of the face amount
of the Treasury Strip . Callable Treasury Strips relate to payments scheduled to
be made after the related Treasury Bonds have become subject to redemption.
Callable Treasury Strips (the "Callable Treasury Strips") evidence ownership of
both principal of the related Treasury Bonds and each of the related interest
payments commencing, typically, on the first interest payment date following the
first optional redemption date. If the underlying Treasury Bonds are actually
redeemed, holders of callable Treasury Strips generally receive a payment equal
to the principal portion of the total face amount of these Treasury Strips plus
the interest payment represented by the Treasury Strips maturing on the
redemption date. No callable Treasury Strips will be included in a Trust. The
face amount of any Treasury Strip is the aggregate of all payments scheduled to
be received on that Treasury Strip. Treasury Strips are available in registered
form and generally may be transferred and exchanged by the holders of the
Treasury Strips in accordance with procedures applicable to the particular issue
of the applicable Treasury Strips.
GSE BONDS. As specified in the applicable prospectus supplement, the
obligations of one or more of the following GSEs may be included in Base Assets:
The Federal National Mortgage Association ("Fannie Mae"), The Federal Home Loan
Mortgage Association ("Freddie Mac"), The Student Loan Marketing Association
("Sallie Mae"), REFCO, Tennessee Valley Authority ("TVA"), The Federal Home Loan
Banks ("FHLB"), to the extent the obligations represent the joint and several
obligations of the twelve Federal Home Loan Banks, and The Federal Farm Credit
Banks ("FFCB"). GSE debt securities are exempt from registration under the
Securities Act pursuant to Section 3(a)(2) of the Securities Act ,or are deemed
by statute to be so exempt, and are not required to be registered under the
Exchange Act. The securities of any GSE will be included in Base Assets only to
the extent that:
o its obligations are supported by the full faith and credit of the
United States government, or
o the organization makes publicly available its annual report which
shall include financial statements or similar financial
information with respect to the organization (a "GSE Issuer").
Unless otherwise specified in the related prospectus supplement, the GSE Bonds
will not be guaranteed by the United States and do not constitute a debt or
obligation of the United States or of any agency or instrumentality of the
United States other than the related GSE.
Unless otherwise specified in the related prospectus supplement, none
of the GSE Bonds will have been issued pursuant to an indenture, and no trustee
is provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be governed
by a fiscal agency agreement. A Fiscal Agent is not a trustee for the holders of
the GSE Bonds and does not have the same responsibilities or duties to act for
the holders as would a trustee.
GSE Bonds may be subject to contractual and statutory restrictions
which may provide some protection to securityholders against the occurrence or
effects of specified events. Unless otherwise specified in the related
prospectus supplement, each GSE is limited to activities that will promote its
statutory purposes as set forth in the publicly available information with
respect to the issuer. A GSE's promotion of its statutory purposes, as well as
its statutory, structural and regulatory relationships with the federal
government, may cause or require a GSE to conduct its business in a manner that
differs from what an enterprise which is not a GSE might employ.
THE FEDERAL NATIONAL MORTGAGE ASSOCIATION. Fannie Mae is a federally
chartered and stockholder owned corporation organized and existing under the
Federal National Mortgage Association Charter Act. It is the largest investor in
home mortgage loans in the United States. Fannie Mae originally was established
in 1938 as a corporation wholly owned by the United States government to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder owned and privately managed corporation by legislation enacted in
1968 and 1970. Fannie Mae provides funds to the mortgage market by purchasing
mortgage loans from lenders, thus replenishing their funds for additional
lending.
Fannie Mae acquires funds to purchase loans from many capital market
investors that ordinarily may not invest in mortgage loans, consequently
expanding the total amount of funds available for housing. Operating nationwide,
Fannie Mae helps to redistribute mortgage funds from capital-surplus to
capital-short areas. Fannie Mae also issues mortgage-backed securities ("MBS").
Fannie Mae receives guaranty fees for its guaranty of timely payment of
principal of and interest on MBS. Fannie Mae issues MBS primarily in exchange
for pools of mortgage loans from lenders. The issuance of MBS enables Fannie Mae
to further its statutory purpose of increasing the liquidity of residential
mortgage loans.
Fannie Mae prepares an Information Statement annually which describes
Fannie Mae, its business and operations and contains Fannie Mae's audited
financial statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge from the Office of Investor Relations, Fannie Mae,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016; telephone (202)752-7115.
Fannie Mae is not subject to the periodic reporting requirements of the Exchange
Act.
THE FEDERAL HOME LOAN MORTGAGE CORPORATION. Freddie Mac is a publicly
held government-sponsored enterprise created on July 24, 1970 pursuant to the
Federal Home Loan Mortgage Corporation Act, Title III of the Emergency Home
Finance Act of 1970, as amended (the "FHLMC Act"). Freddie Mac's statutory
mission is to provide stability in the secondary market for home mortgages, to
respond appropriately to the private capital market and to provide ongoing
assistance to the secondary market for home mortgages, including mortgages
secured by housing for low- and moderate-income families involving a reasonable
economic return to Freddie Mac, by increasing the liquidity of mortgage
investments and improving the distribution of investment capital available for
home mortgage financing. The principal activity of Freddie Mac consists of the
purchase of conventional residential mortgages and participation interests in
conventional residential mortgages from mortgage lending institutions and the
sale of guaranteed mortgage securities backed by the mortgages so purchased.
Freddie Mac generally matches and finances its purchases of mortgages with sales
of guaranteed securities. Mortgages retained by Freddie Mac are financed with
short- and long-term debt, cash temporarily held pending disbursement to
security holders, and equity capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Freddie Mac. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained from Freddie Mac by writing or calling Freddie Mac's Investor
Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia, 22102; outside
Washington, D.C. metropolitan area, telephone (800) 336-3672; within Washington,
D.C. metropolitan area, telephone (703)759-8160. Freddie Mac is not subject to
the periodic reporting requirements of the Exchange Act.
THE STUDENT LOAN MARKETING ASSOCIATION. Sallie Mae is a
stockholder-owned corporation established by the 1972 amendments to the Higher
Education Act of 1965, as amended, to provide liquidity, primarily through
secondary market and warehousing activities, for lenders participating in
federally sponsored student loan programs, primarily the Federal Family
Education Loan ("FFEL") program and the Health Education Assistance Loan
Program. Under the Higher Education Act, Sallie Mae is authorized to purchase,
warehouse, sell and offer participations or pooled interests in, or otherwise
deal in, student loans, including, but not limited to, loans insured under the
FFEL program, and to make commitments for any of the foregoing. Sallie Mae is
also authorized to buy, sell, hold, underwrite and otherwise deal in obligations
of eligible lenders, if these obligations are issued by the eligible lenders for
the purpose of making or purchasing federally guaranteed student loans under the
Higher Education Act. As a federally chartered corporation, Sallie Mae's
structure and operational authorities are subject to revision by amendments to
the Higher Education Act or other federal enactments.
Sallie Mae prepares an Information Statement annually which describes
Sallie Mae, its business and operations and contains Sallie Mae's audited
financial statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge upon written request to the Corporate and Investor
Relations Division of Sallie Mae at 1050 Thomas Jefferson Street, N.W.,
Washington, D.C. 20007; telephone (202) 298-3010. Sallie Mae is not subject to
the periodic reporting requirements of the Exchange Act.
THE RESOLUTION FUNDING CORPORATION. REFCO is a mixed-ownership
government corporation established by Title V of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). The sole purpose of
REFCO is to provide financing for the Resolution Trust Corporation (the "RTC").
REFCO is to be dissolved, as soon as practicable, after the maturity and full
payment of all obligations issued by it. REFCO is subject to the general
oversight and direction of the Oversight Board, which is comprised of the
Secretary of the Treasury, the Chairman of the Board of Governors of the Federal
Reserve System, the Secretary of Housing and Urban Development and two
independent members to be appointed by the President with the advice and consent
of the Senate. The day-to-day operations of REFCO are under the management of a
three-member Directorate comprised of the Director of the Office of Finance of
the FHLB and two members selected by the Oversight Board from among the
presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases
involving failed savings and loan institutions pursuant to policies established
by the Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the
Secretary/Treasurer, Resolution Funding Corporation, Suite 1000, 11921 Freedom
Drive, Reston, Virginia 22090; telephone (703) 487-9517. REFCO is not subject to
the periodic reporting requirements of the Exchange Act.
THE FEDERAL HOME LOAN BANKS. The Federal Home Loan Banks constitute a
system of twelve federally chartered corporations, each wholly owned by its
member institutions. The mission of the FHLB is to enhance the availability of
residential mortgage credit by providing a readily available, low-cost source of
funds to their member institutions. A primary source of funds for the FHLB is
the proceeds from the sale to the public of debt instruments issued as
consolidated obligations, which are the joint and several obligations of all the
FHLB. The FHLB are supervised and regulated by the Federal Housing Finance
Board, which is an independent federal agency in the executive branch of the
United States government, but obligations of the FHLB are not obligations of the
United States government.
The Federal Home Loan Bank System produces annual and quarterly
financial reports in connection with the original offering and issuance by the
Federal Housing Finance Board of consolidated bonds and consolidated notes of
the FHLB. Unless otherwise specified in the applicable prospectus supplement,
questions regarding these financial reports should be directed to the Deputy
Director, Financial Reporting and Operations Division, Federal Housing Finance
Board, 1777 F Street, N.W., Washington, D.C. 20006; telephone (202) 408-2901.
Unless otherwise specified in the applicable prospectus supplement, copies of
these reports may be obtained by written request to Capital Markets Division,
Office of Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive,
Reston, Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to
the periodic reporting requirements of the Exchange Act.
TENNESSEE VALLEY AUTHORITY. TVA is a wholly owned corporate agency and
instrumentality of the United States of America established pursuant to the
Tennessee Valley Authority Act of 1933, as amended (the "TVA Act"). TVA's
objective is to develop the resources of the Tennessee Valley region in order to
strengthen the regional and national economy and the national defense. The
programs of TVA consist of power and nonpower programs. For the fiscal year
ending September 30, 1995, TVA received $139 million in congressional
appropriations from the federal government for the nonpower programs. The power
program is required to be self-supporting from revenues it produces. The TVA Act
authorizes TVA to issue evidences of indebtedness that may be serviced only from
proceeds of its power program. TVA bonds are not obligations of or guaranteed by
the United States government.
TVA prepares an Information Statement annually which describes TVA,
its business and operations and contains TVA's audited financial statements.
From time to time TVA prepares supplements to its Information Statement which
include unaudited financial data and other information concerning the business
and operations of TVA. Unless otherwise specified in the applicable prospectus
supplement, these documents can be obtained by writing or calling Tennessee
Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee 37902-1499,
Attention: Vice President and Treasurer; telephone (423) 632-3366. TVA is not
subject to the periodic reporting requirements of the Exchange Act.
FEDERAL FARM CREDIT BANKS. The Farm Credit System is a nationwide
system of lending institutions and affiliated service and other entities (the
"System"). Through its Banks ("FCBs") and related associations, the System
provides credit and related services to farmers, ranchers, producers and
harvesters of aquatic products, rural homeowners, some farm-related businesses,
agricultural and aquatic cooperatives and rural utilities. System institutions
are federally chartered under the Farm Credit Act of 1971, as amended (the "Farm
Credit Act"), and are subject to regulation by a Federal agency, the Farm Credit
Administration (the "FCA"). The FCBs and associations are not commonly owned or
controlled. They are cooperatively owned, directly or indirectly, by their
respective borrowers. Unlike commercial banks and other financial institutions
that lend to the agricultural sector in addition to other sectors of the
economy, under the Farm Credit Act the System institutions are restricted solely
to making loans to qualified borrowers in the agricultural sector, to some
related businesses and to rural homeowners. Moreover, the System is required to
make credit and other services available in all areas of the nation. In order to
fulfill its broad statutory mandate, the System maintains lending units in all
50 states and the Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the
sale of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable on all
Systemwide Debt Securities. Systemwide Debt Securities are issued by the FCBs
through the Federal Farm Credit Banks Funding Corporation, as agent for the FCBs
(the "Funding Corporation").
Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent to the most recently issued annual
statement and press releases issued from time to time by the Funding
Corporation. Unless otherwise specified in the applicable prospectus supplement,
this information and the Farm Credit System Annual Report to Investors for the
current and two preceding fiscal years are available for inspection at the
Federal Farm Credit Banks Funding Corporation, Investment Banking Services
Department, 10 Exchange Place, Suite 1401, Jersey City, New Jersey 07302;
telephone (201) 200-8000. Upon request, the Funding Corporation will furnish,
without charge, copies of the above information. The FCBs are not subject to the
periodic reporting requirements of the Exchange Act.
Private Label Custody Receipt Securities
If so specified in the applicable prospectus supplement, the Trust for
a Series may include any combination of Private Label Custody Strips and Private
Label Custody Receipt Securities. The Private Label Custody Receipt Securities,
if any, included in a Trust Fund are intended to assure investors that funds are
available to make specified payments of principal and/or interest due on the
related Securities. Accordingly, the Private Label Custody Receipt Securities,
if any, included in a Trust are intended both to:
o support the ratings assigned to the relevant Securities, and
o perform a function similar to that described in this Prospectus
under "Series Enhancement".
A description of the respective general features of Private Label Custody Strips
and REFCO Strips is set forth below.
The prospectus supplement, for each Series of Securities of the Trust
Fund with respect to which contains Private Label Custody Receipt Securities,
will contain information as to:
(a) the title and series of each relevant Private Label Custody
Receipt Security, the aggregate principal amount, denomination and form of that
Private Label Custody Receipt Security;
(b) the limit, if any, upon the aggregate principal amount of the
relevant Private Label Custody Receipt Security;
(c) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the relevant Private Label Custody
Receipt Security will be payable;
(d) the rate or rates, or the method of determination of the rate or
rates, at which the relevant Private Label Custody Receipt Security will bear
interest, if any, the date or dates from which the relevant interest will
accrue; and the dates on which the relevant interest will be payable;
(e) whether the relevant Private Label Custody Receipt Security was
issued at a price lower than the principal amount of that Private Label Custody
Receipt Security;
(f) material events of default or restrictive covenants provided for
with respect to the relevant Private Label Custody Receipt Security;
(g) the rating of the Private Label Custody Receipt Security, if any;
(h) the issuer of the relevant Private Label Custody Receipt Security;
(i) the material risks, if any, posed by the Private Label Custody
Receipt Security and the issuer of the Private Label Custody Receipt Security,
which risks, if appropriate, will be described in the "Risk Factors" section of
the related prospectus supplement; and
(j) any other material terms of the relevant Private Label Custody
Receipt Security.
With respect to a Trust which includes a pool of Private Label Custody Receipt
Securities, the related prospectus supplement will, to the extent applicable,
describe the composition of the Private Label Custody Receipt Securities' pool,
material events of default or restrictive covenants common to the Private Label
Custody Receipt Securities, and, on an aggregate, percentage or weighted average
basis, as applicable, the characteristics of the pool with respect to the terms
set forth in (c), (d) and (e) of the preceding sentence and any other material
terms regarding the pool.
The Private Label Custody Receipt Securities included in a Trust will
be senior, unsecured, nonredeemable obligations of the issuers of the Private
Label Custody Receipt Securities, will be denominated in United States dollars
and, if rated, will be rated at least investment grade by at least one
nationally recognized rating agency. In addition, the inclusion of Private Label
Custody Receipt Securities in a Trust with respect to a Series of Securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related Series of Securities. Each Trust which
includes Private Label Custody Securities will be provided with an opinion of
Stroock & Stroock & Lavan LLP or other counsel specified in the related
prospectus supplement to the effect that the Private Label Custody Receipt
Securities included in the Trust are exempt from the registration requirements
of the Securities Act. A copy of the related opinion will be filed with the SEC
in a Current Report on Form 8-K or in a post-effective amendment to the
Registration Statement.
PRIVATE LABEL CUSTODY STRIPS. The first "stripping" of Treasury Bonds
occurred in the 1970s when government securities dealers physically separated
coupons from definitive certificates (the "Definitive Certificates ") and
offered them to investors as tax-deferred investments. Investors were able to
purchase the "strip" at a deep discount and pay no federal income tax until
resale or maturity. This tax treatment was limited in 1982 by the Tax Equity and
Fiscal Responsibility Act ("TEFRA") which required holders of these strips to
accrue a portion of the discount toward par annually and report the accrual,
even though unrealized, as taxable income. TEFRA also required that all new
Treasury issues be made available only in book-entry form.
The shift to "book-entry only" Treasury Bonds created a shortage of
the physical certificates needed for stripping. In response, various dealers
created custodial receipt programs in which Treasury Bonds in book-entry form
were deposited with custodians who would then issue certificates evidencing
rights in principal and interest payments. Some of the better known programs
first came to market in 1982 and 1983. Although available eventually in
denominations as small as $1,000, these custodial receipts lacked the liquidity
of the physical strips. While physical strips had multiple market-makers,
custodial receipts were proprietary and, accordingly, the sole market-maker
would usually be an affiliate of the program's sponsor. As a result, the market
that developed for custodial receipts was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security known
as a TR (Treasury Receipt). A large secondary market quickly developed in these
generic Treasury Strips.
Treasury Receipts, physical strips and the proprietary receipts trade
at varying discounts from STRIPS which reflect, among other things, lower levels
of liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip, as opposed to a STRIP,
cannot enforce payment on a Treasury Strip against the Treasury; instead, the
holder must look to the custodian for payment. The custodian and the holder of a
Private Label Custody Strip that obtains ownership of the underlying Treasury
Bond can enforce payment of the underlying Treasury Bond against the Treasury.
In the event any Private Label Custody Strips are included in a Trust with
respect to any Series of Securities, the prospectus supplement for that Series
will include the identity and a brief description of each custodian that issued
the related Private Label Custody Strips. In the event the Company knows that
the depositor of the Treasury Bonds underlying the related Private Label Custody
Strips is the Company or any of its affiliates, the Company will disclose this
fact in the applicable prospectus supplement.
REFCO STRIPS. A REFCO Bond may be divided into its separate
components, consisting of:
o each future semi-annual interest distribution (an "Interest
Component"); and
o the principal payment (the "Principal Component") (each component
individually referred to as a "REFCO Strip").
REFCO Strips are not created by REFCO; instead, third parties such as investment
banking firms create them. Each REFCO Strip has an identifying designation and
CUSIP number. REFCO Strips generally trade in the market for Treasury Strips at
yields of a few basis points over Treasury Strips of similar maturities. REFCO
Strips are viewed generally by the market as liquid investments.
For a REFCO Bond to be separated into its components, the par amount
of the REFCO Bond must be in an amount which, based on the stated interest rate
of the REFCO Bond, will produce a semi-annual interest payment of $1,000 or an
integral multiple of $1,000. REFCO Bonds may be separated into their components
at any time from the issue date until maturity. Once created, REFCO Strips are
maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on that REFCO Strip
against REFCO; instead, the holder must look to the custodian for payment . This
custodian and the holder of a REFCO Strip who obtains ownership of the
underlying REFCO Bond can enforce payment of the underlying REFCO Bond against
REFCO. The identity and a brief description of each custodian that has issued
any REFCO Strip included in a Trust will be set forth in the related prospectus
supplement. In the event the Company knows that the depositor of the REFCO Bonds
underlying the REFCO Strips included in the Trust is the Company or any of its
affiliates, the Company will disclose this fact in the related prospectus
supplement.
Collection and Payment Accounts
A separate Collection Account will be established by the Trustee, or,
in the case of a Series that includes Notes, the Indenture Trustee, or by the
Servicer in the name of the Trustee, or the Indenture Trustee, for each Series
of Securities for receipt of the amount of cash, if any, specified in the
related prospectus supplement to be initially deposited in the same Collection
Account by the Depositor, all amounts received on or with respect to the Base
Assets and, to the extent specified in the related prospectus supplement, any
income earned on the Collection Account. Specified amounts on deposit in the
Collection Account and specified amounts available pursuant to any Series
Enhancement, as provided in the related prospectus supplement, will be deposited
in one or more related payment accounts (the "Payment Accounts "), which will
also be established by the Trustee, or the Indenture Trustee, for the related
Series of Securities, for payment to the related holders of these Securities.
The Trustee, or Indenture Trustee, will invest the funds in the Collection and
Payment Accounts in Eligible Investments maturing, with some exceptions, in the
case of funds in the Collection Account, not later than the day preceding the
date the related funds are due to be deposited in the applicable Payment Account
or otherwise paid, and in the case of funds in a Payment Account, not later than
the day preceding the next Payment Date for the related Class or Classes of
Securities. Eligible Investments include among other investments, obligations of
the United States and some agencies of the United States, federal funds,
certificates of deposits, commercial paper, demand and time deposits and
banker's acceptances, specified repurchase agreements of United States
government securities and specified guaranteed investment contracts, in each
case, acceptable to the applicable Rating Agencies.
From time to time, various other accounts, which may include a
Pre-Funding Account may be created under the terms of the documents related to a
specific Series.
SERIES ENHANCEMENT
For any Series of Securities, "Series Enhancement" may be provided
with respect to one or more Classes of the related Series of Securities. Series
Enhancement may consist of Credit Enhancement, Ancillary Arrangements, or both.
Credit Enhancement
"Credit Enhancement" with respect to a Series of Securities or one or
more specific Classes of a Series may take the form of the subordination of one
or more Classes of Securities to other Classes of the same Series, a letter of
credit, the establishment of a cash collateral guaranty or account, a surety
bond, insurance, the use of cross support features or another method of Credit
Enhancement described in the related prospectus supplement, or any combination
of the foregoing. If so specified in the related prospectus supplement, any form
of Credit Enhancement may be structured so as to be drawn upon by more than one
Class of Securities of a Series to the extent described in the applicable
prospectus supplement
Credit Enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
Securities and interest on the Securities. If losses occur which exceed the
amount covered by the Credit Enhancement or which are not covered by the Credit
Enhancement, holders of Securities will bear their allocable share of
deficiencies.
If Credit Enhancement is provided with respect to a Series, the
related prospectus supplement will include a description of:
o the amount payable under Credit Enhancement,
o any conditions to payment under the related prospectus supplement
not described in this Prospectus,
o the conditions, if any under which the amount payable under
Credit Enhancement may be reduced and under which Credit
Enhancement may be terminated or replaced; and
o any material provisions of any agreement relating to Credit
Enhancement.
Additionally, the related prospectus supplement may set forth specific
information with respect to the issuer of any third-party Credit Enhancement,
including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business, and
o its total assets and its stockholders' or policyholders' surplus,
if applicable, as of the date specified in the related prospectus
supplement.
If so specified in the related prospectus supplement, the issuer of a
third party Credit Enhancement may have a subordinated interest in the Trust,
the Receivables or cash flows in respect of the Receivables to the extent
described in the related prospectus supplement (the "Enhancement Invested
Amount").
Subordination
If so specified in the related prospectus supplement, one or more
Series of Securities or one or more Classes of Securities of a Series or one or
more classes of other certificated or uncertificated interests in the assets of
the related Trust ("Collateral Indebtedness Interests") may be subordinated to
one or more other Series or one or more Classes of a Series. If so specified in
the related prospectus supplement, the rights of holders of the subordinate
Securities or Collateral Indebtedness Interests to receive distributions of
principal and/or interest on any Payment Date will be subordinated to the rights
of the holders of the Securities which are senior to the subordinate Securities
or Collateral Indebtedness Interests to the extent set forth in the related
prospectus supplement. The related prospectus supplement will also set forth
information concerning the amount of subordination of a Series or Class of
subordinate Securities or Collateral Indebtedness Interests, the circumstances
in which this subordination will be applicable, the manner, if any, in which the
amount of subordination will decrease over time and the conditions under which
amounts available from payments that would otherwise be made to holders of
subordinate Securities or Collateral Indebtedness Interests will be distributed
to holders of Securities which are senior to the subordinate Securities or
Collateral Indebtedness Interests. The amount of subordination will decrease
whenever amounts otherwise payable to the holders of subordinate Securities or
Collateral Indebtedness Interests are paid to the holders of the Securities
which are senior to these subordinated Securities or Collateral Indebtedness
Interests. If so specified in the related prospectus supplement, subordination
may apply only in the event of specific types of losses not covered by another
Credit Enhancement.
Letter of Credit
If so specified in the related prospectus supplement, support for a
Series of Securities or one or more Classes of a Series may be provided by one
or more letters of credit. A letter of credit may provide limited protection
against specific losses in addition to or in lieu of another form of Credit
Enhancement. The issuer of the letter of credit named in the related prospectus
supplement (the "L/C Bank") will be obligated to honor demands with respect to
the letter of credit, to the extent of the amount available under the letter of
credit, to provide funds under the circumstances and subject to conditions
specified in the related prospectus supplement. The liability of the L/C Bank
under its letter of credit may be reduced by the amount of unreimbursed payments
under that same letter of credit.
The maximum liability of a L/C Bank under its letter of credit will
generally be an amount equal to a percentage specified in the related prospectus
supplement of the initial principal amount of a Series of Securities or a Class
of a Series. The maximum amount available at any time to be paid under a letter
of credit will be determined in the manner specified in the letter of credit and
in the related prospectus supplement.
Cash Collateral Guaranty or Cash Collateral Account
If so specified in the related prospectus supplement, support for a
Series of Securities or one or more Classes of a Series may be provided by a
guaranty (a "Cash Collateral Guaranty") secured by the deposit of cash,
government securities or other permitted investments in an account (a "Cash
Collateral Account") reserved for the beneficiaries of the Cash Collateral
Guaranty, or by a Cash Collateral Account alone. A Cash Collateral Account will
generally take the form of a cash collateral trust formed pursuant to a trust
agreement involving a cash collateral depositor and a cash collateral trustee.
The Cash Collateral Guaranty will generally be an obligation of the cash
collateral trust and not of the cash collateral depositor, the cash collateral
trustee, except to the extent of amounts on deposit in the Cash Collateral
Account, or the related Trustee, Indenture Trustee, Seller, Servicer or the
Depositor. The amount available pursuant to a Cash Collateral Guaranty or a Cash
Collateral Account will be the lesser of the amount on deposit in the Cash
Collateral Account and an amount specified in the related prospectus supplement.
The related prospectus supplement will set forth the circumstances under which
payments will be made to beneficiaries of a Cash Collateral Guaranty from the
related Cash Collateral Account or from the Cash Collateral Account directly.
Reserve Account
If so specified in the related prospectus supplement, the Depositor
may deposit cash, a letter or letters of credit, short-term investments,
government securities or other instruments acceptable to the applicable Rating
Agency or Rating Agencies in one or more reserve accounts (each, a "Reserve
Account") to be established in the name of the Trustee, or the Indenture
Trustee. A Reserve Account will be used, as specified in the related prospectus
supplement, by the Trustee, or the Indenture Trustee, to make required payments
of principal of or interest on the Securities of the related Series or one or
more Classes of the Series, to make adequate provision for future payments on
one or more Classes of the Securities or for any other purpose specified in the
applicable Agreement with respect to the Series, to the extent that funds are
not otherwise available for that purpose. In the alternative or in addition to a
deposit, a Reserve Account for a Series may be funded through application of all
or a portion of the excess cash flow from the Base Assets for the Series, to the
extent described in the related prospectus supplement. If applicable, the
initial amount of the Reserve Account and the Reserve Account maintenance
requirements for a Series will be described in the related prospectus
supplement. Amounts deposited in a Reserve Account will be invested by the
Trustee, or the Indenture Trustee, in Eligible Investments meeting specified
maturity criteria.
Surety Bond or Insurance Policy
If so specified in the related prospectus supplement, Credit
Enhancement for a Series or one or more Classes of Securities of a Series may be
provided by the issuance of insurance by one or more insurance companies. The
insurance will guarantee distributions of interest or principal on the affected
Securities in the manner and amount specified in the related prospectus
supplement.
If so specified in the related prospectus supplement, Credit
Enhancement for a Series or one or more Classes of Securities of a Series may
take the form of a surety bond purchased for the benefit of the holders of the
related Securities to assure distributions of interest or principal with respect
to the related Securities in the manner and amount specified in the related
prospectus supplement.
Spread Account
If so specified in the related prospectus supplement, support for a
Series or one or more Classes of Securities of a Series may be provided by the
periodic deposit of available excess cash flow from the Trust assets into an
account (the "Spread Account") intended to assure the subsequent distribution of
interest and principal on the related Securities in the manner specified in the
prospectus supplement.
Ancillary Arrangements
If so specified in the related prospectus supplement, the Trust may
enter into one or more derivative arrangements that are related to or incidental
to one or more of the Base Assets for a Series ("Ancillary Arrangements").
Ancillary Arrangements may take the form of guaranteed rate agreements, maturity
liquidity facilities, tax protection agreements, interest rate caps, floor or
collar agreements, interest rate or currency swap agreements or other similar
arrangements. If so specified in the related prospectus supplement, Ancillary
Arrangements may be entered into with the Depositor or an affiliate of the
Depositor. The related prospectus supplement will to the extent appropriate
contain analogous disclosure with respect to any Ancillary Arrangements as is
set forth in this Prospectus or in the related prospectus supplement with
respect to the Base Assets.
SERVICING OF RECEIVABLES
Customary servicing functions with respect to any Receivables included
in the Base Assets for a Series or underlying any Participations included in the
Base Assets will be provided by the Servicer named in the related prospectus
supplement pursuant to the related Pooling and Servicing Agreement. In general,
comparable servicing functions will be performed by the CRB Servicer with
respect to the Receivables underlying any CRB Securities included in the Base
Assets.
Collection Procedures
The Servicer will make reasonable efforts to collect all payments
required to be made under the Accounts and will, consistent with the terms of
the related Pooling and Servicing Agreement for a Series and any applicable
Credit Enhancement, follow the same collection procedures as it follows with
respect to comparable receivables held in its own portfolio.
Deposits to the Collection Account
The Servicer will deposit, subject to some exceptions which, if
applicable, will be specified in the related prospectus supplement, any
collections on the Receivables in a monthly period (the "Monthly Period"), which
period will be defined for each Servicer in the related prospectus supplement,
into the Collection Account within two business days of the Date of Processing,
or, in the case of interchange, on each Distribution Date, to the extent the
collections are allocable among the Certificateholders of the Series (the
"Investor Certificateholders' Interest ") of any Series and are required to be
deposited into an account for the benefit of, or distributed to, the Investor
Certificateholders of any Series or the issuer of any Series Enhancement. In
limited circumstances, the Servicer will not be required to segregate, and will
be permitted to use for its own benefit collections on the Receivables received
by it during each Monthly Period until the related Distribution Date. The
"Distribution Date" for each calendar month will be specified in the prospectus
supplement. To the extent and in the manner specified in the related prospectus
supplement and subject to specific exceptions that will be described in the
applicable prospectus supplement, on the earlier of:
o the second business day following the Date of Processing, and
o the day on which the Servicer deposits any collections into the
Collection Account.
The Servicer will pay to the holder of the Depositor Certificate its allocable
portion of any collections then held by the Servicer. The "Date of Processing"
will generally be the business day on which a record of any transaction is first
recorded on the Servicer's computer file of consumer revolving accounts, without
regard to the effective date of recordation.
To the extent and in the manner specified in the related prospectus
supplement, the Servicer will establish the Collection Account in the name of
the Trustee or, for a Series that includes Notes, the Indenture Trustee. To the
extent and in the manner indicated in the related prospectus supplement, the
Collection Account will be an account maintained:
o at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit in the depository
institution are rated as described in the related prospectus
supplement and as specified by the Rating Agencies rating the
Securities of the Series, or
o 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 the Rating Agencies.
To the extent and in the manner specified in the related prospectus
supplement, the funds held in the Collection Account may be invested, pending
remittance to the Trustee, or the Indenture Trustee, in Eligible Investments. If
so specified in the related prospectus supplement, the Servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the Collection Account. The related prospectus supplement will describe
the obligations of the Servicer, if different from those described above, the
Seller, the Trustee, the Indenture Trustee and/or the Depositor to deposit
payments and/or collections received by them in respect of the Trust assets into
the Collection Account. In addition, to the extent so provided in the related
prospectus supplement, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited in the Collection Account, it
may, at any time, withdraw that amount from the related Collection Account.
Servicing Compensation and Payment of Expenses
The related prospectus supplement may provide that the Servicer will
be entitled to receive a servicing fee in an amount to be determined as
specified in the related prospectus supplement (the "Servicing Fee"). The
Servicing Fee may be fixed or variable, as specified in the related prospectus
supplement.
As specified in the related prospectus supplement, the Servicer may be
required to pay expenses incurred in connection with the servicing of the
Receivables including, without limitation, the payment of the fees and expenses
of the Trustee, and Indenture Trustee, and independent accountants, payment of
the cost of any Series Enhancement and payment of expenses incurred in
preparation of reports to holders of Securities. To the extent specified in the
related prospectus supplement, 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 expenses or otherwise, may be
subordinated to the rights of holders of the Securities of the related Series.
Evidence as to Compliance
The Pooling and Servicing Agreement for a Series may provide that,
each year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that the firm has examined specific documents and
records relating to the servicing of the Receivables by the Servicer and that,
on the basis of this examination, the firm is of the opinion that the servicing
has been conducted in compliance with the Pooling and Servicing Agreement,
except for:
o exceptions the firm believes to be immaterial, and
o other exceptions set forth in a related statement.
The Pooling and Servicing Agreement for a Series will provide for delivery to
the Trustee for the Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its obligations under the
Pooling and Servicing Agreement throughout the preceding calendar year.
Comparable statements and reports may be required to be delivered to the
Indenture Trustee pursuant to any Indenture relating to this Series.
CERTAIN MATTERS REGARDING THE SERVICER
Any Servicer for a Series will be identified in the related prospectus
supplement. The Servicer may be an affiliate of the Seller or the Depositor and
may have other business relationships with the Seller, the Depositor or their
respective affiliates.
If specific events (each a "Servicer Default") occur with respect to
the Servicer under an applicable Agreement, the related Trustee, or a specified
percentage of the holders of Securities or of each Class of Securities as set
forth in the related prospectus supplement may terminate the Servicer, in which
case the Trustee will appoint a successor Servicer. Servicer Defaults and the
rights of the Trustee and the holders of Securities upon the occurrence of a
Servicer Default under the applicable Agreement for a Series will be
substantially similar to those described under "Description of the Trust
Agreements or Pooling and Servicing Agreements-- Servicer Defaults" and "--
Rights upon Servicer Defaults" or will be as described in the related prospectus
supplement.
The Servicer generally may not resign from its obligations and duties
under the applicable Agreement, except:
(a) upon determination that,
(1) the performance of its duties under the Pooling and Servicing
Agreement is no longer permissible under applicable law, and
(2) there is no reasonable action which the Servicer could take
to make the performance of its duties under the applicable
Agreement permissible under applicable law,
(b) in connection with a conveyance, consolidation or merger by the
Servicer with any corporation, or conveyance or transfer of its
properties or assets substantially as an entirety to any other person
permitted under the applicable Agreement, or
(c) upon the satisfaction of the following conditions:
(1) the acceptance and assumption, by agreement supplemental to
the applicable Agreement, executed and delivered to the Trustee,
in form satisfactory to the Trustee, of the obligations and
duties of the Servicer under the related supplemental agreement
by a proposed successor Servicer,
(2) the Servicer having given written notice to each applicable
Rating Agency of a transfer and each Rating Agency having
notified the Servicer in writing to the effect that its then
current rating of the Securities of any Series will not be
reduced or withdrawn as a result of the transfer,
(3) the provider of Credit Enhancement, if any, having consented
in writing to a transfer consent not to be unreasonably withheld,
and
(4) the proposed successor Servicer being an Eligible Servicer.
Notwithstanding anything in the Pooling and Servicing Agreement to the contrary,
any successor Servicer appointed under clause (c) will be deemed to be a
successor Servicer. Any determination permitting the resignation of the Servicer
will be evidenced as to clause (a) above by an opinion of counsel to that effect
delivered to the Trustee. No resignation will become effective until the Trustee
or a successor Servicer shall have assumed the responsibilities and obligations
of the Servicer in accordance with the Pooling and Servicing Agreement.
"Eligible Servicer" means the Trustee, or the Indenture Trustee, or an
entity which, at the time of its appointment as Servicer:
(a) is an established financial institution having capital or a net
worth of not less than $100,000,000,
(b) is servicing a portfolio of consumer credit card or charge card
accounts,
(c) is legally qualified and has the capacity to service the Accounts,
(d) has demonstrated the ability to professionally and completely
service a portfolio of similar accounts in accordance with standards
of skill and care customary in the industry, and
(e) is qualified to use the software that is then currently being used
to service the Accounts or obtains the right to use or has its own
software which is adequate to perform its duties under the Pooling and
Servicing Agreement.
Indemnification
Except to the extent otherwise provided in the Pooling and Servicing
Agreement, each Pooling and Servicing Agreement will provide that the Servicer
will indemnify the Trust, the Trustee and the holders of all Securities of a
Series from and against any loss, liability, expense, damage or injury suffered
or sustained by reason of any acts, omissions or alleged acts or omissions
arising out of activities of the Servicer with respect to the Trust or the
Trustee or any co-trustee pursuant to the Pooling and Servicing Agreement,
including those arising from acts or omissions of the Servicer pursuant to the
Pooling and Servicing Agreement, including but not limited to any judgment,
award, settlement, reasonable attorneys' fees and other costs or expenses
incurred in connection with the defense of any actual or threatened action,
proceeding or claim; provided, however, that the Servicer shall not indemnify:
o the Trust or the Trustee if any acts, omissions or alleged acts
or omissions constitute fraud, gross negligence, breach of
fiduciary duty or misconduct by the Trustee;
o the Trust, the Trustee or the holders of Securities for any
liability, cost or expense of the Trust with respect to any
action taken by the Trust at the request of the holders in
accordance with the Pooling and Servicing Agreement or with
respect to any Federal, state or local income or franchise taxes,
or any interest or penalties with respect to state or local
income or franchise taxes required to be paid by the Trust or by
holders to any taxing authority; or
o the Trust or the holders for any losses incurred by any of them
as a result of defaulted Receivables or Receivables which are
written off as uncollectible unless the write-off is caused by a
breach of the Pooling and Servicing Agreement by the Servicer.
Subject to exceptions in the Pooling and Servicing Agreement, any
indemnification pursuant to the Pooling and Servicing Agreement will be only
from the assets of the Servicer.
DESCRIPTION OF THE NOTES
The following summaries describe the material provisions of the
Indentures which are anticipated to be common to any Notes included in a 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
related Notes and the Indenture. Where particular provisions or terms used in
the Notes or Indentures are referred to in this Prospectus, the actual
provisions, including definitions of terms, are incorporated in this Prospectus
by reference as part of the summaries. The Notes included in any Series will be
issued in one or more Classes. The Notes will only be issued 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 Notes of a Series, as described in the related
prospectus supplement, the transfer of the Notes may be registered, and the
instruments evidencing the Notes may be exchanged, at the office of the
registrar, which may be the Indenture Trustee, appointed from time to time
pursuant to the Indenture (the "Registrar") without the payment of any service
charge other than any tax or governmental charge payable in connection with the
registration of transfer or exchange. If specified in the related prospectus
supplement, one or more Classes of Notes of a Series may be available in
book-entry form only.
Payments of principal of and interest, if any, on the Notes of a
Series will be made on the dates specified in the related prospectus supplement
(the "Payment Dates") by check mailed to holders of these Notes, registered at
the close of business on the record date applicable to the Payment Dates at
their addresses appearing on the register of Notes for the related Series or in
any other manner specified in the related prospectus supplement, except that:
o payments may be made by wire transfer, at the expense of the
Noteholder requesting payment by wire transfer, in specific
circumstances described in the related prospectus supplement, and
o final payments of principal in retirement of any Note will be
made only upon presentation and surrender of the Note at the
office of the Indenture Trustee specified in the related
prospectus supplement.
Notice of the final payment on a Note will be mailed to the holder of the Note
before the Payment Date on which the final principal payment on any Note is
expected to be made to the holder of that Note.
Payments of principal of and interest on the Notes will be made by the
Indenture Trustee, or a paying agent provided for under the Indenture, as
specified in the related prospectus supplement.
Payments of Interest and Principal
Each Class of Notes of a Series will have a stated principal amount,
notional amount or no principal amount and will bear interest at a specified
"Note Interest Rate " or will not bear interest. Each Class of Notes may have a
different Note Interest Rate, which may be fixed, variable or an adjustable Note
Interest Rate, or any combination of the foregoing. The Notes included in any
Series may include one or more Classes of Notes entitled to:
o principal payments with disproportionate, nominal or no interest
payments, or
o interest payments with disproportionate, nominal or no principal
payments.
The related prospectus supplement will specify the Note Interest Rate for each
Class of Notes or the method for determining the Note Interest Rate. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of one or more other Class
or Classes of Notes of the related Series, as described in the related
prospectus supplement. The prospectus supplement may specify that payments of
interest, if any, on Notes will be made prior to payments of principal on the
Notes or any other order or priority as shall be specified in the related
prospectus supplement.
One or more Classes of Notes of a Series may be redeemable in whole or
in part under the circumstances specified in the related prospectus supplement,
including as the result of the exercise by the Servicer, the Seller or the
Depositor of any option that it may have to purchase the Base Assets of the
related Trust. To the extent specified in the related prospectus supplement, one
or more Classes of Notes of a Series may have fixed principal payment schedules
as set forth in the prospectus supplement. Holders of Notes will have the right
to receive payments of principal on any given Payment Date in the applicable
amount set forth in the related schedule with respect to the Notes. Notes may
also be subject to prepayment of principal to the extent set forth in the
related prospectus supplement.
With respect to a Series that includes two or more Classes of Notes,
each Class may differ as to the timing and priority of payments, seniority,
allocations of losses, Note Interest Rates or amount of payments of principal or
interest, and payments of principal or interest in respect of any related Class
or Classes may be subject to the occurrence of specified events or may be made
on the basis of collections from designated portions of the Base Assets. If
specified in the related prospectus supplement, one or more Classes of Notes
("Strip Notes") may be entitled to:
o principal payments with disproportionate, nominal or no interest
payments, or
o interest payments with disproportionate, nominal or no principal
payments.
Provisions of the Indenture
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. "Events of Default"
in respect of a Series of Notes under the related Indenture will consist of
events specified in the related prospectus supplement, which events will
include:
(a) a default for five days or more in the payment of any interest on
any Note;
(b) a default in the payment of the principal of, or any installment
of the principal of, any Note when the same becomes due and payable;
(c) a default by the related Trust in the observance or performance in
any material respect of any covenant or an applicable agreement made in the
related Indenture and the continuation of any default for a period of 30 days
after notice of default is given to the related Trust by the applicable
Indenture Trustee or to the related Trust and the related Indenture Trustee by
the holders of 25% of the aggregate outstanding principal amount of the Notes;
(d) any representation or warranty made by the related Trust in the
related Indenture or in any certificate delivered pursuant to the related
Indenture or in connection with the related Indenture having been incorrect in
any material respect as of the time made, if the breach is not cured within 30
days after notice of the breach is given to the related Trust by the applicable
Indenture Trustee or to the related Trust and the related Indenture Trustee by
the holders of 25% of the aggregate outstanding principal amount of the Notes;
(e) events of bankruptcy, insolvency, receivership or liquidation with
respect to the Trust; or
(f) any other events as shall be specified in the related prospectus
supplement.
The amount of principal required to be paid to Noteholders of each Series under
the related Indenture on any Payment Date generally will be limited to amounts
available to be deposited in the applicable Payment Account; therefore, the
failure to pay principal on a Class of Notes generally will not result in the
occurrence of an Event of Default until the applicable final scheduled Payment
Date for the related Class of Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any Series, the related Indenture Trustee or holders of a majority
in principal amount of the Notes may declare the principal of the Notes to be
immediately due and payable. A declaration may, under some circumstances, be
rescinded by the holders of a majority in principal amount of the Notes then
outstanding. If the Notes of any Series are declared due and payable following
an Event of Default, the related Indenture Trustee may institute proceedings to
collect amounts due on the Notes, foreclose on the property of the Trust,
exercise remedies as a secured party, sell the related Base Assets or elect to
have the applicable Trust maintain possession of the related Base Assets and
continue to apply collections on these Base Assets as if there had been no
declaration of acceleration. The Indenture Trustee, however, will be prohibited
from selling the Base Assets following an Event of Default, other than a default
in the payment of any principal of, or a default for five days or more in the
payment of any interest on, any Note of the related Series, unless one of the
conditions specified in the related prospectus supplement are met, which
conditions generally will include:
(a) the holders of all outstanding Notes consent to the sale,
(b) the proceeds of the sale are sufficient to pay in full the
principal of and the accrued and unpaid interest on related outstanding Notes at
the date of the sale, or
(c) the related Indenture Trustee determines that the proceeds of the
Base Assets would not be sufficient on an ongoing basis to make all payments on
the Notes as payments would become due if the obligations had not been declared
due and payable, and the related Indenture Trustee obtains the consent of the
holders of 66 2/3% of the aggregate outstanding principal amount of the Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default occurs and is
continuing with respect to a Series of Notes, the related Indenture Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the related Notes
if it reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities that might be incurred by it in complying with
the request. Subject to the provisions for indemnification and limitations
contained in the related Indenture, the holders of a majority of the aggregate
outstanding principal amount of the Notes of a Series will have the right to
direct the time, method and place of conducting any proceeding or exercising any
remedy available to the related Indenture Trustee; in addition, the holders of
Notes representing a majority of the aggregate outstanding principal amount of
the related Notes may, in some cases, waive any default with respect to the
related Notes, except a default in the payment of principal of or interest on
any Note or a default in respect of a covenant or provision of the related
Indenture that cannot be modified or amended without the waiver or consent of
the holders of all the outstanding Notes of the Series.
No holder of a Note will have the right to institute any proceeding
with respect to the related Indenture, unless specified conditions in the
Indenture have been satisfied, which conditions generally will include:
(a) the holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default;
(b) the holders of not less than 25% of the outstanding principal
amount of the Notes have made written request to the related Indenture Trustee
to so institute the proceeding in its own name as Indenture Trustee;
(c) the holder or holders have offered the related Indenture Trustee
reasonable indemnity;
(d) the related Indenture Trustee has for 60 days failed to institute
the proceeding; and
(e) no direction inconsistent with the written request has been given
to the related Indenture Trustee during the 60-day period by the holders of a
majority of the outstanding principal amount of the Notes of the Series.
With respect to any Series of Securities that includes Notes, none of
the related Indenture Trustee in its individual capacity, the related Trustee in
its individual capacity, any holder of a Certificate representing an ownership
interest in the related Trust or any other holder of an interest in the related
Trust, or any of their respective beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of a related
express agreement to the contrary, be personally liable for the payment of the
principal of or interest on the related Notes or for the applicable agreements
of Trust contained in the related Indenture.
No Trust may engage in any activity other than as described in this
Prospectus or in the related prospectus supplement. Except as and to the extent
provided in the related prospectus supplement, no Trust will incur, assume or
guarantee any indebtedness other than indebtedness incurred pursuant to the
related Notes and the related Indenture.
COVENANTS. Each Indenture will provide that the related Trust may not
consolidate with or merge into any other entity, unless specific conditions,
which shall be specified in the related Indenture shall be satisfied, which
conditions generally will include:
(a) the entity formed by or surviving consolidation or merger is
organized under the laws of the United States, any state of the United
States or the District of Columbia;
(b) the entity expressly assumes the related Trust's obligation to
make due and punctual payments upon the Notes of the related Series
and to perform or observe every applicable agreement and covenant of
the related Trust under the Indenture;
(c) no Event of Default shall have occurred and be continuing
immediately after merger or consolidation;
(d) the Trust has been advised by each Rating Agency that merger or
consolidation will not result in the qualification, reduction or
withdrawal of its then-current rating of any Class of the Notes or
Certificates of the Series;
(e) the related Trust has received an opinion of counsel to the effect
that consolidation or merger would have no material adverse tax
consequence to the Trust or to any related Noteholder or
Certificateholder;
(f) any action that is necessary to maintain the lien and security
interest created by this Indenture will have been taken; and
(g) the Trust will have delivered to the Indenture Trustee an
officer's certificate and an opinion of counsel each stating that
consolidation or merger and supplemental indenture comply with the
covenants of the Indenture and that all conditions precedent provided
for in the Indenture relating to the transaction have been complied
with.
No Trust relating to a Series of Securities that includes Notes will:
(a) except as expressly permitted by the applicable Indenture, the
applicable Trust Agreement or Pooling and Servicing Agreement or other
documents with respect to the related Trust (the "Related Documents"),
sell, transfer, exchange or otherwise dispose of any of the assets of
the related Trust;
(b) claim any credit on or make any deduction from principal and
interest payments in respect of the related Notes, other than amounts
withheld under the Code or applicable state tax laws or assert any
claim against any present or former holder of the related Notes
because of the payment of taxes levied or assessed upon the related
Trust;
(c) dissolve or liquidate in whole or in part;
(d) permit the validity or effectiveness of the related Indenture to
be impaired or permit any person to be released from any covenants or
obligations with respect to the related Notes under the related
Indenture except as may be expressly permitted by the related
Indenture;
(e) permit any lien, charge, excise, claim, security interest,
mortgage, or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the related Trust or any
part of the related Trust, or any interest in the related Trust or the
proceeds; or
(f) permit the lien of the related Indenture not to constitute a valid
first priority security interest, other than with respect to a tax,
mechanics' or similar lien, in the assets of the related Trust.
Each Indenture Trustee and the related Noteholders, by accepting the
related Notes, will covenant that they will not at any time institute against
the applicable Trust any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law.
MODIFICATION OF INDENTURE. The Trust and the related Indenture Trustee
may, with the consent of the holders of a majority of the aggregate outstanding
principal amount of the Notes of the related Series, execute a supplemental
indenture to add provisions to, change in any manner or eliminate any provisions
of, the related Indenture, or modify, except as provided below, in any manner
the rights of the related Noteholders, provided that, subject to exceptions
which, if applicable, will be specified in the related prospectus supplement,
without the consent of the holder of each outstanding Note affected by the
related Indenture, no supplemental indenture will:
(a) change the due date of any installment of principal of or interest
on any related Note or reduce the principal amount of any related
Note, the interest rate specified on the related Note or the
redemption price with respect to the related Note or change any place
of payment where or the coin or currency in which any related Note or
any interest on the related Note is payable;
(b) impair the right to institute suit for the enforcement of specific
provisions of the related Indenture regarding payment;
(c) reduce the percentage of the aggregate amount of the outstanding
Notes of the related Series, the consent of the holders of which is
required for any supplemental indenture or for any waiver of
compliance with specific provisions of the related Indenture or of
specific defaults under the related Indenture and their consequences
as provided for in the related Indenture;
(d) modify or alter the provisions of the related Indenture regarding
the voting of Notes held by the applicable Trust, any other obligor on
the related Notes, the Seller or an affiliate of any of them;
(e) reduce the percentage of the aggregate outstanding amount of the
related Notes, the consent of the holders of which is required to
direct the related Indenture Trustee to sell or liquidate the Base
Assets in the Trust if the proceeds of the sale would be insufficient
to pay the principal amount and accrued and unpaid interest on the
outstanding Notes of the related Series;
(f) decrease the percentage of the aggregate principal amount of the
related Notes required to amend the sections of the related Indenture
that specify the percentage of the aggregate principal amount of the
Notes of the Series necessary to amend the related Indenture or other
related Agreements; or
(g) permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the related Notes or, except as otherwise permitted or
contemplated in the related Indenture, terminate the lien of the
related Indenture on any related collateral or deprive the holder of
any the related Note of the security afforded by the lien of the
related Indenture.
The Trust and the related Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Noteholders of the
related Series, for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of the related
Indenture or of modifying in any manner the rights of the Noteholders; provided
that this action will not materially and adversely affect the interest of any
related Noteholder.
ANNUAL COMPLIANCE STATEMENT. Each Trust for a Series of Securities
that includes Notes will be required to file annually with the related Indenture
Trustee a written statement as to the fulfillment of its obligations under the
related Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The Indenture Trustee for each
Trust for a Series of Securities that includes Notes will be required to mail
each year to all related Noteholders a brief report relating to its eligibility
and qualification to continue as Indenture Trustee under the related Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of indebtedness owing by the related Trust to the applicable
Indenture Trustee in its individual capacity, the property and funds physically
held by the related Indenture Trustee as such and any action taken by it that
materially affects the related Notes that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. Each Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all related Notes
or, with limitations, upon deposit with the related Indenture Trustee of funds
sufficient for the payment in full of all related Notes.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the related Trust will be obligated to appoint a
successor indenture trustee for the related Series. The Trust may also remove
the related Indenture Trustee if the related Indenture Trustee ceases to be
eligible to continue as Indenture Trustee under the related Indenture or if the
related Indenture Trustee becomes insolvent. In these circumstances, the related
Trust will be obligated to appoint a successor indenture trustee for the
applicable Series of Notes. No resignation or removal of the Indenture Trustee
and appointment of a successor indenture trustee for a Series of Notes will
become effective until the acceptance of the appointment by the successor
indenture trustee for the related Series.
DESCRIPTION OF THE CERTIFICATES
The following summaries describe the material provisions in the
applicable Agreements which generally are anticipated to be common to the Trust
Agreements and to the Pooling and Servicing Agreement. 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 prospectus supplement and Agreement
relating to each Series of Certificates. Where particular provisions or terms
used in the related Certificates or Agreements are referred to in this
Prospectus, the actual provisions, including definitions of terms, are
incorporated in this Prospectus by reference as part of the summaries.
The related prospectus supplement will provide that each Class of
Certificates will have an original principal amount, no principal amount or
notional amount and will accrue interest on the original principal amount or
notional amount at a specified Certificate Interest Rate or will not bear
interest. Each Class of Certificates may have a different Certificate Interest
Rate, which may be a fixed, variable or adjustable Certificate Interest Rate, or
any combination of the foregoing. The related prospectus supplement will specify
the Certificate Interest Rate, or the method for determining the applicable
Certificate Interest Rate, for each Class of Certificates.
A Series of Securities may include two or more Classes of Certificates
that differ as to timing and priority of distributions, seniority, allocations
of losses, Certificate Interest Rate or amount of distributions in respect of
principal or interest. Additionally, distributions in respect of principal or
interest in respect of any Class or Classes may or may not be made upon the
occurrence of specified events or on the basis of collections from designated
portions of the related Base Assets. If specified in the related prospectus
supplement, one or more Classes of Certificates may be Strip Certificates. If a
Series of Securities includes 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.
Certificates will be available for purchase in a minimum denomination
of $100,000 or other minimum denominations as the prospectus supplement shall
provide and in integral multiples of $1,000 in excess of the minimum
denominations and will be available in book-entry form or if provided in the
related prospectus supplement, as Definitive Certificates. If the Certificates
will be available in book-entry form only, the related prospectus supplement
will provide that Certificateholders will be able to receive Definitive
Certificates only in the limited circumstances described in this Prospectus or
in the related prospectus supplement. The Certificates 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
Certificates of a Series, as described in the related prospectus supplement, the
transfer of the Certificates may be registered and the Certificates may be
exchanged at the office of the Trustee specified in the related prospectus
supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange.
Payments of principal of and interest, if any, on the Certificates of
a Series will be made on the dates specified in the related prospectus
supplement by check mailed to Certificateholders of the related Series,
registered as Certificateholders of the Series at the close of business on the
record date applicable to each Payment Date at their addresses appearing on the
register of Certificates for the related Series or in any other manner as shall
be specified in the related prospectus supplement, except that:
o payments may be made by wire transfer, at the expense of the
Certificateholder requesting payment by wire transfer, in
circumstances described in the related prospectus supplement, and
o final payments of principal in retirement of any Certificate will
be made only upon presentation and surrender of the related
Certificate at the office of the Trustee specified in the related
prospectus supplement.
Notice of the final payment on a Certificate will be mailed to the holder of the
Certificate before the Payment Date on which the final principal payment on any
Certificate is expected to be made to the holder of that Certificate.
Payments of principal of and interest, if any, on the Certificates
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
Base Assets for a Series, together with reinvestment income on these payments,
amounts withdrawn from any Reserve Account and amounts available pursuant to any
other Series Enhancement generally will be deposited directly into the
Collection Account net, if and as provided in the related prospectus supplement,
of amounts payable to the Servicer under the related Agreement and specified in
the related prospectus supplement, and will then be deposited into the
applicable Payment Accounts and be available to make payments on Certificates of
the related Series on the next Payment Date, as the case may be. See "The Trust
Assets --Collection and Payment Accounts" .
Payments of Interest
The Certificates of each Class which by their terms are entitled to
receive interest will bear interest, calculated on the basis of a 360-day year
of twelve 30-day months or any other basis as is specified in the related
prospectus supplement, from the date and at the rate per annum specified, or
calculated in the method described, in the related prospectus supplement.
Interest on the Certificates of a Series will be payable on the Payment Dates
specified in the related prospectus supplement. The rate of interest on one or
more Classes of Certificates of a Series may be fixed, floating, variable or
adjustable. A Class of Certificates may by its terms be "Principal Only
Certificates", which may not be entitled to receive any interest distributions
or may be entitled to receive only nominal interest distributions. A Class of
Certificates may by its terms be "Zero Coupon Certificates", the interest on
which is not paid on the related Payment Date, but will accrue and be added to
the principal of the Certificates on the related Payment Date.
Interest payable on the Certificates on a Payment Date will include
all interest accrued during the related period specified in the related
prospectus supplement. In the event interest accrues during the calendar month
preceding a Payment Date, the effective yield to Certificateholders will be
reduced from the yield that would otherwise be obtainable if interest payable on
the Certificates were to accrue through the day immediately preceding the
related Payment Date.
Payments of Principal
On each Payment Date for Certificates of a Series, principal payments
will be made to the holders of the related Certificates on which principal is
then payable, to the extent set forth in the related prospectus supplement. The
payments will be made in an aggregate amount determined as specified in the
related prospectus supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority, which may, in some
cases, include allocation by random lot, set forth in the related prospectus
supplement.
With respect to each Class of Certificates not issued pursuant to a
Pooling and Servicing Agreement, a "Final Scheduled Payment Date" will be
specified in the related prospectus supplement, which will be the date,
calculated on the basis of the assumptions applicable to the Series described in
the related prospectus supplement, on which the entire aggregate principal
balance of the related Class is expected to be reduced to zero. Because payments
received on the Base Assets will generally be used to make distributions in
reduction of the outstanding principal amounts of the Certificates, it is likely
that the final principal payment with respect to a Class of Certificates will
occur earlier, and may occur substantially earlier than its Final Scheduled
Payment Date.
Receivables Pooling Certificates
INVESTOR CERTIFICATEHOLDERS' INTEREST; DEPOSITOR'S INTEREST. In the
case of a Series of Receivables Pooling Certificates, a portion of the assets of
the related Trust will be allocated among the Investor Certificateholders'
Interest and the remainder will be allocated to the depositor's interest (the
"Depositor's Interest") and as provided in the related prospectus supplement.
The Depositor's Interest represents the rights to the assets of the Trust not
allocated to the Investor Certificateholders' Interest of any Series or any
interests in the Trust issued as Series Enhancement. In the case of a Master
Trust, the related Seller may cause the issuance of additional Series of
Certificates from time to time and this issuance will have the effect of
decreasing the Depositor's Interest. The Depositor's Interest may be evidenced
by an exchangeable certificate that is subject to specific transfer
restrictions. The aggregate principal amount of the Investor Certificateholders'
Interest will, except as provided in this Prospectus or in the related
prospectus supplement, remain fixed at the aggregate initial principal amount of
the Certificates of the related Series and the principal amount of the
Depositor's Interest will fluctuate as the amount of the "Principal
Receivables", as defined in the related prospectus supplement, Government
Securities, if any, and Private Label Custody Receipt Securities, if any, held
by the Trust changes from time to time. If so provided in the related prospectus
supplement, in some circumstances, interests in the assets of a Trust may be
allocated to a credit enhancer, and in the case of a Master Trust, interests in
the assets of the Trust may be allocated to the Investor Certificateholders of
more than one Series.
EFFECT OF ISSUANCE OF ADDITIONAL SERIES. In the case of a Master
Trust, the Pooling and Servicing Agreement may provide that, pursuant to any one
or more supplements to the related Pooling and Servicing Agreement (each, a
"Supplement"), the Depositor may direct the Trustee to authenticate from time to
time new Series, subject to the conditions described below (each issuance, a
"New Issuance"). Each New Issuance will have the effect of decreasing the
Depositor's Interest to the extent of the initial Invested Amount of a Series.
Under the Pooling and Servicing Agreement, the Depositor may designate, with
respect to any newly issued Series:
(a) its name or designation;
(b) its initial principal amount or method for calculating its amount,
and its Invested Amount in the Trust which is generally based on the aggregate
amount of Principal Receivables, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, in the Trust allocated to the related
Series, and its Series Invested amount;
(c) its certificate rate, or formula for the determination of the
certificate rate;
(d) the interest payment date or dates and the dates from which
interest shall accrue;
(e) the method for allocating collections to Certificateholders of the
Series;
(f) any bank accounts to be used by the related Series and the terms
governing the operation of these bank accounts;
(g) the percentage used to calculate the Monthly Servicing Fee;
(h) the provider and terms of any form of Series Enhancement with
respect to any newly issued Series;
(i) the terms on which the Certificates of the Series may be
repurchased or remarketed to other investors;
(j) the Series Termination Date;
(k) the number of Classes of Certificates of the Series, and if the
Series consists of more than one Class, the rights and priorities of each
related Class;
(l) the extent to which the Certificates of the Series will be
issuable in temporary or permanent global form, and, in this case, the
depositary for these global certificate or certificates, the terms and
conditions, if any, upon which these global certificate or certificates may be
exchanged, in whole or in part, for definitive certificates, and the manner in
which any interest payable on this global certificate or certificates will be
paid;
(m) whether the Certificates of the Series may be issued in bearer
form and any limitations imposed on the Certificates;
(n) the priority of the Series with respect to any other Series; and
(o) any other relevant terms (all relevant terms, the "Principal
Terms" of the related Series).
None of the Depositor, the Servicer, the Trustee or the Trust is required or
intends to obtain the consent of any Certificateholder of any outstanding Series
to issue any additional Series.
The Pooling and Servicing Agreement may provide that the Depositor may
designate Principal Terms so that each Series has a Controlled Accumulation
Period or a Controlled Amortization Period that may have a different length and
begin on a different date than the Controlled Accumulation Periods or the
Controlled Amortization Periods for any other Series. Further, one or more
Series may be in their Controlled Accumulation Period or Controlled Amortization
Period while other Series are not. Moreover, each Series may have the benefits
of Series Enhancement issued by enhancement providers different from the
providers of Series Enhancement with respect to any other Series. Under the
Pooling and Servicing Agreement, the Trustee shall hold any Series Enhancement
only on behalf of the Certificateholders of the Series to which the Series
Enhancement relates. With respect to each Series Enhancement, the Depositor also
has the option under the Pooling and Servicing Agreement to vary among Series
the terms upon which a Series may be repurchased by the Depositor or remarketed
to other investors. There is no limit to the number of New Issuances the
Depositor may cause under the Pooling and Servicing Agreement. The Trust will
terminate only as provided in the Pooling and Servicing Agreement. There can be
no assurance that the terms of any Series might not have an impact on the timing
and amount of payments received by a Certificateholder of another Series.
Under the Pooling and Servicing Agreement and pursuant to a
Supplement, a New Issuance may only occur upon the satisfaction of conditions
provided in the Pooling and Servicing Agreement. The obligation of the Trustee
to authenticate the Certificates of a new Series and to execute and deliver the
related Series Supplement is subject to the satisfaction of the following
conditions:
(a) on or before the fifth day immediately preceding the date upon
which the New Issuance is to occur, the Depositor shall have given the Trustee,
the Servicer, each Rating Agency and any Series Enhancer so entitled pursuant to
the relevant Supplement, written notice of the New Issuance and the date upon
which the New Issuance is to occur;
(b) the Depositor shall have delivered to the Trustee the related
Supplement, in form satisfactory to the Trustee, executed by each party to the
Pooling and Servicing Agreement other than the Trustee;
(c) the Depositor shall have delivered to the Trustee any related
Series Enhancement agreement executed by each of the parties to the applicable
Agreement;
(d) the Depositor shall have received notice from each Rating Agency
that the New Issuance shall not cause the Rating Agency to reduce or withdraw
the then current rating of the Certificates of any outstanding Series or Class;
(e) the Depositor shall have delivered to the Trustee and providers of
Series Enhancement a certificate of an authorized representative, dated the date
upon which the New Issuance is to occur, to the effect that the Depositor
reasonably believes that the issuance will not, based on the facts known to the
representative at the time of certification, cause a Pay Out Event; and
(f) the Depositor shall have delivered to the Trustee, each Rating
Agency and providers of Series Enhancement an opinion of counsel acceptable to
the Trustee that for federal income tax purposes:
(1) following a New Issuance the Trust will not be deemed to be
an association, or publicly traded partnership taxable as a
corporation,
(2) a New Issuance will not adversely affect the tax
characterization as debt of Certificates of any outstanding
Series or Class that were characterized as debt at the time of
their issuance,
(3) a New Issuance will not cause or constitute an event in which
gain or loss would be recognized by any Certificateholders, and
(4) except as is otherwise provided in a Supplement with respect
to any Series, the Certificates of the related Series will be
properly characterized as debt.
Upon satisfaction of the above conditions, the Trustee shall execute the
Supplement and issue to the Depositor the Certificates of the new Series for
execution and redelivery to the Trustee for authentication.
ALLOCATION PERCENTAGE. Pursuant to the Pooling and Servicing
Agreement, all amounts collected with respect to:
(a) finance charge receivables (as defined in the related prospectus
supplement, the "Finance Charge Receivables") and Principal Receivables and the
Defaulted Amount,
(b) the Government Securities, if any, and
(c) the Private Label Custody Receipt Securities, if any, with respect
to any Monthly Period will be allocated among the Investor Certificateholders'
Interest of each Series, the Depositor's Interest and in some circumstances to
the provider of Series Enhancement, and all Adjustment Payments and Deposit
Amounts deposited in the Collection Account (collectively, "Miscellaneous
Payments") with respect to any Monthly Period will be allocated among the
Investor Certificateholders' Interest of each Series, as follows:
(1) collections of:
(A) Finance Charge Receivables and the Defaulted Amount,
(B) interest on the Government Securities, if any, and
(C) interest on the Private Label Custody Receipt
Securities, if any, will at all times be allocated to the
Investor Certificateholders' Interest of a Series based on
the Floating Allocation Percentage of the related Series;
(2) collections of:
(A) Principal Receivables;
(B) principal of the Government Securities, if any, and
(C) principal of the Private Label Custody Receipt
Securities, if any, will at all times be allocated to the
Investor Certificateholders' Interest of a Series based on
the Principal Allocation Percentage of the related Series;
and
(3) miscellaneous Payments will at all times be allocated among
the Investor Certificateholder's Interest of each Series based on
their respective Invested amounts.
The "Floating Allocation Percentage" and the "Principal Allocation Percentage"
with respect to any Series will be determined as set forth in the related
Supplement and, with respect to each Series offered by this Prospectus, in the
related prospectus supplement. Amounts not allocated to the Investor
Certificateholders' Interest of any Series as described above will be allocated
to the Depositor's Interest.
COLLECTIONS. All collections in respect of Receivables and
Participations with respect to a given Trust will be allocated by the related
Servicer or Trustee as amounts collected on Principal Receivables and on Finance
Charge Receivables. The Servicer will allocate between the Investor
Certificateholders' Interest of each Series, if more than one, of the related
Trust and the Depositor's Interest all amounts collected with respect to:
o Finance Charge Receivables and Principal Receivables and the
Defaulted Amount,
o the Government Securities, if any, and
o Private Label Custody Receipt Securities, if any.
The "Defaulted Amount" for any Monthly Period will be an amount, not less than
zero, equal to:
(a) the amount of Principal Receivables which were charged off as
uncollectible in the Monthly Period in accordance with the Servicer's customary
and usual servicing procedures ("Defaulted Receivables") for the Monthly Period,
minus
(b) the sum of:
(1) the amount of any Defaulted Receivables of which either the
Depositor or the Servicer becomes obligated to accept
reassignment or assignment during the Monthly Period, unless an
Insolvency Event shall have occurred with respect to the
Depositor, the Seller or the Servicer, in which event the amount
of the Defaulted Receivables will not be added to the sum so
subtracted,
(2) the aggregate amount of recoveries, net of collection
expenses, received in the Monthly Period with respect to both
Finance Charge Receivables and Principal Receivables previously
charged off as uncollectible, and
(3) the excess, if any, for the immediately preceding Monthly
Period of the sum computed pursuant to this clause (b) for the
Monthly Period over the amount of Principal Receivables which
became Defaulted Receivables in the Monthly Period.
Collections of:
o Finance Charge Receivables and the Defaulted Amount,
o interest on the Government Securities, if any, and
o interest on the Private Label Custody Receipt Securities, if any,
will be allocated to each Series at all times based upon its
Floating Allocation Percentage.
Collections of:
o Principal Receivables,
o principal of the Government Securities, if any, and
o principal of the Private Label Custody Receipt Securities, if
any, will be allocated to each related Series at all times based
upon its Principal Allocation Percentage.
The Floating Allocation Percentage and the Principal Allocation Percentage with
respect to each related Series will be determined as set forth in the related
Supplement and, with respect to each Series offered by this Prospectus, in the
related prospectus supplement. Collections will be deposited in the related
Collection Account and invested in the manner described under "Servicing of
Receivables -- Deposits in the Collection Account".
INTEREST. Interest will accrue on the Invested amount of the
Receivables Pooling Certificates of a Series or Class (the "Invested Amount" of
the Series or Class) offered by this Prospectus at the per annum rate either
specified, or determined in the manner specified, in the related prospectus
supplement (the "Certificate Interest Rate "). If the prospectus supplement for
a Series of Receivables Pooling Certificates so provides, the interest rate and
interest payment dates applicable to each Class of Certificates of that Series
may be subject to adjustment from time to time. Any interest rate adjustment
would be determined by reference to one or more indices or by a remarketing
firm, in each case as described in the prospectus supplement for the related
Series. To the extent provided in this Prospectus or in the related prospectus
supplement, collections of Finance Charge Receivables and other amounts
allocable to the Investor Certificateholders' Interest of a Series offered by
this Prospectus will be used to make interest payments to Certificateholders of
the related Series on each Interest Payment Date with respect to these
collections, provided that if a rapid amortization period commences with respect
to the related Series, interest will then be distributed to these
Certificateholders monthly on each Special Payment Date. If the Interest Payment
Dates for a Series or Class occur less frequently than monthly, collections or
other amounts, or the portion allocable to the related Class, will be deposited
in one or more trust accounts (in the case of the deposit of interest, an
"Interest Funding Account") and used to make interest payments to
Certificateholders of the related Series or Class on the following Interest
Payment Date with respect to the related Series or Class. If a Series has more
than one Class of Receivables Pooling Certificates, each related Class may have
a separate Interest Funding Account.
PRINCIPAL. The principal of any Receivables Pooling Certificates will
be scheduled to be paid either in full on an expected date specified in the
related prospectus supplement (the "Expected Final Payment Date "), in which
case the related Series will have an accumulation period, as described below
under " -- Accumulation Period", or in installments commencing on a date
specified in the related prospectus supplement (the "Principal Commencement Date
"), in which case the Receivables Pooling Certificates will have a Controlled
Amortization Period as described below under " -- Controlled Amortization
Period". If the related Series has more than one Class of Certificates, a
different method of paying principal, Expected Final Payment Date and/or
Principal Commencement Date may be assigned to each Class. The principal with
respect to the Certificates of the related Series or Class may be made or
commence earlier than the applicable Expected Final Payment Date or Principal
Commencement Date, as the case may be, and the final principal payment with
respect to the Certificates of the related Series or Class may be made earlier
or later than the applicable Expected Final Payment Date or Principal
Commencement Date, if a Pay Out Event occurs with respect to the related Series
or Class or under other circumstances described in this Prospectus or in the
related prospectus supplement.
REVOLVING PERIOD. Receivables Pooling Certificates will have a
"Revolving Period", which will commence on the date specified in the related
prospectus supplement as the Series Cut-Off Date and continue until the earliest
to occur of:
o the commencement of the Rapid Amortization Period with respect to
the Series, and
o the date specified in the related prospectus supplement as the
last day of the Revolving Period with respect to the Series.
During the Revolving Period with respect to the Series, collections of Principal
Receivables, collections of principal of the Government Securities, if any,
collections of principal of the Private Label Custody Receipt Securities, if
any, and other amounts otherwise allocable to the Investor Certificateholders'
Interest of the Series will be distributed to or for the benefit of the
Certificateholders of other Series, if so provided in the related prospectus
supplement or the Seller or the Depositor in respect of the Depositor's
Interest.
CONTROLLED ACCUMULATION PERIOD. If so specified by the related
prospectus supplement in the case of a Series of Receivables Pooling
Certificates, and unless a Rapid Amortization Period commences with respect to
the related Series, one or more Classes of Certificates of the Series will have
a Controlled Accumulation Period. The controlled accumulation period (the
"Controlled Accumulation Period") will commence on the close of business on the
date specified, or determined in the manner specified, in the related prospectus
supplement and will continue until the earliest to occur of:
o the commencement of a Rapid Amortization Period with respect to
the Series,
o payment in full of the Invested Amount of the Certificates of the
Series, or
o the Series Termination Date with respect to the Series.
During the Controlled Accumulation Period with respect to a Series of
Receivables Pooling Certificates, collections of Principal Receivables,
principal of the Government Securities, if any, principal of the Private Label
Custody Receipt Securities, if any, and other amounts allocable to the Investor
Certificateholders' Interest of the Series will be deposited on each
Distribution Date in a trust account established for the benefit of the Investor
Certificateholders of the Series (the "Principal Funding Account") and used to
make principal distributions to the Certificateholders when due. The amount to
be deposited in the Principal Funding Account on the applicable Distribution
Date may, but will not necessarily, be limited to the "Controlled Deposit Amount
" equal to the "Controlled Accumulation Amount" specified in the related
prospectus supplement plus any existing deficit with respect to the Controlled
Accumulation Amount arising from prior Distribution Dates (the "Deficit
Controlled Accumulation Amount "). If a Series of Receivables Pooling
Certificates has more than one Class, each Class may have a separate Principal
Funding Account and Controlled Accumulation Amount. In addition, the related
prospectus supplement may describe priorities among Classes with respect to
deposits of principal into Principal Funding Accounts. In general, unless a Pay
Out Event shall have occurred prior to the Expected Final Payment Date for a
Series, on the Expected Final Payment Date for a particular Series or Class, all
amounts accumulated in the Principal Funding Account with respect to the Series
or Class during the Controlled Accumulation Period will be distributed as a
single repayment of principal with respect to the Series or Class.
RAPID ACCUMULATION PERIOD. If so specified and under the conditions
set forth in the prospectus supplement relating to a Series having a Controlled
Accumulation Period, during the period (the "Rapid Accumulation Period" and
together with the Controlled Accumulation Period, each an "Accumulation Period")
from the day on which a Pay Out Event has occurred until the earliest of:
o the commencement of the Rapid Amortization Period,
o payment in full of the Investor Interest of the Certificates of
the Series and, if so specified in the related prospectus
supplement, of the Collateral Interest, if any, with respect to
the Series, and
o the related Series Termination Date,
collections of Principal Receivables allocable to the Investor Interest of the
Series, and other amounts if so specified in the related prospectus supplement,
will be deposited on each Transfer Date in the Principal Funding Account and
used to make distributions of principal to the Certificateholders of the Series
or Class on the Scheduled Payment Date.
The amount to be deposited in the Principal Funding Account during the Rapid
Accumulation Period will not be limited to the Controlled Deposit Amount.
During the Rapid Accumulation Period, funds on deposit in any
Principal Funding Account may be invested in permitted investments or subject to
a guaranteed rate or investment contract or other arrangement intended to assure
a minimum return on the investment of the funds. Investment earnings on the
funds may be applied to pay interest on the related Series of Certificates or
make other payments as specified in the related prospectus supplement. In order
to enhance the likelihood of payment in full of principal at the end of the
Rapid Accumulation Period with respect to a Series of Certificate, the Series
may be subject to a principal guaranty or other similar agreement.
CONTROLLED AMORTIZATION PERIOD. If the related prospectus supplement
so specifies with respect to a Series of Receivables Pooling Certificates,
unless a Rapid Amortization Period commences with respect to a Series, one or
more Classes of Certificates of the Series will have a Controlled Amortization
Period. The controlled amortization period (the "Controlled Amortization
Period") will commence at the close of business on the date specified or
determined in the manner specified in the related prospectus supplement and will
continue until the earliest to occur of:
o the commencement of the Rapid Amortization Period with respect to
a Series,
o payment in full of the Invested Amount of the Certificates of a
Series, or
o the Series Termination Date with respect to a Series.
During the Controlled Amortization Period with respect to a Series, collections
of Principal Receivables, principal of the Government Securities, if any,
principal of the Private Label Custody Receipt Securities, if any, and other
amounts allocable to the Investor Certificateholders' Interest of a Series will
be used on each Distribution Date to make principal distributions to
Certificateholders of the Series or any Class of the Series then scheduled to
receive the related distributions. The amount to be distributed to
Certificateholders of any Series on any Distribution Date may, but will not
necessarily, be limited to an amount (the "Controlled Distribution Amount")
which will be equal to the "Controlled Amortization Amount" specified in the
related prospectus supplement plus any existing deficit with respect to the
Controlled Amortization Amount arising from prior Distribution Dates (the
"Deficit Controlled Amortization Amount". If a Series of Receivables Pooling
Certificates has more than one Class, each Class may have a separate Controlled
Amortization Amount. In addition, the related prospectus supplement may describe
priorities among the Classes with respect to these distributions.
RAPID AMORTIZATION PERIOD. During the Rapid Amortization Period,
collections of Principal Receivables and other amounts allocable to the Investor
Certificateholders' Interest of the Series will be distributed as principal
payments to the Investor Certificateholders of the Series monthly on each
Distribution Date beginning with the first Special Payment Date with respect to
the Series. The "Rapid Amortization Period" will commence and end on the dates
set forth in the related prospectus supplement. During the Rapid Amortization
Period with respect to a Series, distributions of principal to Investor
Certificateholders will not be subject to any Controlled Deposit Amount or
Controlled Distribution Amount. In addition, upon the commencement of the Rapid
Amortization Period with respect to a Series, any funds on deposit in a
Principal Funding Account with respect to a Series will be paid to the
Certificateholders of the relevant Class or Series on the first Special Payment
Date with respect to the related Series. See "Description of the Certificates --
Pay Out Events" below for a discussion of the events which might lead to the
commencement of the Rapid Amortization Period with respect to a Series.
PAY OUT EVENTS. As described above, the Revolving Period with respect
to a Series of Receivables Pooling Certificates will commence on the Series
Cut-Off Date and continue until the commencement of the Controlled Accumulation
Period or the Controlled Amortization Period, unless a Pay Out Event occurs with
respect to the Series prior to any of these dates. A "Pay Out Event" with
respect to the Series refers to any events specified in the related prospectus
supplement, which events may include:
o the occurrence of an "Insolvency Event", which shall mean the
appointment of the FDIC as receiver of the Depositor or the
Seller or another person specified in the related prospectus
supplement, or other events relating to the bankruptcy,
insolvency or receivership of the Depositor or the Seller, or
another person specified in the related prospectus supplement; or
o the Trust becoming an investment company within the meaning of
the Investment Company Act of 1940 (the "Investment Company
Act").
In the case of any event described above, a Pay Out Event with respect
to the affected Series will be deemed to have occurred without any notice or
other action on the part of the Trustee or the Investor Certificateholders of
the affected Series immediately upon the occurrence of this event. The Rapid
Amortization Period with respect to a Series will commence at the close of
business on the day immediately preceding the day on which a Pay Out Event
occurs with respect to the related Series. Distributions of principal to the
Investor Certificateholders of the related Series will begin on the Distribution
Date next following the month during which the Pay Out Event occurs (the
Distribution Date and each following Distribution Date with respect to the
related Series, a "Special Payment Date"). Any amounts on deposit in a Principal
Funding Account or an Interest Funding Account with respect to the related
Series at that time will be distributed on the first Special Payment Date to the
Investor Certificateholders of the Series. If a Series has more than one Class
of Certificates, each Class may have different Pay Out Events which, in the case
of any Series of Certificates offered by this Prospectus, will be described in
the related prospectus supplement.
In addition to the consequences of a Pay Out Event discussed above, if
any Insolvency Event occurs with respect to the Depositor or the Seller,
pursuant to the Pooling and Servicing Agreement and the Receivables Purchase
Agreement, on the day of the Insolvency Event, the Depositor or the Seller will
immediately cease to transfer Principal Receivables directly or indirectly to
the Trust and promptly give notice to the Trustee of the Insolvency Event. Under
the terms of the Pooling and Servicing Agreement and the Receivables Purchase
Agreement applicable to the Series, within 15 days the Trustee will publish a
notice of the occurrence of the Insolvency Event stating that the Trustee
intends to sell, dispose of or otherwise liquidate the Receivables, Government
Securities, if any, and Private Label Custody Receipt Securities, if any, in a
commercially reasonable manner and on commercially reasonable terms unless
within 90 days from the date notice is published the holders of Certificates of
each Series or, if a Series includes more than one Class, each Class of the
related Series evidencing more than 50% of the aggregate unpaid principal amount
of each related Series or Class and other interested parties specified in the
related prospectus supplement instruct the Trustee not to dispose of or
liquidate the Receivables, Government Securities, if any, and Private Label
Custody Receipt Securities, if any, and to continue transferring Principal
Receivables as before the Insolvency Event. The proceeds from any sale,
disposition or liquidation of the Receivables, Government Securities, if any,
and Private Label Custody Receipt Securities, if any, will be deposited in the
Collection Account and allocated as described in the applicable Pooling and
Servicing Agreement and the related prospectus supplement. If the sum of:
o the portion of the proceeds allocated to the Investor
Certificateholders' Interest of any Series, and
o the proceeds of any collections of the Receivables, Government
Securities, if any, and Private Label Custody Receipt Securities,
if any, in the Collection Account allocated to the Investor
Certificateholders' Interest of the related Series, together with
any related rights under any applicable Series Enhancement,
is not sufficient to pay the Invested Amount of the Certificates of the related
Series in full, the Investor Certificateholders will incur a loss.
PAIRED SERIES. If so provided in the related prospectus supplement,
one or more Series or a portion of one or more Series previously issued by a
Trust (a "Prior Series ") may be paired with one or more other series (a "Paired
Series ") issued by the Trust. As the Invested Amount of the Prior Series is
reduced, the Invested Amount in the Trust of the Paired Series will increase by
an equal amount. Upon payment in full of the Prior Series, the Invested Amount
of the Paired Series will be equal to the Invested Amount paid to
Certificateholders of the Prior Series. If a Pay Out Event occurs with respect
to the Prior Series or with respect to the Paired Series when the Prior Series
is in a Controlled Amortization Period or Controlled Accumulation Period, the
Series Allocation Percentage and the Principal Allocation Percentage for the
Prior Series and the Series Allocation Percentage and the Principal Allocation
Percentage for the Paired Series will be reset as provided in the related
prospectus supplement and the Early Amortization Period or Early Accumulation
Period for the related Series could be lengthened. It shall be a condition to
the issuance of a Paired Series that this issuance shall not result in the
reduction by any Rating Agency of the rating of the Prior Series.
OPTIONAL TERMINATION; FINAL PAYMENT OF PRINCIPAL. If specified in the
prospectus supplement, subject to any conditions described in the prospectus
supplement, on any day occurring on or after the day that the principal amount
of the Certificates of a Series and the Enhancement Invested Amount, if any,
with respect to the Series is reduced to a percentage of the initial outstanding
aggregate principal amount of the Certificates of the related Series set forth
in the related prospectus supplement, the Depositor will have the option to
repurchase the Investor Certificateholders' Interest of the related Series. The
purchase price will be equal to the sum of the principal amount of the Series,
less the amount, if any, on deposit in any Principal Funding Account with
respect to the related Series, plus the Enhancement Invested Amount, if any,
with respect to the related Series, plus accrued and unpaid interest on the
unpaid principal amount of the Certificates, including the Collateral
Indebtedness Interests, if any, and, if applicable, on the Enhancement Invested
Amount, and accrued and unpaid interest with respect to interest amounts that
were due but not paid on a prior Payment Date, through:
o if the day on which the repurchase occurs is a Distribution Date,
the day preceding this Distribution Date, or
o if the day on which the repurchase occurs is not a Distribution
Date, the day preceding the Distribution Date following that day,
at the applicable Certificate Interest Rate.
Following any repurchase and the deposit of the aggregate purchase price into
the Collection Account, the Investor Certificateholders of the related Series
will have no further rights with respect to the Receivables. In the event that
the Depositor shall fail for any reason to deposit the aggregate purchase price
for the Investor Certificateholders' Interest of a Series, payments would
continue to be made to the Investor Certificateholders of the related Series as
described in this Prospectus and in the related prospectus supplement.
In any event, the last payment of principal and interest on the
Securities of a Series will be due and payable not later than the date (the
"Series Termination Date") specified in the related prospectus supplement. In
the event that the principal amount of the Securities of any related Series or
the Enhancement Invested Amount is greater than zero on the Series Termination
Date, the Trustee will sell or cause to be sold interests in the Receivables,
Government Securities, if any, and Private Label Custody Receipt Securities, if
any, of the related Trust, as specified in the Pooling and Servicing Agreement,
in an amount equal to the sum of the principal amount of the outstanding
Securities and the Enhancement Invested Amount, if any, with respect to the
related Series at the close of business on the Series Termination Date. The net
proceeds of the sale will be deposited in the Collection Account and allocated
to the Certificateholders of the related Series or the holder of the Enhancement
Invested Amount after the Certificateholders are paid in full, as provided in
the Pooling and Servicing Agreement with respect to the Series.
The Depositor may, at its option, purchase a Class of Certificates of
any Series, on any Distribution Date under the circumstances, if any, specified
in the prospectus supplement relating to that Series. Alternatively, if so
specified in the related prospectus supplement for a Series of Certificates, the
Depositor, the Servicer, or another entity designated in the related prospectus
supplement may, at its option, cause an early termination of a Trust by
repurchasing all of the Receivables, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, from the Trust on or after a date
specified in the related prospectus supplement, or on or after that time as the
aggregate outstanding principal amount of the Certificates or Receivables,
Government Securities, if any, and Private Label Custody Receipt Securities, if
any, as specified in the related prospectus supplement, is less than the amount
or percentage specified in the related prospectus supplement. Notice of a
purchase or termination must be given by the Depositor, the Servicer or the
Trustee prior to the related date. The purchase or repurchase price will be set
forth in the related prospectus supplement.
In addition, the related prospectus supplement may provide other
circumstances under which holders of Certificates of a Series could be fully
paid significantly earlier than would otherwise be the case as a result of the
occurrence of a Rapid Amortization Event.
CERTAIN INFORMATION REGARDING THE SECURITIES
Book-Entry Registration
If so specified in the related prospectus supplement, holders of
Securities may hold their Securities through the Depository Trust Company ("DTC"
in the United States) or Clearstream Luxembourg or Euroclear (in Europe) if they
are participants of these systems, or indirectly through organizations which are
participants in these systems.
Cede & Co. ("Cede"), as nominee for DTC, will hold one or more global
Securities. Unless and until definitive securities are issued in fully
registered, certified form ("Definitive Securities ") under the limited
circumstances described in the related prospectus supplement, all references in
this Prospectus or in the related prospectus supplement to actions by holders of
Securities shall refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references in this
Prospectus to distributions, notices, reports and statements to holders of
Securities shall refer to distributions, notices, reports and statements to DTC
or Cede, as the registered holder of the Securities, as the case may be, for
distribution to the beneficial owners of the related Securities in accordance
with DTC procedures.
Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
Depositaries which in turn will hold these positions in customers' securities
accounts in the Depositaries' names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream Luxembourg and Morgan Guaranty Trust Company of
New York will act as depositary for Euroclear (in these capacities, the
"Depositaries").
Transfers between DTC Participants will occur in the ordinary way in
accordance with DTC rules. Transfers among Clearstream Luxembourg Participants
or Euroclear Participants will occur in the ordinary way in accordance with the
applicable rules and operating procedures of Clearstream Luxembourg and
Euroclear.
Cross-market transfers between persons holding directly or indirectly
through DTC on the one hand, and directly or indirectly through Clearstream
Luxembourg or Euroclear, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, these cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in the clearing system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its 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. Clearstream Luxembourg Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a DTC
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear Participant or Clearstream Luxembourg Participant on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream Luxembourg Participant or a
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream Luxembourg
or Euroclear cash account only as of the business day following settlement in
DTC. For additional information regarding clearance and settlement procedures
for the Securities, see Annex I to this Prospectus and for information with
respect to tax documentation procedures relating to the Securities, see Annex I
to this Prospectus and "Certain Federal Income Tax Consequences -- Foreign
Investors."
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thus eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations, including the Underwriters. Indirect access to the
DTC System also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (the "Indirect Participants").
Holders of Securities that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Securities may do so only through Participants and Indirect
Participants. In addition, holders of Securities will receive all distributions
of principal of and interest on the Securities from the Trustee, or the
Indenture Trustee, as paying agent, or its successor in this capacity (the
"Paying Agent"), through the Participants who in turn will receive them from
DTC. Under a book-entry format, holders of Securities may experience some delay
in their receipt of payments, since these payments will be forwarded by the
Paying Agent to Cede, as nominee for DTC. DTC will forward these payments to its
Participants which will then forward them to Indirect Participants or holders of
Securities. It is anticipated that the only holder of the Certificates (the
"Certificateholder"), holder of the Note (the "Noteholder" and together with the
Certificateholder, the "Securityholder") for a Series will be Cede, as nominee
of DTC. Holders of Securities would not then be recognized by the Trustee as
"Certificateholders", "Noteholders" or "Securityholders", as these terms are
used in the related Agreement, and holders of Securities would only be permitted
to exercise the rights of a "Certificateholder", "Noteholder" or
"Securityholder" indirectly through the Participant who in turn will exercise
those rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of and interest on
the Securities. Participants and Indirect Participants with which holders of
Securities have accounts with respect to the Securities similarly are required
to make book-entry transfers and receive and transmit payments on behalf of
their respective holders of Securities. Accordingly, although holders of
Securities will not possess Securities, holders of Securities will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, the ability of a holder of Securities to pledge
Securities to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of the Securities, may be limited due to the
lack of a physical certificate or instrument for the Securities.
DTC will take any action permitted to be taken by a
"Certificateholder", "Noteholder" or "Securityholder" under the applicable
Agreement or Indenture only at the direction of one or more Participants to
whose account with DTC the relevant Securities are credited. Additionally, DTC
will take these actions with respect to specified percentages of the
Certificateholders', Noteholders' or Securityholders' interests only at the
direction of and on behalf of Participants whose holdings include undivided
interests that satisfy the specified percentages. DTC may take conflicting
actions with respect to other undivided interests to the extent that these
actions are taken on behalf of Participants whose holdings include these
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
The Euroclear System ("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, thus eliminating both the need
for physical movement of certificates and the risk resulting from transfers of
securities and cash that are not simultaneous.
The Euroclear System has subsequently been extended to clear and
settle transactions between Euroclear Participants counterparties both in
Clearstream Luxembourg and in many domestic securities markets. Transactions may
be settled in any of 32 settlement currencies, including United States dollars.
In addition to safekeeping (custody) and securities clearance and settlement,
the Euroclear System includes securities lending and borrowing and money
transfer services. The Euroclear System is operated by the Brussels, Belgium
office of Morgan Guaranty Trust Company of New York (the "Euroclear Operator"),
under contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation that establishes policy on behalf of Euroclear Participants. The
Euroclear Operator is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. Accordingly, 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.
All operations are conducted by the Euroclear Operator and all
Euroclear securities clearance accounts and cash accounts are accounts with the
Euroclear Operator. They 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 all transfers of securities and cash, both within the
Euroclear System and receipts and withdrawals of securities and cash. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
Euroclear Participants include banks, including central banks,
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System 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 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 with respect to Securities held through Clearstream
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream
Luxembourg Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by its
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Certain Federal
Income Tax Consequences". Clearstream Luxembourg or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Certificateholder, Noteholder or Securityholder under the applicable Agreement
or Indenture on behalf of a Clearstream Luxembourg Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect these actions on its behalf
through DTC.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Securities among
participants of DTC, Clearstream Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform the procedures and these procedures
may be discontinued at any time.
Definitive Securities
If the Securities of any Series will be available in book entry form,
the related Securities will be issued as Definitive Securities, rather than to
DTC or its nominee, only under circumstances specified in the related prospectus
supplement, which circumstances may include that,
o the Depositor advises the Trustee, and any Indenture Trustee, in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the
Securities, and the Trustee, or the Indenture Trustee, or the
Depositor are unable to locate a qualified successor,
o the Depositor, at its option, elects to terminate the book-entry
system through DTC, or
o after the occurrence of a Servicer Default, holders of Securities
of the related Series evidencing not less than 50% of the
aggregate unpaid principal amount of the Securities advise the
Trustee and DTC through Participants in writing that the
continuation of a book-entry system through DTC, or a successor
to DTC, is no longer in the best interests of the holders of the
Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities. Upon surrender by DTC of the
physical certificates or notes held by Cede that represent the Securities, and
instructions for registration, the Trustee, or the Indenture Trustee, will issue
the related Securities in the form of Definitive Securities, and the Trustee, or
the Indenture Trustee, will then recognize the holders of these Definitive
Securities as holders of Securities, under the applicable Agreement or Indenture
and the related prospectus supplement ("Holders").
If Definitive Securities are issued, distribution of principal and
interest on the Definitive Securities will be made by the Paying Agent or the
Trustee, or the Indenture Trustee, directly to the Holders in whose names the
Definitive Securities were registered on the related Record Date in accordance
with the procedures set forth in this Prospectus and in the related Agreement,
Indenture and prospectus supplement. Distributions will be made by check mailed
to the address of each Holder as it appears on the register maintained by the
Trustee, or the Indenture Trustee, except that the final payment on any
Definitive Security will be made only upon presentation and surrender of the
Definitive Security on the date for final payment at the office or agency as is
specified in the notice of final distribution to Holders. The Trustee, or the
Indenture Trustee, will provide notice to Holders not later than the date
specified in the related prospectus supplement.
Definitive Securities will be transferable and exchangeable at the
offices of the Transfer Agent specified pursuant to the applicable Agreement or
Indenture (the "Transfer Agent") and the Registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Transfer Agent and
Registrar may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection with the registration of transfer or
exchange.
DESCRIPTION OF THE TRUST AGREEMENTS
OR THE POOLING AND SERVICING AGREEMENTS
The following summaries describe the material provisions of the Trust
Agreements and Pooling and Servicing Agreements which are anticipated to be
common to any 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 related Agreement. Where particular provisions or terms used
in a related Agreement are referred to in this Prospectus, the actual
provisions, including definitions of terms, are incorporated in this Prospectus
by reference as part of the summaries.
Assignment of Base Assets to the Trust
ASSIGNMENT OF RECEIVABLES; PRE-FUNDING ACCOUNT. For any Series of
Receivables Pooling Certificates, pursuant to the related Pooling and Servicing
Agreement and Receivables Purchase Agreement, the Seller will sell and assign to
the related Trust on the Closing Date specified in the related prospectus
supplement (the "Closing Date"), either directly or by assignment to the
Depositor and reassignment by the Depositor to the Trust, without recourse to
the Seller, or the Depositor, all Receivables in the Initial Accounts
outstanding as of the Series Cut-Off Date, and will similarly sell and assign to
the Trust all Receivables in the Additional Accounts as of the applicable
additional cut-off dates and all Receivables later created under the Initial
Accounts or the Additional Accounts, other than the Removed Accounts, any
Participations added to the Trust and the proceeds of all of the foregoing. To
the extent specified in the related prospectus supplement, a portion of the
proceeds from the sale of the Securities of a Series may be applied by the
Depositor to the deposit of an amount on deposit in a Pre-Funding Account (the
"Pre-Funded Amount"). If a Pre-Funding Account is provided for, the related
prospectus supplement will specify the terms, conditions and manner under which
additional Receivables will be purchased by the Trust from time to time during
the funding period provided for in the related prospectus supplement.
In connection with any transfer of any Receivables, the Seller will
annotate and indicate in its computer files that these Receivables have been
conveyed to the Trust. In addition, the Seller will provide to the Trustee a
computer file or a microfiche list containing a true and complete list showing
each Account, the Receivables of which have been designated for inclusion in the
Trust, identified by account number, collection status, the amount of
Receivables outstanding and the amount of Principal Receivables as of the
initial Series Cut-Off Date, or additional Cut-Off Date. The Seller will not
deliver to the Trustee any other records or agreements relating to these
Accounts or the Receivables. The records and agreements relating to these
Accounts and the Receivables maintained by the Seller or the Servicer will not
be segregated by the Seller or the Servicer from other documents and agreements
relating to other accounts and receivables and will not be stamped or marked to
reflect the transfer of the Receivables to the Trust. Each Seller will file the
UCC financing statements meeting the requirements of applicable state law with
respect to the Receivables. See "Risk Factors - Certain Legal Aspects --
Transfer of Receivables" and "Risk Factors-- Risk of Commingling" and "Certain
Legal Aspects of the Receivables".
ASSIGNMENT OF CRB SECURITIES; PRE-FUNDING ACCOUNT. All or a portion of
the net proceeds received from the sale of the Securities of a Series, the Base
Assets of which consist entirely or in part of CRB Securities, will be applied
to the purchase of the related CRB Securities from the Depositor or other Seller
on the Closing Date and, to the deposit of a Pre-Funded Amount into a
Pre-Funding Account, if and to the extent specified in the related prospectus
supplement. If a Pre-Funding Account is provided for, the related prospectus
supplement will specify the terms, conditions and manner under which additional
CRB Securities will be purchased by the Trust from time to time during the
funding period provided for in the related prospectus supplement. The Trustee
will cause any CRB Securities purchased by the Trust to be registered in the
name of the Trustee, or its nominee or correspondent, or, where applicable, the
Indenture Trustee, and the Trustee, or its agent or correspondent, or the
Indenture Trustee will have possession of any certificated CRB Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a CRB Security. See "The Trust Assets -- CRB Securities".
Each CRB Security to be transferred to the Trust will be identified in
a schedule appearing as an exhibit to the related Trust Agreement (the "CRB
Schedule"), which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, or subsequent cut-off date, annual
Certificate Interest Rate or interest rate and maturity date for each CRB
Security. In the Trust Agreement, to the extent that any CRB Securities are
purchased from the Depositor, the Depositor will represent and warrant to the
Trustee regarding the CRB Securities:
(a) that the information contained in the CRB Schedule is true and
correct in all material respects;
(b) that, immediately prior to the conveyance of the CRB Securities,
the Depositor had good title to, and was the sole owner of the CRB Securities;
(c) that there has been no other sale by it of the CRB Securities; and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the CRB Securities.
ASSIGNMENT OF GOVERNMENT SECURITIES; PRE-FUNDING ACCOUNT. A portion of
the net proceeds received from the sale of the Securities of a Series, the Base
Assets of which consist in part of Government Securities, will be applied to the
purchase of the related Government Securities from the Depositor or other Seller
on the Closing Date and, to the deposit of a Pre-Funded Amount into a Pre-
Funding Account, if and to the extent specified in the related prospectus
supplement. If a Pre-Funding Account is provided for, the related prospectus
supplement will specify the terms, conditions and manner under which additional
Government Securities will be purchased by the Trust from time to time during
the funding period provided for in the related prospectus supplement. The
Trustee will cause any Government Securities purchased by the Trust to be
registered in the name of the Trustee, or its nominee or correspondent, or,
where applicable, the Indenture Trustee, and the Trustee, or its agent or
correspondent, or the related Indenture Trustee will have possession of any
certificated Government Securities. The Trustee will not be in possession of or
be assignee of record of any underlying assets for a Government Security. See
"The Trust Assets -- Government Securities".
Each Government Security to be transferred to the Trust will be
identified in a schedule appearing as an exhibit to the related Trust Agreement
(the "Government Security Schedule"), which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, or subsequent
cut-off date, annual interest rate and maturity date for each Government
Security. In the Trust Agreement, to the extent that any Government Securities
are purchased from the Depositor, the Depositor will represent and warrant to
the Trustee regarding the Government Securities:
(a) that the information contained in the Government Schedule is true
and correct in all material respects;
(b) that immediately prior to the conveyance of the Government
Securities, the Depositor had good title to and was the sole owner of the
Government Securities;
(c) that there has been no other sale by it of Government Securities;
and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the Government Securities.
ASSIGNMENT OF PRIVATE LABEL CUSTODY RECEIPT SECURITIES; PRE-FUNDING
ACCOUNT. A portion of the net proceeds received from the sale of the Securities
of a Series, the Base Assets of which consist in part of Private Label Custody
Receipt Securities, will be applied to the purchase of the related Private Label
Custody Receipt Securities from the Depositor or other Seller on the Closing
Date and, to the deposit of a Pre-Funded Amount into a Pre-Funding Account, if
and to the extent specified in the related prospectus supplement. If a
Pre-Funding Account is provided for, the related prospectus supplement will
specify the terms, conditions and manner under which additional Private Label
Custody Receipt Securities will be purchased by the Trust from time to time
during the funding period provided for in the related prospectus supplement. The
Trustee will cause any Private Label Custody Receipt Securities purchased by the
Trust to be registered in the name of the Trustee, or its nominee or
correspondent, or, where applicable, the Indenture Trustee, and the Trustee, or
its agent or correspondent, or the Indenture Trustee will have possession of any
certificated Private Label Custody Receipt Securities. The Trustee will not be
in possession of or be assignee of record of any underlying assets for a Private
Label Custody Receipt Security. See "The Trust Assets -- Government Securities".
Each Private Label Custody Receipt Security to be transferred to the
Trust will be identified in a schedule appearing as an exhibit to the related
Trust Agreement (the "Private Label Custody Receipt Security Schedule"), which
will specify the original principal amount, outstanding principal balance as of
the Cut-off Date, or subsequent cut-off date, annual interest rate and maturity
date for each Private Label Custody Receipt Security. In the Trust Agreement, to
the extent that any Private Label Custody Receipt Securities are purchased from
the Depositor, the Depositor will represent and warrant to the Trustee regarding
the Private Label Custody Receipt Securities:
(a) that the information contained in the Private Label Custody
Receipt Schedule is true and correct in all material respects;
(b) that immediately prior to the conveyance of the Private Label
Custody Receipt Securities, the Depositor had good title to and was the sole
owner of the Private Label Custody Receipt Securities;
(c) that there has been no other sale by it of the related Private
Label Custody Receipt Securities; and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the related Private Label Custody Receipt Securities.
Repurchase and Substitution of Non-Conforming Base Assets
In general, the Depositor and/or the Seller or another entity will
make specific representations and warranties to the Trust regarding the Base
Assets to be purchased by the Trust. To the extent described in the related
prospectus supplement, the applicable Agreement will provide that if the
Depositor, the Seller or another entity cannot cure a breach of representations
and warranties in all material respects within the time period specified in the
related prospectus supplement after notification by the Trustee of the breach,
and if the breach is of a nature that materially and adversely affects the value
of a Base Asset, then the Depositor, the Seller or another entity will be
required to repurchase the affected Base Assets on the terms and conditions and
in the manner described in the related prospectus supplement. If provided in the
related prospectus supplement, the Depositor, the Seller or another entity may,
rather than repurchase a Base Asset as described above, remove the affected Base
Asset from the Trust (the "Removed Base Asset") and substitute in its place one
or more other Base Assets meeting the qualifications described in the related
prospectus supplement each, a "Qualifying Substitute Base Asset". The
above-described cure, repurchase or substitution obligations, subject to
specific exceptions which, if applicable, will be specified in the related
prospectus supplement, shall constitute the sole remedies available to holders
of Securities or the Trustee, or Indenture Trustee, for a breach of a
representation or warranty in respect of a Base Asset. Where Base Assets are
purchased by a Depositor from a Seller and reconveyed to the Trustee, the
Depositor's only source of funds to effect any cure, repurchase or substitution
generally will be through the enforcement of the corresponding obligations of
the Seller to the Depositor.
Trust Accounts
With respect to any Series of Securities that includes Notes, the
Owner Trustee will establish and maintain with the related Indenture Trustee:
o one or more accounts, in the name of the Indenture Trustee on
behalf of the related Securityholders, into which all payments
made on or in respect of the related Base Assets will be
deposited (the "Collection Account"), and
o one or more accounts, in the name of the Indenture Trustee on
behalf of the Noteholders, into which amounts released from the
Collection Account and any Reserve Account or other form of
Series Enhancement for payment to the Noteholders will be
deposited and from which all payments to these Noteholders will
be made (the "Note Payment Account").
With respect to each Trust, the Trustee will establish and maintain one or more
accounts with the related Trustee, in the name of that Trustee on behalf of the
Certificateholders, into which amounts released from the Collection Account and
any Reserve Account or other form of Series Enhancement for distribution to the
Certificateholders will be deposited and from which all distributions to the
Certificateholders will be made (the "Certificate Payment Account "). With
respect to any Series that does not include Notes, the Trustee will also
establish and maintain the Collection Account and any other account in the name
of the related Trustee on behalf of the related Certificateholders.
For each Series of Securities, funds in the Collection Account, Note
Payment Account and Certificate Payment Account and any Reserve Account or other
accounts, identified in the related prospectus supplement (collectively, the
"Trust Accounts") will be invested as provided in the related Agreement or
Indenture in Eligible Investments. "Eligible Investments" will generally be
limited to investments acceptable to the Rating Agencies as being consistent
with the rating of the related Securities. Except as described in this
Prospectus or in the related prospectus supplement, Eligible Investments will be
limited to obligations or securities that mature on or before the date of the
next scheduled distribution to Securityholders of the related Series. However,
to the extent permitted by the Rating Agencies, funds in any Reserve Account may
be invested in securities that will not mature prior to the date of the next
scheduled distribution with respect to the Notes or Certificates and will not be
sold prior to maturity to meet any shortfalls. Thus, the amount of available
funds on deposit in a Reserve Account at any time may be less than the balance
of the Reserve Account. If the amount required to be withdrawn from a Reserve
Account to cover shortfalls in collections with respect to the related Base
Assets, as provided in the related prospectus supplement, exceeds the amount of
available funds on deposit in the Reserve Account, a temporary shortfall in the
amounts distributed to the related Noteholders or Certificateholders could
result, which could, in turn, increase the average life of the related Notes or
Certificates. The related prospectus supplement may provide that investment
earnings on funds deposited in the Trust Accounts, net of losses and investment
expenses (collectively, "Investment Earnings"), will be treated as collections
of interest on the related Base Assets.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either:
o a segregated account with an Eligible Institution, or
o a segregated trust account with the corporate trust department of
a depository institution organized under the laws of the United
States of America or any one of the states of the United States
of America or the District of Columbia, or any domestic branch of
a foreign bank, having corporate trust powers and acting as
trustee for funds deposited in the segregated trust account, so
long as any of the securities of the depository institution have
a credit rating from each Rating Agency in one of its generic
rating categories that signifies investment grade.
"Eligible Institution" means, with respect to a Trust:
(a) the corporate trust department of the related Indenture Trustee or
Trustee, as applicable, or
(b) a depository institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank,
(1) that has either,
(A) a long-term unsecured debt rating acceptable to the
Rating Agencies, or
(B) a short-term unsecured debt rating or certificate of
deposit rating acceptable to the Rating Agencies, and
(2) whose deposits are insured by the FDIC.
Reports to Certificateholders
The Trustee will prepare and forward to each Certificateholder on each
Distribution Date, or as soon after each Distribution Date as is practicable, a
statement setting forth, to the extent applicable to any Series, the information
specified in the related prospectus supplement for the related Series. In
addition, within a reasonable period of time after the end of each calendar
year, the Trustee will be required to furnish to each holder of record at any
time during the calendar year a statement setting forth the information
specified in the related prospectus supplement, which will include information
intended to enable holders of Certificates to prepare their tax returns.
Information in the Distribution Date reports and the annual reports provided to
the holders will not have been examined and reported upon by an independent
public accountant. However, any Servicer will provide to the Trustee an annual
report by independent public accountants with respect to the Servicer's
servicing of the Receivables. See "Servicing of Receivables -- Evidence as to
Compliance".
Servicer Defaults
With respect to a Series of Receivables Pooling Certificates,
"Servicer Defaults" under the Pooling and Servicing Agreement for a Series
generally include:
(a) any failure by the Servicer to deposit amounts in the Collection
Account and any Payment Account to enable the Trustee to distribute to
Certificateholders of the Series any required payment, which failure continues
unremedied for five days after the giving of written notice of failure to the
Servicer by the Trustee for the Series, or to the Servicer and the Trustee by
the holders of the required percentage of any Class of Securities of the related
Series specified in the related prospectus supplement,
(b) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which continues unremedied for 30 days after the giving of
written notice of the failure to the Servicer by the Trustee, or to the Servicer
and the Trustee by the holders of the required percentage of any Class of
Securities of the related Series,
(c) events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and specific actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations,
and
(d) other events that shall be specified in the related prospectus
supplement.
Rights Upon Servicer Defaults
With respect to a Series of Receivables Pooling Certificates, so long
as a Servicer Default remains unremedied under the Pooling and Servicing
Agreement for a Series, and subject to any right of any Indenture Trustee, the
Trustee for the Series or holders of the required percentage of any Class of
Securities specified in the related prospectus supplement may terminate all of
the rights and obligations of the Servicer as servicer under the Pooling and
Servicing Agreement in and to the Receivables, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Pooling and Servicing Agreement and will be entitled to reasonable
servicing compensation not to exceed the applicable Servicing Fee, together with
other servicing compensation in the form of assumption fees, late payment
charges or as otherwise provided in the Pooling and Servicing Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a financial
institution, bank or loan servicing institution with a net worth of at least
$15,000,000 to act as successor Servicer under the provisions of the Pooling and
Servicing Agreement relating to the servicing of the Receivables. The successor
Servicer would be entitled to reasonable servicing compensation in an amount not
to exceed the Servicing Fee as set forth in the related prospectus supplement,
together with the other servicing compensation in the form of assumption fees,
late payment charges or otherwise, as provided in the Pooling and Servicing
Agreement.
During the continuance of any Servicer Default under the Pooling and
Servicing Agreement for a Series, the Trustee for the Series will have the right
to take action to enforce its rights and remedies and to protect and enforce the
rights and remedies of the Certificateholders of the Series, and holders of the
required percentages of the Certificates specified in the related prospectus
supplement may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred upon the Trustee. The Trustee, however, will not be under any
obligation to pursue any remedy or to exercise any trusts or powers unless the
Certificateholders have offered the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred by the Trustee
in or by pursuit of remedy or exercise of trusts or powers. Also, the Trustee
may decline to follow any direction if the Trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the nonassenting Certificateholders.
No Certificateholder of a Series, solely by virtue of the holder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement for the related Series to institute any proceeding with
respect to the Pooling and Servicing Agreement, unless the holder previously has
given to the Trustee for the Series written notice of default and unless the
holders of the required percentages of the outstanding Securities specified in
the related prospectus supplement have made written request upon the Trustee to
institute a proceeding in its own name as Trustee under the Pooling and
Servicing Agreement and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any proceeding.
The Trustee
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Certificates will be set
forth in the related prospectus supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor, the Seller or the
Servicer. In addition, for the purpose of meeting the legal requirements of some
local jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust relating to a Series of
Securities. In the event of an appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the applicable Agreement
relating to the Series will be conferred or imposed upon the Trustee and each
separate trustee or co-trustee jointly, or in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform specific acts, singly
upon the separate trustee or co-trustee who shall exercise and perform these
rights, powers, duties and obligations solely at the direction of the Trustee.
The Trustee may also appoint agents to perform any of the responsibilities of
the Trustee, which agents shall have any or all of the rights, powers, duties
and obligations of the Trustee conferred on them by the appointment; provided
that the Trustee shall continue to be responsible for its duties and obligations
under the applicable Agreement.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of the applicable Agreement, the Securities or of any Base Asset,
Series Enhancement or related documents. If no Servicer Default, as defined in
the related Pooling and Servicing Agreement, if applicable, has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of the documents furnished by it or the Securityholders to
the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the
Securityholders upon a Servicer Default. See "-- Rights Upon Servicer Defaults"
above. The Trustee is not required to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties under an
Agreement, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of funds or adequate indemnity
against risk or liability is not reasonably assured to it.
Replacement of the Trustee
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time:
o by the Depositor, if the Trustee ceases to be eligible to
continue as under the related Agreement,
o if the Trustee becomes insolvent, or
o by the holders of the required percentages of the outstanding
Securities specified in the related prospectus supplement upon 30
days' advance written notice to the Trustee and to the Depositor.
Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
Amendment of the Agreement
The Agreement for each Series of Securities may be amended by the
Depositor and the related Trustee, and where applicable the Seller and the
Servicer, without notice to or consent of the Securityholders:
(a) to cure any ambiguity,
(b) to correct any defective provisions or to correct or supplement
any provision in the Agreement which may be inconsistent with any other
provision in the Agreement,
(c) to add to the duties of the Depositor, Seller or Servicer,
(d) to add any other provisions with respect to matters or questions
arising under the related Agreement or related Series Enhancement,
(e) to add or amend any provisions of the Agreement as required by a
Rating Agency in order to maintain or improve the rating of any Class of the
Securities,
(f) to comply with any requirements imposed by the Code, or
(g) to make other amendments as are specified in the related
prospectus supplement;
provided that any amendment pursuant to clause (d) or (g) above will not
adversely affect in any material respect the interests of any Securityholders of
the related Series, as evidenced by an opinion of counsel.
Any amendment except pursuant to clause (f) of the preceding sentence shall be
deemed not to adversely affect in any material respect the interests of any
Securityholder if the Trustee receives written confirmation from each Rating
Agency rating the Securities that the amendment will not cause the Rating Agency
to reduce the then current rating of the Securities. The Agreement for each
Series may also be amended by the Depositor and the Trustee, and where
applicable the Seller and the Servicer, with the consent of the holders of the
required percentages of the outstanding Securities of each Series affected by
the amendment of the Agreement specified in the related prospectus supplement,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or modifying in any manner
the rights of Securityholders of the related Series; provided, however, that no
amendment may:
o reduce the amount or delay the timing of payments on any Security
without the consent of the holder of that Security; or
o reduce the aforesaid percentage of aggregate outstanding
principal amount of Securities of each Class, the holders of
which are required to consent to any amendment.
List of Certificateholders
Upon written request of three or more Certificateholders of record of
a Series for purposes of communicating with other Certificateholders with
respect to their rights under the Agreement or under the Certificates for the
Series, which request is accompanied by a copy of the communication which the
Certificateholders propose to transmit, the Trustee will afford these
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Certificateholders.
Termination
The obligations created by the Agreement for a Series will terminate
upon the distribution to Certificateholders of all amounts distributable to them
pursuant to that Agreement after the earliest to occur of:
o the final payment or other liquidation of the last Base Asset
remaining in the Trust for the related Series, or
o the repurchase, as described below, by the Servicer from the
Trustee for the related Series of all Base Assets and other
property at that time subject to the Agreement.
The Agreement for each Series will permit, but will not require, the Servicer,
the Seller and/or the Depositor to repurchase from the Trust for the Series all
remaining Base Assets at a price equal to 100% of the aggregate principal amount
of the Base Assets plus, with respect to any property acquired in respect of a
Base Asset, if any, the outstanding principal amount of the related Base Asset,
and unreimbursed expenses, that are reimbursable pursuant to the terms of the
Agreement, plus accrued interest on the unreimbursed expenses at the weighted
average rate on the related Base Assets through the last day of the Monthly
Period in which the repurchase occurs. The exercise of this right will effect
early retirement of the Certificates of the Series, but the Servicer's right to
so purchase is subject to the aggregate principal balance of the Base Assets at
the time of repurchase being less than a fixed percentage, to be set forth in
the related prospectus supplement, of the Cut-off Date aggregate principal
balance. In no event, however, will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the last survivor of persons
identified in the related prospectus supplement. For each Series, the Servicer
or the Trustee, as applicable, will give written notice of termination of the
Agreement to each Certificateholder, and the final distribution will be made
only upon surrender and cancellation of the Certificates at an office or agency
specified in the notice of termination. If so provided in the related prospectus
supplement for a Series, the Depositor or another entity may effect an optional
termination of the Trust under the circumstances described in the related
prospectus supplement. See "Description of the Certificates-- Receivables
Pooling Certificates -- Optional Termination; Final Payment of Principal".
Payment in Full of the Notes
With respect to any Series of Securities that includes Notes, the
Trust Agreement will provide that upon the payment in full of all outstanding
Notes of a given Series and the satisfaction and discharge of the related
Indenture, the related Trustee will succeed to all the rights of the Indenture
Trustee, and the Certificateholders of the Series will succeed to all the rights
of the Noteholders of the Series under the related Trust Agreement, to the
extent and in the matter provided in the Trust Agreement.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
The following discussion contains summaries of some legal aspects of
credit, charge and debit card receivables which are general in nature. As a
consequence, investors should consider the issues raised by the following
discussion as relevant in connection with both the Receivables and the
Receivables underlying the CRB Securities. Because some legal aspects are
governed by applicable state law, which laws may differ substantially, the
summaries do not purport to be complete nor purport to reflect the laws of any
particular state, nor purport to encompass the laws of all states in which
Receivables, or the Receivables underlying the CRB Securities, originate. The
summaries are qualified in their entirety by reference to the applicable federal
and state laws governing the Receivables, and the Receivables underlying the CRB
Securities.
Transfer of Receivables
With respect to each transfer of Receivables to a Trust, the Seller
and/or the Depositor will warrant in the applicable Agreement that the transfer
constitutes either a valid transfer and assignment to the Trust of all right,
title and interest of the Seller, and/or the Depositor, in and to the
Receivables free and clear from liens arising from or through the Seller, or the
Depositor, except, to the extent specified in the related prospectus supplement,
for potential tax liens, any interest of the Seller or the Depositor as holder
of the Depositor's Interest and the Servicer's right to receive interest and
investment earnings ,net of losses and investment expenses, in respect of the
Collection Account, or a valid grant to the Trust of a security interest in the
Receivables. The Seller and/or the Depositor will also warrant in the Agreement
that, in the event that the transfer of the Receivables to the Trust is deemed
to create a security interest under the Uniform Commercial Code (the "UCC") as
in effect in the state in which its principal office is located, there will
exist a valid, subsisting and enforceable first priority perfected security
interest in the Receivables in favor of the Trust and a valid, subsisting and
enforceable first priority perfected security interest in the Receivables later
created in the relevant Accounts in favor of the Trust upon their creation
except for specific liens as described in the Agreement.
The Receivables are generally considered to be "general intangibles"
or "accounts" for purposes of the UCC. Both the transfer of accounts and the
transfer of accounts as security for an obligation are treated under Article 9
of the UCC as creating a security interest in the Receivables and are subject to
its provisions, and the filing of appropriate financing statements is required
to perfect the security interest of the Trust. Financing statements covering the
Receivables will be filed with the appropriate governmental authority to protect
the interest of the Depositor and the Trust.
There are limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the date on
which the Receivables are transferred to the Trust could have an interest in
these Receivables with priority over the Trust's interest. Under the Pooling and
Servicing Agreement, however, the Seller and/or the Depositor will warrant that
the Receivables have been transferred to the Trust free and clear of the lien of
any third party, except for some tax and other governmental liens. In addition,
the Seller and the Depositor will each covenant that, except as permitted by the
Pooling and Servicing Agreement, it will not sell, pledge, assign, transfer or
grant any lien on any Receivables, or any interest in the Receivables, other
than to the Trust. A tax or other government lien on property of the Seller or
the Depositor arising prior to the time a Receivable comes into existence may
also have priority over the interest of the Trust in the Receivables. In
addition, if a Seller is a Bank, if the FDIC were appointed as receiver of the
Bank, some administrative expenses of the receiver may also have priority over
the interest of the Trust in these Receivables.
A case decided by the United States Court of Appeals for the Tenth
Circuit contains language to the effect that accounts sold by an entity which
subsequently became bankrupt remained property of the debtor's bankruptcy
estate. If a Seller were to become a debtor under the federal bankruptcy code
and a court were to follow the reasoning of the Tenth Circuit, Securityholders
could experience a delay or reduction in distributions.
Certain Matters Relating to Receivership
It is likely that the Sellers of Receivables to a Trust or the sellers
of Receivables to CRB Trusts will be banking institutions. FIRREA, which became
effective August 9, 1989, sets forth certain powers that the FDIC could exercise
if it were appointed as receiver of a Seller which is a national bank.
Subject to clarification by FDIC regulations or interpretations, it
would appear from the positions taken by the FDIC before the passage of FIRREA
that the FDIC in its capacity as receiver for a Seller would not interfere with
the timely transfer to the Trust or to a CRB Trust of payments collected on the
Receivables or interfere with the timely liquidation of Receivables as described
below. To the extent that a Seller granted a security interest in the
Receivables to the related Trust (or granted such a security interest to the
Depositor which was then assigned the related Trust) or to a CRB Trust, and that
interest was validly perfected before the Seller's insolvency and was not taken
or granted in contemplation of insolvency or with the intent to hinder, delay or
defraud the Seller or its creditors, that security interest should not be
subject to avoidance, and payments to the Trust or to a CRB Trust with respect
to Receivables should not be subject to recovery by the FDIC as receiver of the
Seller. If, however, the FDIC were to assert a contrary position, or were to
require the related Trustee or CRB Trustee to establish its right to those
payments by submitting to and completing the administrative claims procedure
established under FIRREA, delays in payments on the Securities of any Series
relating to such Seller (or delays in payments on CRB Securities relating to a
similarly insolvent seller) outstanding at such time and possible reductions in
the amount of those payments could occur.
Each Pooling and Servicing Agreement and Receivables Purchase
Agreement as to which a banking institution is the Seller will provide that,
upon the appointment of a receiver for the Seller, the Seller will promptly give
notice thereof to the Depositor, and a Pay Out Event will occur. Under the
Pooling and Servicing Agreement, no new Principal Receivables will be
transferred to the Trust and, unless otherwise instructed within a specified
period by the holders of the required percentages of outstanding Securities
specified in the related Prospectus Supplement or unless otherwise prohibited by
law, the Trustee will proceed to sell, dispose of or otherwise liquidate the
Receivables in a commercially reasonable manner and on commercially reasonable
terms. The proceeds from the sale of the Receivables would then be treated by
the Trustee as collections on the Receivables. This procedure could by delayed
as described above. The net proceeds of any such sale will first be treated by
the Trustee as collections on the Finance Charge Receivables, if any. Upon the
occurrence of a Pay Out Event, if a conservator or receiver is appointed for the
Seller or the Depositor and no Pay Out Event other than such conservatorship or
receivership or insolvency of the Seller or the Depositor exists, the
conservator or receiver may have the power to prevent the early sale,
liquidation or disposition of the Receivables and the commencement of a Rapid
Amortization Period with respect to any outstanding Series. In addition, a
conservator or receiver for the Seller or the Depositor may have the power to
cause early payment of the Certificates.
If a Seller that is a banking institution is servicing its Receivables
and a conservator or receiver is appointed for the Servicer, and no Servicer
Default other than such conservatorship or receivership or insolvency of the
Servicer exist, the conservator or receiver may have the power to prevent either
the Trustee or the Certificateholders from effecting a transfer of servicing to
a successor Servicer.
Consumer Protection Laws
The relationship of cardholder and card issuer is extensively
regulated by Federal and state consumer protection laws. The most significant of
these laws include the Federal Truth-in-Lending Act, Equal Credit Opportunity
Act, Fair Credit Reporting Act, Electronic Funds Transfer Act and, to the extent
that the Seller is a national banking association, the National Bank Act, as
well as the banking statutes of the state in which the bank is located, and
comparable statutes in the states in which cardholders reside. These statutes
impose disclosure requirements when an account is advertised, when it is opened,
at the end of monthly billing cycles, upon account renewal for accounts on which
annual fees are assessed, and at year end and, in addition, limit cardholder
liability for unauthorized use, prohibit certain discriminatory practices in
extending credit, and impose certain limitations on the type of account-related
charges that may be assessed. Newly adopted Federal legislation requires card
issuers to disclose to consumers the interest rates, annual cardholder fees,
grace periods, and balance calculation methods associated with their accounts.
Cardholders are entitled under current law to have payments and credits applied
to the account promptly, to receive prescribed notices and to have billing
errors resolved promptly.
Various proposed laws and amendments to existing laws have been
introduced in Congress and certain state and local legislatures that, if
enacted, would further regulate the credit card industry. Certain such laws
would, among other things, impose a ceiling on the rate at which a financial
institution may assess finance charges on credit card accounts that would be
substantially below the rates of the finance charges currently assessed by most
Sellers on their accounts. A proposed bill of this nature was defeated in the
United States House of Representatives in 1987, and on November 14, 1991, the
United States Senate approved by a vote of 74 to 19 a measure which could have
established, if it were enacted as law, a ceiling on credit card interest rates
of 4% above the rate that the IRS charges on the underpayment of taxes. Such a
law would, in effect, reduce all interest rates on credit cards to 14% per annum
until the IRS calculates the new rate, which is currently done on a quarterly
basis. Although this proposed legislation was not passed by Congress, the issue
of federal regulation of interest rates on credit cards continues to be debated,
and there can be no assurance that such a bill will not become law in the
future. The potential effect of any legislation which limits the amount of
finance charges that may be charged on credit cards could be to reduce the Net
Portfolio Yield of each Series. If such Net Portfolio Yield of a Series is
reduced, a Pay Out Event for such Series may occur, and the Rapid Amortization
Period for such Series would commence.
Since October 1991, a number of lawsuits and administrative actions
have been filed in several states against out-of-state banks (both federally
insured state-chartered banks and federally insured national banks) which issue
cards. These actions challenge various fees and charges (such as late fees,
overlimit fees, returned payment check fees and annual membership fees) assessed
against residents of the states in which such suits were filed, based on
restrictions or prohibitions under such states' laws alleged to be applicable to
the out-of-state card issuers. In October 1991, the United States District Court
for the State of Massachusetts held that Greenwood Trust Company (a
federally-insured, Delaware-charted bank that issues the Discover credit card)
was prohibited by Massachusetts law from assessing late charges on credit card
accounts of Massachusetts residents. On August 6, 1992, the decision was
reversed by the United States Court of Appeals for the First Circuit, which held
that the Massachusetts law was preempted by federal law permitting the charges
in question. In November 1992, the Commonwealth of Massachusetts petitioned the
United States Supreme Court to accept the case. On January 11, 1993, the U.S.
Supreme Court denied the petition of the Commonwealth to review the decision of
the First Circuit. The California Supreme Court in March 1992 refused to review
a lower court's determination that the practice by Wells Fargo Bank of charging
its cardholders over-the-limit and late payment fees violated California laws
that require banks to limit such charges to their costs. On November 29, 1995,
the Supreme Court of New Jersey ruled that a national bank that issued credit
cards in New Jersey but is located in another state, and that is entitled under
the National Bank Act to charge borrowers interest at a rate allowed by the laws
of the state where the bank is located, was not entitled to charge New Jersey
cardholders certain late payment fees, notwithstanding the fact that the state
in which the bank is located permits such late payment fees, because late
payment fees are not defined as interest within the meaning of the National Bank
Act and because New Jersey state law forbade the charging of such late payment
fees. On June 3, 1996, the U.S. Supreme Court upheld regulations issued by the
U.S. Comptroller of the Currency that characterize late fees as interest and
that therefore entitle a national bank to charge late fees if the state in which
such national bank is located allows such late fees. Although the U.S. Supreme
Court resolved certain conflicts of interpretation among the states, such
actions and similar actions which may be brought in other states as a result of
such actions, if resolved adversely to card issuers, could have the effect of
limiting certain charges, other than periodic finance charges, that could be
assessed on accounts of residents of such states and could require card issuers
to pay refunds and civil penalties with respect to charges previously imposed on
cardholders in such states.
The Trust may be liable for certain violations of consumer protection
laws that apply to the Receivables, either as assignee of the Seller with
respect to obligations arising before transfer of the Receivables to the Trust
or as a party directly responsible for obligations arising after the transfer.
In addition, a cardholder may be entitled to assert such violations by way of
set-off against his obligation to pay the amount of Receivables owing. Each
Seller will covenant in the Agreement to accept the retransfer of all
Receivables in an Account if any Receivable in such Account has not been created
in compliance with the requirements of such laws.
Application of Federal and state bankruptcy and debtor relief laws
would adversely affect the interests of the Certificateholders if such laws
result in any Receivables being written off as uncollectible.
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans and
related assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
USE OF PROCEEDS
The Depositor will use the net proceeds from the sale of each Series
of Securities for one or more of the following purposes:
(a) to purchase the related Base Assets and/or Series Enhancement,
(b) to repay indebtedness which has been incurred to obtain funds to
acquire the related Base Assets and/or Series Enhancement,
(c) to fund the purchase of the related Base Assets and/or Series
Enhancement by the related Trust on the Closing Date or to establish a
Pre-Funding Account for the Series,
(d) to establish any Reserve Account or Cash Collateral Accounts
described in the related prospectus supplement, or
(e) to pay costs of structuring and issuing the Securities.
If so specified in the related prospectus supplement, the purchase of the Base
Assets for a Series may be effected in whole or in part by an exchange of
Securities with the Seller of the related Base Assets.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of Securities. Stroock & Stroock & Lavan LLP, New York, New York or
any other counsel specified in the related prospectus supplement ("Federal Tax
Counsel"), will deliver its opinion regarding some related federal income tax
matters discussed below, a copy of which will be filed with the SEC in a Current
Report on Form 8-K or in a post-effective amendment to the Registration
Statement. The opinion of Federal Tax Counsel specifically addresses only those
issues specifically identified below as being covered by the opinion; however,
the opinion also states that the additional discussion set forth below
accurately sets forth Federal Tax Counsel's advice with respect to material
federal income tax issues. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of Notes ("Note Owners") or Certificates
("Certificate Owners", together with Note Owners, "Security Owners") that are
insurance companies, regulated investment companies or dealers in securities.
Moreover, there are no cases or Internal Revenue Service ("IRS") rulings on
similar transactions involving both debt and equity interests issued by a trust
with terms similar to those of the Notes and the Certificates. As a result, the
IRS might disagree with all or part of the discussion below. Prospective
investors are urged to consult their own tax advisors in determining the
federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated under the Code and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Federal Tax Counsel regarding some related federal income tax
matters. An opinion of Federal Tax Counsel, however, is not binding on the IRS
or the courts. No ruling on any of the issues discussed below will be sought
from the IRS. For purposes of the following summary, references to the Trust,
the Notes, the Certificates and related terms, parties and documents shall be
deemed to refer, unless otherwise specified in this Prospectus, to each Trust
and the Notes, Certificates and related terms, parties and documents applicable
to each Trust.
OWNER TRUSTS
TAX CHARACTERIZATION OF THE OWNER TRUSTS
In the case of an Owner Trust, Federal Tax Counsel will deliver its
opinion that the Trust will not be an association, or publicly traded
partnership, taxable as a corporation for federal income tax purposes. The
opinion of Federal Tax Counsel will be based on the assumption that the terms of
the Trust Agreement and related documents will be complied with, and on the
Federal Tax Counsel's conclusions that the nature of the income of the Trust, or
the restrictions, if any, on transfers of the Certificates, will exempt the
Trust from the rule that some publicly traded partnerships are taxable as
corporations.
If an Owner Trust were taxable as a corporation for federal income tax
purposes, the Owner Trust would be subject to corporate income tax on its
taxable income. The Trust's taxable income would include all of its income on
the related Base Assets, which might be reduced by its interest expense on the
Notes. Any corporate income tax could materially reduce cash available to make
payments on the Notes and distributions on the Certificates, and Certificate
Owners, and possibly Note Owners could be liable for any tax that is unpaid by
the Trust.
TAX CONSEQUENCES TO NOTE OWNERS
Treatment of the Notes as Indebtedness. The Trust will agree, and the
Note Owners will agree by their purchase of Notes, to treat the Notes as debt
for federal tax purposes. Federal Tax Counsel will advise the Owner Trust that
the Notes will be classified as debt for federal income tax purposes, or
classified in another manner as shall be provided in the related prospectus
supplement. As noted above, there are no cases or IRS rulings on similar
transactions involving both debt and equity interests issued by a trust with
terms similar to those of the Notes and the Certificates and, as a result, the
IRS might disagree with a conclusion. 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. If so treated, the Trust might be treated as a
publicly traded partnership that would be taxable as a corporation unless it met
specified qualifying income tests, and the resulting taxable corporation would
not be able to reduce its taxable income by deductions for interest expense on
Notes recharacterized as equity. Treatment of the Notes as equity interests in a
partnership could have adverse tax consequences to some holders, even if the
Trust were not treated as a publicly traded partnership taxable as a
corporation. For example, income allocable to foreign holders might be subject
to U.S. federal income tax and U.S. federal tax return filing and withholding
requirements, and individual holders might be subject to limitations on their
ability to deduct their share of Trust expenses. The discussion below assumes
that the Notes will be characterized as debt for federal income tax purposes.
Interest Income on the Notes. The taxation of interest on a Note will
depend on whether the interest constitutes "qualified stated interest". Interest
on a Note that constitutes qualified stated interest is includible in a Note
Owner's income as ordinary interest income when actually or constructively
received, if the Note Owner uses the cash method of accounting for federal
income tax purposes, or when accrued, if the Note Owner uses an accrual method
of accounting for federal income tax purposes. Interest that does not constitute
qualified stated interest is included in a Note Owner's income under the rules
described below under "--Original Issue Discount", regardless of the Note
Owner's method of accounting, or, in some circumstances, under rules governing
contingent payments which are set out in regulations issued in final form on
June 11, 1996 (the "1996 Contingent Debt Regulations"). Notwithstanding the
foregoing, interest that is payable on a Note with a fixed maturity of one year
or less from its issue date is included in a Note Owner's income under the rules
described below under "--Short Term Notes".
In general, "qualified stated interest " is stated interest that,
during the entire term of the Note, is unconditionally payable at least annually
at a single fixed rate of interest or, subject to exceptions summarized below,
at a variable rate that is a single "qualified floating rate" or a single
"objective rate". If stated interest is unconditionally payable at two or more
qualified floating rates, a single fixed rate and one or more qualified floating
rates, or a single fixed rate and a single objective rate that is a "qualified
inverse floating rate", all or a portion of the stated interest might be treated
as "qualified stated interest". See "--Original Issue Discount", below. Under
Treasury Regulations under Sections 1271-1275 of the Code (the "OID
Regulations"), interest is considered unconditionally payable only if late
payment or nonpayment is remote or reasonable remedies exist to compel payment.
If stated interest is payable at a variable rate other than in accordance with
the foregoing, the interest will not be treated as "qualified stated interest",
and it is unclear whether these payments must be treated as part of a Note's
"stated redemption price at maturity" and governed by the rules described below
under "--Original Issue Discount" or, alternatively, must be taxed as contingent
interest under, or under rules similar to, the 1996 Contingent Debt Regulations,
or in some other manner.
Stated interest generally qualifies as being payable at a "qualified
floating rate" if variations in the value of the rate can reasonably be expected
to measure contemporaneous fluctuations in the cost of newly borrowed funds in
the currency in which the Note is denominated. A variable rate will be
considered a qualified floating rate if the variable rate equals:
a) the product of an otherwise qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, or
b) an otherwise qualified floating rate, or the product described in
clause (a), plus or minus a fixed rate.
If the variable rate equals the product of an otherwise qualified floating rate
and a single multiplier greater than 1.35 or less than or equal to 0.65,
however, the rate will generally constitute an objective rate, described more
fully below.
Stated interest qualifies as payable at an "objective rate" if the
rate is determined using a single fixed formula and is based on objective
financial information or economic information. However, an objective rate does
not include a rate based on information that is within the control of the issuer
or that is unique to the circumstances of the issuer, or a related party. The
IRS may designate other objective rates. An objective rate is a "qualified
inverse floating rate " if:
o the rate is equal to a fixed rate minus a qualified floating
rate, and
o the variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the cost of newly
borrowed funds, disregarding some related caps, floors, governors
or similar restrictions.
All or a portion of interest that otherwise is treated as qualified
stated interest under the rules summarized above will not be treated as
qualified stated interest if, among other circumstances:
(a) the variable rate of interest is subject to one or more minimum or
maximum rate floors or ceilings or one or more governors limiting the amount of
increase or decrease in each case which are not fixed throughout the term of the
Note and which are reasonably expected as of the issue date to cause the rate in
some accrual periods to be significantly higher or lower than the overall
expected return on the Note determined without a floor or ceiling;
(b) it is reasonably expected that the average value of the variable
rate during the first half of the term of the Note will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the term of the Note;
(c) the "issue price" of the Note, as described below, exceeds the
total noncontingent principal payments by more than an amount equal to the
lesser of .015 multiplied by the product of the total noncontingent principal
payments and the number of complete years to maturity from the issue date, or,
in some cases, its weighted average maturity, and 15 percent of the total
noncontingent principal;
(d) the Note does not provide that a qualified floating rate or
objective rate in effect at any time during the term of the Note is set at the
value of the rate on any day that is no earlier than three months prior to the
first day on which the value is in effect and no later than one year following
that first day, or
(e) if interest is not unconditionally payable.
In these situations, as well as others, it is unclear whether interest payments
must be treated either as part of a Note's "stated redemption price at
maturity," as described below, resulting in original issue discount, or
represent contingent payments subject to taxation under, or under rules similar
to, the 1996 Contingent Debt Regulations, or some other manner.
Original Issue Discount. Notes may be issued with "original issue
discount "). Rules governing original issue discount are set forth in Sections
1271-1275 of the Code and the OID Regulations. The discussion in this Prospectus
is based in part on the OID Regulations. Note Owners also should be aware that
the OID Regulations do not address all issues relevant to prepayable securities
such as the Notes.
In general, a Note's original issue discount, if any, is the
difference between the "stated redemption price at maturity" of the Note and its
"issue price".
The original issue discount with respect to a Note will be considered
to be zero if it is less than a specified de minimis amount of 0.25% of the
Note's stated redemption price at maturity multiplied by the number of complete
years from the date of issue of the Note to its maturity date or, in the case of
Notes that have more than one principal payment or that have interest payments
that are not qualified stated interest, the weighted average maturity of the
Note, as specially defined for tax purposes. Because of the possibility of
prepayments, it is not clear how the de minimis rules will apply to the Notes.
It is likely that the anticipated rate of prepayments assumed in pricing the
debt instrument (the "Prepayment Assumption") will be required to be used in
determining the weighted average maturity of the Notes. In the absence of
authority to the contrary, the Depositor presently expects to apply the de
minimis rule by using the Prepayment Assumption. Generally, a Note Owner
includes de minimis original issue discount in income as principal payments are
made. The amount includable in income with respect to each principal payment
equals a pro rata portion of the entire amount of de minimis original issue
discount with respect to that Note. Any de minimis amount of original issue
discount includable in income by a Note Owner is generally treated as a capital
gain if the Note is a capital asset in the hands of the Note Owner.
The "stated redemption price at maturity" of a Note generally will be
equal to the sum of all payments, whether denominated as principal or interest,
to be made with respect to the Note other than "qualified stated interest".
In general, the "issue price" of a Note is the first price at which a
substantial amount of the Notes of a class are sold for money to the public,
excluding bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers.
If a Note is determined to be issued with original issue discount, the
Note Owner must generally include the original issue discount in ordinary gross
income for federal income tax purposes as it accrues in advance of the receipt
of any cash attributable to income. The amount of original issue discount, if
any, required to be included in a Note Owner's ordinary gross income for federal
income tax purposes in any taxable year will be computed in accordance with
Section 1272(a) of the Code and the OID Regulations. Under this section and the
OID Regulations, original issue discount accrues on a daily basis under a
constant yield method that takes into account the compounding of interest.
The amount of original issue discount includable in income by a Note
Owner is the sum of the "daily portions" of the original issue discount for each
day during the taxable year on which the holder held the Note. The daily
portions of original issue discount are determined by allocating to each day in
any "accrual period" a pro rata portion of the excess, if any, of:
(a) the sum of,
(1) the present value of all remaining payments to be made on the
Note as of the close of the "accrual period", and
(2) the payments during the accrual period of amounts included in
the stated redemption price of the Note over,
(b) the "adjusted issue price" of the Note at the beginning of the
accrual period.
Generally, the "accrual period" for the Notes corresponds to the intervals at
which amounts are paid or compounded with respect to the Note, beginning with
their date of issuance and ending with the maturity date. The "adjusted issue
price" of a Note at the beginning of any accrual period is the sum of the issue
price and accrued original issue discount for each prior accrual period reduced
by the amount of payments other than payments of qualified stated interest made
during each prior accrual period. The Code and related legislative history
require, pending the issuance of Treasury Regulations, the present value of the
remaining payments to be determined on the bases of:
o the original yield to maturity, determined on the basis of
compounding at the close of each accrual period and properly
adjusted for the length of the accrual period,
o events, including actual prepayments, which have occurred before
the close of the accrual period, and
o the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption.
Although original issue discount, if any, will be reported to Note Owners based
on the Prepayment Assumption, no representation is made to Note Owners that the
Notes will be prepaid at that rate or at any other rate.
In general, a subsequent purchaser of a Note will also be required to
include in the purchaser's ordinary gross income for federal income tax purposes
the original issue discount, if any, accruing with respect to the Note, unless
the price paid equals or exceeds the Note's stated redemption price at maturity.
If the price paid exceeds the Note's "adjusted issue price", but does not equal
or exceed the stated redemption price at maturity, the amount of original issue
discount to be accrued will be reduced in accordance with a formula set forth in
Section 1272(a)(7)(B) of the Code. If the price paid is less than the Note's
adjusted issue price, the purchaser will be required to include in income any
original issue discount on the Note and, to the extent the price paid is less
than the adjusted issue price, the Note will be treated as having been purchased
with "market discount". See "--Market Discount", below.
If a variable rate Note is deemed to have been issued with original
issue discount, as described above, the amount of original issue discount
accrues on a daily basis under a constant yield method that takes into account
the compounding of interest; provided, however, that the interest associated
with this Note generally is assumed to remain constant throughout the term of
the Note at a rate that, in the case of a qualified floating rate or qualified
inverse floating rate, equals the value of the qualified floating rate as or
qualified inverse floating rate as of the issue date of the Note, or, in the
case of an objective rate other than a qualified floating rate, at a fixed rate
that reflects the yield that is reasonably expected for the Note. A holder of
this type of Note would then recognize original issue discount during each
accrual period which is calculated based upon the Note's assumed yield to
maturity. If the interest actually accrued or paid during an accrual period
exceeds, or is less than, the constant interest assumed to be accrued or paid
during the accrual period under the foregoing rules, qualified stated interest
or original issue discount allocable to an accrual period is increased, or
decreased, under rules set forth in the OID Regulations.
The Depositor believes that the owner of a Note determined to be
issued with original issue discount will be required to include the original
issue discount in ordinary gross income for federal income tax purposes computed
in the manner described above. However, the OID Regulations either do not
address or are subject to varying interpretations with respect to several issues
concerning the computation of original issue discount for like the Notes.
Market Discount. Notes, whether or not issued with original issue
discount, will be subject to the market discount rules of the Code. A purchaser
of a Note who purchases the Note at a price that is less than the Note's "stated
redemption price at maturity" or, in the case of a Note issued with original
issue discount, at a price that is less than the Note's "adjusted issue price"
(as these terms are described above under "--Original Issue Discount") will be
required to recognize accrued market discount as ordinary income as payments of
principal are received on the Note or upon the sale or exchange of the Note. In
general, the holder of a Note may elect to treat market discount as accruing
either:
o under a constant yield method that is similar to the method for
the accrual of original issue discount, or
o in proportion to accruals of original issue discount, or, if
there is no original issue discount, in proportion to accruals of
stated interest, in each case computed taking into account the
Prepayment Assumption.
The amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on the Note
is to be reduced by the amount previously treated as ordinary income under the
market discount rule.
The Code provides that the market discount in respect of a Note will
be considered to be zero if the market discount is less than a specified de
minimis amount of 0.25% of the Note's stated redemption price at maturity
multiplied by its weighted average remaining life as computed for tax purposes.
If market discount is treated as de minimis under this rule, the de minimis
market discount would be allocated among the scheduled payments included in the
stated redemption price at maturity of the Note, and the portion of the discount
allocable to each payment would be reported as income when the payment is made.
The Code grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, like the Notes, that are subject to repayment. Until the time
regulations are issued, rules described in the legislative history for these
provisions of the Code will apply. Note Owners who acquire a Note at a market
discount should consult their tax advisors concerning various methods which are
available for accruing that market discount.
In general, the Code requires a holder of a Note having market
discount to defer a portion of the interest deductions attributable to any
indebtedness incurred or continued to purchase or carry the Note. Alternatively,
a holder of a Note may elect to include market discount in gross income as it
accrues and, if the holder makes the election, the holder will be exempt from
this rule. The adjusted basis of a Note subject to the election will be
increased to reflect market discount included in gross income, thus reducing any
gain or increasing any loss on a sale or other taxable disposition.
Amortizable Premium. A Note Owner who holds the Note as a capital
asset and who purchased the Note at a price greater than its stated redemption
price at maturity will be considered to have purchased the Note at a premium. In
general, the Note Owner may elect under Code Section 171 to deduct the
amortizable bond premium as it accrues under a constant yield method. A Note
Owner's tax basis in the Note will be reduced by the amount of the amortizable
bond premium deducted. In addition, it appears that the same methods which apply
to the accrual of market discount on obligations providing for principal
payments prior to maturity are intended to apply in computing the amortizable
bond premium deduction with respect to a Note. Although there are Treasury
regulations dealing with amortizable bond premiums, they specifically do not
apply to prepayable debt instruments subject to Section 1272(a)(6), like the
Notes. However, by analogy to the regulations, any premium in excess of interest
income may be deductible to the extent of prior accruals of interest. Note
Owners who pay a premium for a Note should consult their tax advisors concerning
an election and rules for determining the method for amortizing bond premium.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit an election to accrue all interest, discount, including de
minimis market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to a Note, the Note Owner 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 the Note Owner acquires during the year
of the election or after the year of election. See "--Market Discount" above.
Similarly, a Note Owner that makes this election for a Note 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 the Note
Owner owns at the beginning of the first taxable year to which the election
applies or later acquires. See "-- Amortizable Premium", above. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Note is irrevocable.
Gain or Loss on Disposition. If a Note is sold, the selling Note Owner
will recognize gain or loss equal to the difference between the amount realized
from the sale and the selling Note Owner's adjusted basis in the Note. The
adjusted basis generally will equal the cost of the Note to the seller,
increased by any original issue discount and market discount on the Note
included in the seller's income, and reduced, but not below zero, by any
payments on the Note other than qualified stated interest and reduced further by
any amortizable premium. Except as discussed above with respect to market
discount, any gain or loss recognized upon a sale, exchange, retirement, or
other disposition of a Note will be capital gain or loss if the Note is held as
a capital asset and as long-term capital gain or loss if the Note Owner's
holding period exceeded one year. Special character rules apply to debt
instruments characterized as contingent debt instruments under the 1996
Contingent Debt Regulations. In general, under those rules gain is treated as
ordinary, and loss is treated as ordinary to the extent of prior ordinary income
inclusions.
Short-Term Notes. In the case of a Note with a maturity of one year or
less from its issue date (a "Short-Term Note"), no interest is treated as
qualified stated interest, and therefore all interest is included in original
issue discount. Note Owners that report income for federal income tax purposes
on an accrual method and other Note Owners, including banks and dealers in
securities, are required to include original issue discount in income on these
Short-Term Notes on a straight-line basis, unless an election is made to accrue
the original issue discount according to a constant yield method based on daily
compounding.
Any other Note Owner of a Short-Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount on a
Short- Term Note in income currently are required to defer deductions for any
interest paid on indebtedness incurred or continued to purchase or carry the
Short-Term Note in an amount not exceeding the deferred interest income with
respect to the Short-Term Note, which includes both the accrued original issue
discount and accrued interest that are payable but that have not been included
in gross income, until deferred interest income is realized. The Note Owner may
elect to apply the foregoing rules, except for the rule characterizing gain on
sale, exchange or retirement as ordinary, with respect to "acquisition discount"
rather than original issue discount. Acquisition discount (the "Acquisition
Discount") is the excess of the stated redemption price at maturity of the
Short-Term Note over the Note Owner's basis in the Short-Term Note. This
election applies to all obligations acquired by the taxpayer on or after the
first day of the first taxable year to which an election applies, unless revoked
with the consent of the IRS. A Note Owner's tax basis in a Short-Term Note is
increased by the amount included in the Owner's income on the Note.
Taxation of Certain Foreign Note Owners. As used in this Prospectus,
the term "Non- United States Person" means any Person other than a "United
States Person". A "United States Person" is an individual who is a citizen or
resident of the United States, a corporation, partnership or other entity
treated as such, created or organized in or under the laws of the United States
or any political subdivision of the United States, an estate the income of which
is subject to United States federal income taxation regardless of its source and
any trust with respect to which:
o a court of the United States is able to exercise primary
supervision over the administration of the trust, and
o one or more United States persons have the authority to control
all substantial decisions of the trust.
A "Non-United States Holder" means a Non-United States Person that is a Note
Owner.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Holders. The 1997 Withholding Regulations are generally effective for
payments after December 31, 1999, regardless of the issue date of the Note with
respect to which these payments are made, subject to specific transition rules.
The discussion under this heading and under "-- Backup Withholding and
Information Reporting", below, is not intended to include a complete discussion
of the provisions of the 1997 Withholding Regulations, and prospective investors
are urged to consult their tax advisors with respect to the effect of the 1997
Withholding Regulations.
In general, Non-United States Holders will not be subject to United
States federal withholding tax with respect to payments of principal and
interest on Notes, including original issue discount, provided that specific
conditions are met. Under United States federal income tax law now in effect,
and subject to the discussion of backup withholding in the following section,
payments of principal and interest, including original issue discount, with
respect to a Note to any Non-United States Holder will not be subject to United
States federal withholding tax, provided, in the case of interest, including
original issue discount, that:
(a) the Holder does not actually or constructively own 10% or more of
the equity of the Trust,
(b) the Holder is not for federal income tax purposes a controlled
foreign corporation related, directly or indirectly, to the Trust through equity
ownership,
(c) the Holder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code, and
(d) either:
(1) the Non-United States Holder certifies, under penalties of
perjury, to the Trust or paying agent, as the case may be, that
the Holder is a Non- United States Holder and provides the
Holder's name and address, or
(2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and
holds the Note, certifies, under penalties of perjury, to the
Trust or paying agent, as the case may be, that the certificate
has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and
furnishes the payor with a copy of the certificate.
A certificate described in this paragraph is effective only with respect to
payments of interest, including original issue discount, made by the certifying
Non-United States Holder after the issuance of the certificate in the calendar
year of its issuance and the two immediately succeeding calendar years. The
forgoing certification may be provided by the beneficial owner of a Note on IRS
Form W-8.
The 1997 Withholding Regulations provide optional documentation
procedures designed to simplify compliance by withholding agents. The 1997
Withholding Regulations will add "intermediary certification" options for some
qualifying withholding agents. Under one option, a withholding agent will be
allowed to rely on an IRS Form W-8 furnished by a financial institution or other
intermediary on behalf of one or more beneficial owners, or other
intermediaries, without having to obtain the beneficial owner certificate
described in the preceding paragraph, provided that the financial institution or
intermediary has entered into a withholding agreement with the IRS and is thus a
"qualified intermediary". Under another option, an authorized foreign agent of a
United States withholding agent will be permitted to act on behalf of the United
States withholding agent, provided specific conditions are met.
The 1997 Withholding Regulations will also provide presumptions with
respect to withholding for holders not providing the required certifications to
qualify for the withholding exemption described above. In addition, the 1997
Withholding Regulations will replace a number of current tax certification
forms, including IRS Form W-8 IRS, Form 1001, and IRS Form 4224, discussed
below, with restated forms and standardize the period of time for which
withholding agents can rely on these certifications.
Notwithstanding the foregoing, interest described in Section 871(h)(4)
of the Code will be subject to United States withholding tax at a 30% rate, or a
lower rate as may be provided by an applicable treaty. In general, interest
described in Section 871(h)(4) of the Code includes, subject to exceptions, any
interest the amount of which is determined by reference to receipts, sales or
other cash flow of the issuer or a related person, any income or profits of the
issuer or a related person, any change in the value of any property of the
issuer or a related person or any dividends, partnership distributions or
similar payments made by the issuer or a related person. Interest described in
Section 871(h)(4) of the Code may include other types of contingent interest
identified by the IRS in future Treasury Regulations. If the Trust issues Notes
the interest on which the Trust believes is described in Section 871(h)(4) of
the Code, the United States withholding tax consequences of any Notes will be
described in the applicable prospectus supplement.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest, including original issue discount, on the Note is
effectively connected with the conduct of that trade or business, the Non-United
States Holder, although exempt from the withholding tax discussed in the
preceding paragraphs, will be subject to United States federal income tax on the
interest, including original issue discount, in the same manner as if it were a
United States person. In lieu of the certificate described above, the Holder
will be required to provide a properly executed IRS Form 4224 annually in order
to claim an exemption from withholding tax. In addition, the Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30%, or any
lower rate as may be specified by an applicable treaty, of its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, interest, including original issue discount, on a Note will be
included in the earnings and profits of the Holder if the interest, including
original issue discount, is effectively connected with the conduct by the Holder
of a trade or business in the United States.
Generally, any gain or income, other than that attributable to accrued
interest, market discount or original issue discount in specific circumstances,
realized upon the sale, exchange, retirement or other disposition of a Note by a
Non-United States Holder will not be subject to United States federal income tax
unless:
o the gain or income is effectively connected with a trade or
business in the United States of the Non-United States Holder, or
o in the case of a Non-United States Holder who is a nonresident
alien individual, the Non-United States Holder is present in the
United States for 183 days or more in the taxable year of the
sale, exchange, retirement or other disposition and the
individual has a "tax home" as defined in Section 911(d)(3) of
the Code, in the United States.
Backup Withholding and Information Reporting. Under current United
States federal income tax law, information reporting requirements apply to
interest, including original issue discount, and principal payments made to, and
to the proceeds of sales before maturity by, particular Note Owners that are
United States Persons.
In addition, a 31% backup withholding tax will apply if the Note
Owner:
(a) fails to furnish its Taxpayer Identification Number ("TIN"),
which, for an individual, would be his or her Social Security Number, to the
payor in the manner required,
(b) furnishes an incorrect TIN and the payor is so notified by the
IRS,
(c) is notified by the IRS that it has failed properly to report
payments of interest and dividends, or
(d) in particular circumstances, fails to certify, under penalties of
perjury, that it has not been notified by the IRS that it is subject to backup
withholding for failure properly to report interest and dividend payments.
Backup withholding will not apply with respect to payments made to some exempt
recipients, like corporations, within the meaning of Section 7701(a) of the
Code, and tax-exempt organizations.
In the case of a Non-United States Holder, under Treasury Regulations,
backup withholding and information reporting will not apply to payments of
principal and interest made by the Trust or any paying agent of the Trust on a
Note with respect to which the holder has provided the required certification
under penalties of perjury that it is a Non-United States Holder or has
otherwise established an exemption, provided that:
o the Trust or paying agent, as the case may be, does not have
actual knowledge that the payee is a United States person, and
o other conditions are satisfied.
Subject to the discussion below, payments to or through the United
States office of a broker will be subject to backup withholding and information
reporting unless the holder certifies under penalties of perjury as to its
status as a Non-United States Holder and other qualifications, and no agent of
the broker who is responsible for receiving or reviewing the statement has
actual knowledge that it is incorrect, and provides his or her name and address
or the holder otherwise establishes an exemption.
In general, if principal or interest payments on a Note are collected
outside the United States by a foreign office of a custodian, nominee or other
agent acting on behalf of a Note Owner, the custodian, nominee or other agent
will not be required to apply backup withholding to payments made to the owner
and will not be subject to information reporting. However, if the custodian,
nominee or other agent is a United States Person for United States federal
income tax purposes, a controlled foreign corporation for United States tax
purposes, or a foreign person 50% or more of whose gross income is effectively
connected with its conduct of a United States trade or business for a specified
three-year period, the custodian, nominee or other agent may be subject to
information reporting, but not backup withholding, requirements with respect to
payment unless the custodian, nominee or other agent has in its records
documentary evidence that the Note Owner is not a United States person and
specific conditions are met or the Note Owner otherwise establishes an
exemption.
Under Treasury Regulations, payments on the sale, exchange or
retirement of a Note effected by or through a foreign office of a broker will
not be subject to backup withholding. However, if the broker is a United States
person, a controlled foreign corporation for United States tax purposes, or a
foreign person 50% or more of whose gross income is effectively connected with
its conduct of a United States trade or business for a specified three-year
period, information reporting, but not backup withholding, will be required
unless the broker has in its records documentary evidence that the Note Owner is
not a United States person and other conditions are met or the Note Owner
otherwise establishes an exemption.
The 1997 Withholding Regulations alter the forgoing rules in some
respects. In particular, the 1997 Withholding Regulations will provide specific
presumptions under which Non-United States Holders may be subject to backup
withholding in the absence of required certifications.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a Note Owner under the backup withholding rules will
be allowed as a refund or a credit against the owner's United States federal
income tax, provided that the required information is furnished to the IRS.
Note Owners should consult their tax advisors regarding the
application of information reporting and backup withholding to their particular
situations, the availability of an exemption from reporting and backup
withholding, and the procedure for obtaining an exemption, if available.
TAX CONSEQUENCES TO CERTIFICATE OWNERS
Treatment of the Trust as a Partnership. The Trust will agree, and the
related Certificate Owners will agree by their purchase of Certificates, to
treat the Trust 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, the partners of
the partnership being the Certificate Owners, including, to the extent relevant,
the Seller or the Depositor in its capacity as recipient of distributions from
any reserve fund, and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, the Seller, the Depositor and the Servicer is not
definite because there is no authority on transactions closely comparable to
that contemplated in this Prospectus. A variety of alternative characterizations
are possible. For example, to the extent the Certificates have particular
features characteristic of debt, the Certificates might be considered debt of
the Seller, the Depositor or the Trust. As long as the characterization did not
result in the Trust being subject to tax as a corporation, the characterization
is not expected to result in materially adverse tax consequences to Certificate
Owners as compared to the consequences from treatment of the Certificates as
equity in a partnership, described below.
On December 17, 1996, final Treasury Regulations (the "Check-the-Box
Regulations") were issued which generally permit non-corporate entities, like
the Trust, to elect whether to be taxed as corporations or partnerships. Under
the Check- the-Box Regulations, the Trust will be classified as a partnership
unless it elects to be classified as an association taxable as a corporation.
Except as expressly provided in the applicable prospectus supplement, the Trust
will not elect to be classified as an association taxable as a corporation.
However, the Check-the-Box-Regulations would have no effect on whether a
partnership should be classified as a publicly traded partnership taxable as a
corporation.
The following discussion assumes that the Certificates represent
equity interests in a partnership, none of the Certificates represents Stripped
Certificates 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 the
Certificates will be disclosed in the related prospectus supplement.
Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificate Owner will be required to take
into account separately the Owner's allocable share of income, gains, losses,
deductions and credits of the Trust, whether or not there is a corresponding
cash distribution. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificate Owners may
become liable for taxes on Trust income even if they have not received cash from
the Trust to pay the taxes. The Trust's income will consist primarily of
interest and finance charges earned on the related Base Assets, including
appropriate adjustments for market discount, original issue discount and bond
premium, and any gain upon collection or disposition of the related Base Assets.
The Trust's deductions will consist primarily of interest accruing with respect
to the Notes to the extent the Notes are properly characterized as debt, as
discussed above under "--Tax Consequences to Note Owners", servicing and other
fees, and losses or deductions upon collection or disposition of Base Assets.
Any collateral certificates held by the Owner Trustee will be subject
to the federal income tax treatment described in this Prospectus depending on
the terms of the collateral certificates and their characterization (for
example, as indebtedness) for federal income tax purposes.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Trust Agreement and related documents). The Trust Agreement is
expected to provide, in general, that the Certificate Owners will be allocated
taxable income of the Trust for each month equal to the sum of:
(a) the interest or other income that accrues on the Certificates in
accordance with their terms for the month including, as applicable, interest
accruing at the related Certificate Interest Rate for the month and interest on
amounts previously due on the Certificates but not yet distributed;
(b) any Trust income attributable to discount on the related Base
Assets that corresponds to any excess of the principal amount of the
Certificates over their initial issue price;
(c) any prepayment premium payable to the Certificate Owners for the
month; and
(d) any other amounts of income payable to the Certificate Owners for
the month.
This allocation will be reduced by any amortization by the Trust of premium on
Base Assets that corresponds to any excess of the issue price of Certificates
over their principal amount. Losses will generally be allocated in the manner in
which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating Trust 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 Certificate Owners.
Moreover, even under the foregoing method of allocation, Certificate Owners may
be allocated income equal to the entire Certificate Interest Rate plus the other
items described above, even though the Trust might not have sufficient cash to
make current cash distributions of that amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificate Owners, but Certificate Owners may be purchasing Certificates at
different times and at different prices, Certificate Owners 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.
All of the taxable income allocated to a Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will generally constitute "unrelated
business taxable income" taxable to the holder under the Code.
A non-corporate Certificate Owner's share of expenses of the Trust,
including fees to the Servicer, but not interest expense, would generally be
"miscellaneous itemized deductions" and thus deductible only to the extent the
expenses plus all other miscellaneous itemized deductions exceed two percent of
the Certificate Owner's adjusted gross income. A non-corporate Certificate Owner
will be allowed no deduction for its share of the expenses of the Trust in
determining its liability for alternative minimum tax. In addition, Section 68
of the Code provides that the amount of all "itemized deductions" otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code $100,000 (or $50,000 in the
case of a separate return by a married individual), adjusted for changes in the
cost of living subsequent to 1990) will be reduced by the lesser of:
o 3% of the excess of adjusted gross income over the specified
threshold amount, or
o 80% of the amount of itemized deductions otherwise allowable for
the relevant taxable year.
Accordingly, deductions might be disallowed to an individual in whole or in part
and might result in the Certificate Owner being taxed on an amount of income
that exceeds the amount of cash actually distributed to the holder over the life
of the Trust. 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 the partnership 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 Trust intends to make all tax calculations relating to income and
allocations to Certificate Owners on an aggregate basis. If the IRS were to
require that the calculations be made separately for each Base Asset, the
calculations may result in timing and character differences under some
circumstances.
Discount and Premium. The purchase price paid by the Trust for the
related Base Assets may be greater or less than the remaining principal balance
of the Base Assets at the time of purchase. If so, the Base Assets will have
been acquired at a premium or market discount, as the case may be. See "Tax
Consequences to Note Owners--Market Discount" and "--Amortizable Premium" above.
As indicated above, the Trust will make this calculation on an aggregate basis,
but it is possible that the IRS might require that it be recomputed on a Base
Asset-by-Base Asset basis.
If the Trust acquires the Base Assets at a market discount or premium,
the Trust will elect to include any discount in income currently as it accrues
over the life of the Base Assets or to offset any premium against interest
income on the Base Assets. As indicated above, a portion of market discount
income or premium deduction may be allocated to Certificate Owners.
Section 708 Termination. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If termination occurs, the Trust will be considered to
contribute its assets to a new Trust, which will be treated as a new partnership
for tax purposes, in exchange for Certificates in the new Trust. The original
Trust will then be deemed to distribute the Certificates in the new Trust to
each of the Owners of Certificates in the original Trust in liquidation of the
original Trust. The Trust will not comply with technical requirements that might
apply when this constructive termination occurs. As a result, the Trust may be
subject to tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply with those requirements 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.
Any gain or loss would be long-term capital gain or loss if the Certificate
Owner's holding period exceeded one year. A Certificate Owner's tax basis in a
Certificate will generally equal the Certificate's cost, increased by the share
of Trust income allocable to the Certificate Owner with respect to the
Certificates and decreased by any distributions received or losses allocated
with respect to the Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the Certificate Owner's share, determined under Treasury Regulations, of the
Notes and other liabilities of the Trust. A Certificate Owner acquiring
Certificates at different prices will generally be required to maintain a single
aggregate adjusted tax basis in the related Certificates and, upon a sale or
other disposition of some of the Certificates, allocate a portion of the
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.
If a Certificate Owner 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 to these Certificates, this excess will
generally give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificate Owners
based on the principal amount of Certificates owned by them as of the close of
the last day of that month. As a result, a Certificate Owner purchasing
Certificates may be allocated tax items, which will affect the purchaser's tax
liability and tax basis, attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
Treasury 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 might be reallocated among the Certificate Owners. The Seller will
be authorized to revise the Trust's method of allocation between transferors and
transferees.
Section 754 Election. In the event that a Certificate Owner sells its
Certificates at a profit (loss), the purchasing Certificate Owner will have a
higher (lower) basis in the Certificates than the selling Certificate Owner had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust 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 will not make the election. As a
result, Certificate Owners might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep complete and
accurate books of the Trust. These books will be maintained for financial
reporting and tax purposes on an accrual basis, and the fiscal year of the Trust
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 and will
report each Certificate Owner's allocable share of items of Trust income and
expense to Certificate Owners and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and the nominees will be required
to forward information to the beneficial owners of the Certificates. Generally,
Certificate Owners must timely file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
holder timely notifies the IRS of all 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
with a statement containing specific information on the nominee, the beneficial
owners and the Certificates so held. This information includes:
(a) the name, address and taxpayer identification number of the
nominee, and
(b) as to each beneficial owner:
(1) the name, address and identification number of the person,
(2) whether the 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
(3) information on Certificates that were held, bought or sold on
behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust 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 information
statement to the Trust. The information referred to above for any calendar year
must be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
Except as provided otherwise in the relevant prospectus supplement,
the Depositor will be designated as the tax matters partner for each Trust in
the related Trust Agreement and, accordingly, will be responsible for
representing the Certificate Owners in some disputes 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 the later of three years after the date
on which the partnership information return is filed or the last day for filing
a return for the year, determined without regard to extension. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificate Owners, and, under some circumstances, a Certificate Owner may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificate Owner's
returns and adjustments of items not related to the income and losses of the
Trust.
The Taxpayer Relief Act of 1997 created a special audit system for
qualifying large partnerships that have elected to apply a simplified
flow-through reporting system under new sections 771 through 777. Unless
otherwise specified in the applicable prospectus supplement, a Trust will not
elect to apply the simplified flow-through reporting system.
Taxation of Certain Foreign Certificate Owners. As used in this
Prospectus, the term "Non-United States Owner" means a Certificate Owner that is
not a United States Person, as defined under "Owner Trusts -- Tax Consequences
to Note Owners -- Backup Withholding and Information Reporting", above.
It is not clear whether the Trust would be considered to be engaged in
a trade or business in the United States for purposes of federal withholding
taxes with respect to Non-United States Owners because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this Prospectus. Although it is not expected that the Trust would
be engaged in a trade or business in the United States for these purposes, the
Trust will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to Non-United
States Owners pursuant to Section 1446 of the Code, as if the income were
effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners. Subsequent adoption of Treasury regulations or
the issuance of other administrative pronouncements may require the Trust to
change its withholding procedures. In determining a Certificate Owner's
withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9 or the
Certificate Owner's certification of nonforeign status signed under penalties of
perjury.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the Trust's income,
including, in the case of a corporation, a return in respect of the branch
profits tax. Each Non-United States Owner must obtain a taxpayer identification
number from the IRS and submit that number to the Trust in order to assure
appropriate crediting of the taxes withheld. Assuming that the Trust is
determined not to be engaged in a U.S. trade or business, a Non-United States
Owner might be entitled to a refund with respect to all or a portion of taxes
withheld by the Trust if, in particular, the Owner's allocable share of interest
from the Trust constituted "portfolio interest" under the Code.
This interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Trust, in the
later case, the interest being properly characterized as a guaranteed payment
under Section 707(c) of the Code. If this were the case, Non-United States
Owners would be subject to a United States federal income and withholding tax at
a rate of 30 percent on the Trust's gross income, without any deductions or
other allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
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 Certificate Owner fails to comply
with particular identification procedures, unless the certificate owner is an
exempt recipient under applicable provisions of the Code.
GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE GRANTOR TRUSTS
Characterization. In the case of a "Grantor Trust ", Federal Tax
Counsel will deliver its opinion that the Trust will not be classified as an
association taxable as a corporation and that the Grantor Trust will be
classified as a grantor trust under subpart E, Part I of subchapter J of the
Code. In this case, beneficial owners of Certificates (referred to in this
Prospectus as "Grantor Trust Certificateholders") will be treated for federal
income tax purposes as owners of a portion of the Trust's assets as described
below. The Certificates issued by a Trust that is treated as a grantor trust are
referred to in this Prospectus as "Grantor Trust Certificates".
Taxation of Grantor Trust Certificateholders. Subject to the
discussion below under "--Stripped Certificates" and "--Subordinated
Certificates", each Grantor Trust Certificateholder will be treated as the owner
of a pro rata undivided interest in the Base Assets and other assets of the
Trust. Accordingly, and subject to the discussion below of the
recharacterization of the Servicing Fee, each Grantor Trust Certificateholder
must include in income its pro rata share of the interest and other income from
the Base Assets, including any interest, original issue discount, market
discount, prepayment fees, assumption fees, and late payment charges with
respect to the Base Assets, and, subject to limitations discussed below, may
deduct its pro rata share of the fees and other deductible expenses paid by the
Trust, at the same time and to the same extent as these items would be included
or deducted by the Grantor Trust Certificateholder if the Grantor Trust
Certificateholder held directly a pro rata interest in the assets of the Trust
and received and paid directly the amounts received and paid by the Trust. Any
amounts received by a Grantor Trust Certificateholder in lieu of amounts due
with respect to Base Assets because of a default or delinquency in payment will
be treated for federal income tax purposes as having the same character as the
payments they replace.
Under Sections 162 and 212 each Grantor Trust Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Servicer, provided that the amounts are reasonable compensation
for services rendered to the Trust. A non-corporate Grantor Trust
Certificateholder's share of expenses of the Trust would generally be
"miscellaneous itemized deductions" and thus deductible only to the extent the
expenses plus all other miscellaneous itemized deductions exceed two percent of
the Grantor Trust Certificateholder's adjusted gross income. A non-corporate
Grantor Trust Certificateholder will be allowed no deduction for its share of
the expenses of the Trust, other than interest, in determining its liability for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of "itemized deductions" otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($100,000 (or $50,000 in the case of a separate return by a married
individual), adjusted for changes in the cost of living subsequent to 1990 will
be reduced by the lesser of:
o 3% of the excess of adjusted gross income over the specified
threshold amount, or
o 80% of the amount of itemized deductions otherwise allowable for
that 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 these partnership 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 servicing compensation to be received by the Servicer might be
questioned by the IRS with respect to specific Certificates or Base Assets as
exceeding a reasonable fee for the services being performed in exchange for the
fee, and a portion of the servicing compensation could be recharacterized as an
ownership interest retained by the Servicer or other party in a portion of the
interest payments to be made pursuant to the Base Assets. In this event, a
Certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code and therefore be subject to the original
issue discount rules. See the discussion below under "--Stripped Certificates".
Except as discussed below under "--Stripped Certificates" or "--Subordinated
Certificates", this discussion assumes that the servicing fees paid to the
Servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Certificate will be treated as
purchasing an interest in each Base Asset in the Trust at a price determined by
allocating the purchase price paid for the Certificate among all Base Assets in
proportion to their fair market values at the time of the purchase of the
Certificate. To the extent that the portion of the purchase price of a Grantor
Trust Certificate allocated to Base Assets is less than or greater than the
portion of the stated redemption price at maturity of the Base Assets, the
interest in the Base Assets will have been acquired at a discount or premium.
See "--Market Discount" and "--Premium", below.
The treatment of any discount on a Base Asset will depend on whether
the discount represents original issue discount or market discount. It is not
expected that any Base Assets will have original issue discount, except as
discussed below under "--Stripped Certificates" or "--Subordinated
Certificates". For the rules governing original issue discount, see "Owner
Trusts -- Tax Consequences to Note Owners -- Short-Term Notes" above. However,
in the case of Base Assets that constitute short-term Government Securities or
short-term Private Label Custody Receipt Securities the rules set out above
dealing with short-term obligations (see "Owner Trusts -- Tax Consequences to
Note Owners -- Short-Term Notes" above) are applied with reference to
acquisition discount rather than original issue discount, if the obligations
constitute "short-term Government obligations" within the meaning of Section
1271(a)(3)(B) of the Code.
The information provided to Grantor Trust Certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Base Asset is acquired.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Base Assets may be subject to the market discount rules of
Sections 1276 through 1278 of the Code to the extent an undivided interest in a
Base Asset is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "Owner Trust -- Tax
Consequences to Note Owners -- Market Discount" above.
Premium. To the extent a Grantor Trust Certificateholder is considered
to have purchased an undivided interest in a Base Asset for an amount that is
greater than the stated redemption price at maturity of the interest, the
Grantor Trust Certificateholder will be considered to have purchased the
interest in the Base Asset at a "premium" equal in amount to the excess. For a
discussion of the rules applicable to premium, see "Owner Trusts -- Tax
Consequences to Note Owners -- Amortizable Premium" above.
Stripped Certificates. Some classes of Certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates". In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Base Asset from ownership of the right to receive some
or all of the related interest payments. In general, where separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the Base Asset is
required to accrue into income, on a constant yield basis under rules governing
original issue discount (see "Owner Trust--Tax Consequences to Note
Owners--Original Issue Discount"), the difference between the holder's initial
purchase price for the right and the principal or interest payment to be
received with respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
(a) if any servicing compensation is deemed to exceed a reasonable
amount (see "--Taxation of Grantor Trust Certificateholders", above);
(b) if the Company or any other party retains a retained yield with
respect to the Base Assets held by the Trust;
(c) if two or more classes of Certificates are issued representing the
right to non-pro rata percentages of the interest or principal payments on the
Base Assets; or
(d) if Certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the Trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and the accrual of income
may be in advance of the receipt of any cash attributable to the income. See
"Owner Trust--Tax Consequences to Note Owners--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code, the
issue price of a Stripped Certificate will be the purchase price paid by each
holder of the Stripped Certificate and the stated redemption price at maturity
may include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated as
zero under the original issue discount de minimis rules described above.
Subordinated Certificates. In the event the Trust issues two classes
of Grantor Trust Certificates that are identical except that one class is a
subordinated class, with a relatively higher Certificate Interest Rate, and the
other is a senior class, with a relatively lower Certificate Interest Rate,
(referred to in this Prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the Grantor Trust Certificateholders would be
deemed to have acquired the following assets:
o the principal portion of each Base Asset plus a portion of the
interest due on each Base Asset (the "Trust Stripped Bond"), and
o a portion of the interest due on each Base Asset equal to the
difference between the Certificate Interest Rate on the
Subordinate Certificates and the Certificate Interest Rate on the
Senior Certificates, if any, which difference is then multiplied
by the Subordinate Class Percentage (the "Trust Stripped
Coupon").
The "Subordinate Class Percentage" equals the initial aggregate principal amount
of the Subordinate Certificates divided by the sum of the initial aggregate
principal amount of the Subordinate Certificates and the Senior Certificates.
The "Senior Class Percentage" equals the initial aggregate principal amount of
the Senior Certificates divided by the sum of the initial aggregate principal
amount of the Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of the related
asset. The Senior Certificateholders will not own any portion of the Trust
Stripped Coupon. The Subordinate Certificateholders in the aggregate own both
the Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the
Trust Stripped Coupon, if any, and accordingly each Subordinate
Certificateholder will be treated as owning its pro rata share in both assets.
The Trust Stripped Bond will be treated as a "stripped bond" and the Trust
Stripped Coupon will be treated as "stripped coupons" within the meaning of
Section 1286 of the Code. Because the purchase price paid by each Subordinate
Certificateholder will be allocated between that Certificateholder's interest in
the Trust Stripped Bond and the Trust Stripped Coupon based on the relative fair
market value of each asset on the date Subordinate Certificate is purchased, the
Trust Stripped Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped
Bond represented by a Certificate will be reported in the same manner as
described generally above for holders of Certificates. The interest income on
the Subordinate Certificates at the Senior Certificate Certificate Interest Rate
and the portion of the Servicing Fee that does not constitute excess servicing
may be treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the related Trust Stripped Coupon over the portion of the purchase price
allocated to the Trust Strip Coupon. The sum of the daily portions of original
issue discount on the Trust Stripped Coupon for each day during a year in which
the Subordinate Certificateholder holds the Trust Stripped Coupon will be
included in the Subordinate Certificateholder's income. It is unclear whether a
Subordinated Certificateholder's interest in Trust Stripped Bonds and Trust
Stripped Coupons should be treated separately, or aggregated and treated as a
single debt instrument for purposes of applying the original issue discount
rules. However, the Trustee intends to treat each Subordinate
Certificateholder's interest in Trust Stripped Bonds and Trust Stripped Coupons
as a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount.
If the Subordinate Certificateholders receive distribution of less
than their share of the Trust's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had:
o received as distributions their full share of the receipts,
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount, and
o retained the right to reimbursement of these amounts to the
extent these amounts are otherwise available as a result of
collections on the Base Assets or amounts available from a
Reserve Account or other form of credit enhancement, if any.
Under this analysis:
o Subordinate Certificateholders would be required to accrue as
current income any interest income or original issue discount on
the Base Assets that was a component of the Shortfall Amount,
even though that amount was in fact paid to the Senior
Certificateholders,
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that the amount will not be available from any source to
reimburse the loss), and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Grantor Trust Certificateholder to elect to accrue all
interest, discount, including de minimis market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield method.
If an election were to be made with respect to an interest in a Base Asset with
market discount, the Certificate Owner 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 the Grantor Trust Certificateholder
acquires during the year of the election or later acquires. See "--Market
Discount" above. Similarly, a Grantor Trust Certificateholder that makes this
election for an interest in a Base Asset 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, including other Base Assets,
that the Grantor Trust Certificateholder owns at the beginning of the first
taxable year to which the election applies or later acquires. See "-- Premium",
above. The election to accrue interest, discount and premium on a constant yield
method with respect to a Grantor Trust Certificate is irrevocable.
Prepayments. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments,
the yield on which may be affected by reason of prepayments to be calculated
taking into account the Prepayment Assumption and requiring the discount to be
taken into income on the basis of a constant yield to maturity taking account of
actual prepayments. The legislative history of the 1986 Act states that similar
rules apply with respect to market discount and amortizable bond premium on
these debt instruments.
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will be treated as a sale or
exchange of the Grantor Trust Certificateholder's interest in the assets of the
Grantor Trust and will result in gain or loss equal to the difference, if any,
between the amount realized, exclusive of amounts attributable to accrued and
unpaid interest, which will be treated as ordinary income, and the owner's
adjusted basis in those assets. The adjusted basis generally will equal the
Seller's cost for the Grantor Trust Certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the Grantor Trust Certificate, and reduced, but not below zero, by
any premium amortized by the Seller and by principal payments on the Grantor
Trust Certificate previously received by the seller. Gain or loss will be
capital gain or loss to an owner for which the interests in the assets of the
Grantor Trust represented by the Grantor Trust Certificate are "capital assets"
within the meaning of Section 1221, except that gain will be treated in whole or
in part as ordinary interest income to the extent of the Depositor's Interest in
accrued market discount not previously taken into income on underlying Base
Assets having a fixed maturity date of more than one year from the date of
origination. A capital gain or loss will be long-term or short-term depending on
whether or not the Grantor Trust Certificate has been owned for the long-term
capital gain holding period, currently more than one year.
Non-United States Grantor Trust Certificate Owners. Amounts paid to
Non-United States Persons (as defined above under "Owner Trusts--Tax
Consequences to Certificate Owners--Taxation of Certain Foreign Certificate
Owners) who are owners of Grantor Trust Certificates will be treated as interest
for purposes of United States withholding tax. The interest attributable to the
underlying Receivables will not be subject to the normal 30%, or a lower rate
provided for by an applicable tax treaty, withholding tax imposed on the amounts
provided that the Owner:
o does not own, directly or indirectly, 10% or more of, and is not
a controlled foreign corporation, within the meaning of Section
957 of the Code, related to, any of the issuers of the Base
Assets, and
o fulfills particular certification and other requirements.
Under these requirements, the Owner must certify, under penalty of perjury, that
it is not a "United States Person" (as defined above under "Owner Trusts-- Tax
Consequences to Note Owners--Backup Withholding and Information Reporting") and
must provide its name and address. If interest or gain is effectively connected
to the conduct of a trade or business within the United States by the Owner, the
owner will be subject to United States federal income tax on the interest or
gain at graduated rates and, in the case of a corporation, to a possible branch
profits tax, and will not be subject to withholding tax provided that the owner
meets applicable documentation requirements. Potential investors who are not
United States persons should consult their own tax advisors regarding the
specific tax consequences of owning a Certificate.
On October 6, 1997, the1997 Withholding Regulations were issued which
affect the United States taxation of Non-United States Owners of Grantor Trust
Certificates. The 1997 Withholding Regulations are generally effective for
payments after December 31, 1999, regardless of the issue date of the Base
Assets with respect to which payments are made, subject to some related
transition rules. For further discussion, see "Owner Trusts - Tax Consequences
to Note Owners - Taxation of Certain Foreign Note Owners" above.
Backup Withholding. Distributions made on the Grantor Trust
Certificates and proceeds from the sale of the related Certificates will be
subject to a "backup" withholding tax of 31% if, in general, the Grantor Trust
Certificateholder fails to comply with particular identification procedures,
unless the Owner is an exempt recipient under applicable provisions of the Code.
See "Owner Trusts -- Tax Consequences to Note Owners -- Backup Withholding and
Information Reporting," above.
MASTER TRUST
TREATMENT OF THE CERTIFICATES AS INDEBTEDNESS
In the case of a Master Trust, Federal Tax Counsel will deliver its
opinion that, although no transaction closely comparable to that contemplated in
this Prospectus has been the subject of any Treasury regulation, revenue ruling
or judicial decision, based upon its analysis of the factors discussed below,
the Depositor, or the Seller, will be properly treated as the owner of the Base
Assets for federal income tax purposes and, accordingly, the Certificates, when
issued, will be properly characterized for federal income tax purposes as
indebtedness of the Depositor, or the Seller, that is secured by the Base
Assets.
The Depositor, or the Seller, and Certificate Owners will express in
the Agreement the intent that, for federal, state and local income and franchise
tax purposes, and for the purposes of any other tax imposed on or measured by
income, the Certificates will be indebtedness of the Depositor, or the Seller,
secured by the Base Assets. The Depositor, or the Seller, by entering into the
Agreement, each Certificate holder, by the acceptance of a Certificate, and each
Certificate Owner, by virtue of accepting a beneficial interest in a
Certificate, will agree to treat the Certificates, or the beneficial interests
in the Certificates, as indebtedness of the Depositor, or the Seller, secured by
the Base Assets for federal, state and local income and franchise tax purposes
and for the purposes of any other tax imposed on or measured by income. However,
because different criteria are used in determining the non-tax accounting
treatment of a transaction, the Seller is expected to treat the Agreement for
financial accounting purposes as a transfer of an ownership interest in the Base
Assets and not as creating a debt obligation of the Depositor, or the Seller.
The economic substance of a transaction generally determines its
federal income tax consequences and the form of a transaction, while a relevant
factor, is generally not conclusive evidence of its economic substance. In
appropriate circumstances the courts have allowed taxpayers, as well as the IRS,
to treat a transaction in accordance with its economic substance,
notwithstanding that participants characterized the transaction differently for
nontax purposes. In some instances, however, courts have held that a taxpayer is
bound by the particular form it has chosen for a transaction, even if the
substance of the transaction does not accord with its form. Based on the advice
of Federal Tax Counsel, the Depositor and the Seller believe that the rationale
of those cases will not apply to this transaction.
The determination of whether the economic substance of a transfer of
an interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished, and the transferee has obtained, substantial incidents of
ownership in the property. Among the primary factors considered are whether the
transferee has obtained the opportunity for gain if the property increases in
value, has assumed the risk of loss if the property decreases in value and, in
the case of accounts receivable such as the Base Assets, whether the transferee,
at the time of transfer, has a fixed interest in the proceeds of the receivable
when collected. Federal Tax Counsel will consider these factors in rendering its
opinion that the Certificates will be properly characterized for federal income
tax purposes as indebtedness of the Depositor, or the Seller, secured by the
Base Assets. Contrary characterizations that could be asserted by the IRS are
described under "Possible Characterization of the Arrangement as a Partnership
or Association Taxable as a Corporation" below. Except as otherwise expressly
indicated, the following discussion assumes that the Certificates are properly
treated as debt obligations of the Depositor, or the Seller, for federal income
tax purposes.
Interest Income to Certificate Owners. It is anticipated that the
Certificates will be issued at par value, or at an insubstantial discount from
par value, and therefore, except as discussed below or in the applicable
prospectus supplement, will not be issued with original issue discount.
As discussed above under "Owner Trusts--Tax Consequences to Note
Owners--Interest Income on the Notes" and "--Original Issue Discount", interest
that constitutes "qualified stated interest" is includible in a Certificate
Owner's income as ordinary interest income when it is received or accrued in
accordance with the Certificate Owner's method of tax accounting. Interest that
does not constitute "qualified stated interest" may be treated either as part of
a Certificate's stated redemption price at maturity (as described above under
"Owner Trusts - Tax Consequences to Note Owners - Original Issue Discount")
resulting in original issue discount, or be treated as contingent interest under
the 1996 Contingent Debt Regulations.
One requirement for treatment as "qualified stated interest" is that
the interest be "unconditionally payable". Interest is considered
unconditionally payable only if reasonable legal remedies exist to compel timely
payment or the debt instrument otherwise contains terms and conditions that make
the likelihood of late payment a remote contingency. See "Owner Trusts - Tax
Consequences to Note Owners - Original Issue Discount" above.
Market Discount and Premium. A Certificate Owner who purchases a
Certificate at a market discount may be subject to the "market discount" rules
of the Code. These rules provide, in part, for the treatment of gain
attributable to accrued market discount as ordinary income upon the receipt of
partial principal payments or on the sale or other disposition of the
Certificate, and for the deferral of interest deductions with respect to debt
incurred to acquire or carry the market discount Certificate. See "Owner
Trusts--Tax Consequences to Note Owners--Market Discount".
If a Certificate is purchased by a Certificate Owner at a premium, the
premium will be amortized as an offset to interest income, with a corresponding
reduction in the Certificate Owner's basis, under a constant yield method over
the term of the Certificate if an election under Section 171 of the Code is made
or is previously in effect. See "Owner Trusts--Tax Consequences to Note Owners--
Amortizable Premium".
Disposition of Certificates. If a Certificate is sold, exchanged or
otherwise disposed of, a Certificate Owner generally will recognize gain or loss
in an amount equal to the difference between the amount realized on the sale,
exchange or disposition and the Certificate Owner's adjusted tax basis in the
Certificate. The adjusted tax basis of a Certificate generally will equal the
cost of the Certificate to the Certificate Owner, increased by any original
issue discount or market discount previously includible in the Certificate
Owner's gross income, and reduced by the portion of the basis of the Certificate
allocable to payments on the Certificate previously received by the Certificate
Owner and any amortized premium. Subject to the market discount rules, gain or
loss on the sale or other disposition of a Certificate will generally be capital
gain or loss if the Certificate is held by the Certificate Owner as a capital
asset. Capital gain or loss will be long-term if the Certificate is held by the
Certificate Owner for more than one year and otherwise will be short-term.
POSSIBLE CHARACTERIZATION OF THE ARRANGEMENT AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
Although, as described above, Federal Tax Counsel will deliver an
opinion that the Certificates are properly characterized as debt of the
Depositor, or the Seller, for federal income tax purposes, this opinion is not
binding on the IRS or the courts and no assurance can be given that this
characterization would prevail. If the IRS were to contend successfully that the
Certificates were not debt obligations of the Seller for federal income tax
purposes, the arrangement among the Seller and the Certificate Owners might be
classified for federal income tax purposes as either a partnership or as a
publicly traded partnership taxable as a corporation.
If the Certificates were treated as interests in a partnership, the
partnership would probably be treated as a "publicly traded partnership." A
publicly traded partnership is taxed in the same manner as a corporation unless
at least 90% of its gross income consists of specified types of "qualifying
income." Qualifying income includes, among other things, "interest" that is not
"derived in the conduct of a financial or insurance business." If a deemed
partnership between the Depositor, or the Seller, and the Certificate Owners
were to qualify for the foregoing exception from taxation as a corporation, the
deemed partnership would not be subject to federal income tax but each item of
income, gain, loss, and deduction generated as a result of the ownership of the
Base Assets by the partnership would be passed through to the Depositor, or the
Seller, and the Certificate Owners as partners in a partnership according to
their respective interests in the partnership.
The income reportable by the Certificate Owners as partners could
differ from the income reportable by the Certificate Owners as holders of debt
obligations of the Depositor, or the Seller. For example, a cash basis
Certificate Owner might be required to report income when it accrued to the
partnership rather than when it is received by the Certificate Owner. Moreover,
an individual's share of expenses of the partnership would be miscellaneous
itemized deductions that, in the aggregate, are allowed as deductions only to
the extent they, together with other miscellaneous itemized deductions, exceed
two percent of the individual's adjusted gross income, and an individual
Certificate Owner's deduction for a holder's share of expenses of the
partnership would be subject to reduction under Section 68 of the Code if the
individual's adjusted gross income exceeded specified limits. As a result, the
individual might be taxed on a greater amount of income than the stated rate on
the Certificates.
If, alternatively, the arrangement created by the Agreement were
treated as a "publicly traded partnership" taxable as a corporation, the
resulting entity would be subject to federal income taxes at corporate tax rates
on its taxable income from the Base Assets. Because neither the Seller nor the
Depositor will provide any indemnity for income taxes, this tax might result in
reduced distributions to Certificate Owners and Certificate Owners might be
liable for a share of this tax. Moreover, distributions by the entity would
probably not be deductible in computing the entity's taxable income and all or
part of the distributions to Certificate Owners would generally be treated as
dividend income to the Certificate Owners.
Since the Seller will treat the Certificates as indebtedness for
federal income tax purposes, the Seller will not comply with the tax reporting
requirements that would apply under these alternative characterizations of the
Certificates.
FOREIGN INVESTORS
Taxation of Certain Foreign Note Owners. As used in this Prospectus,
the term "Non- United States Person" means any Person other than a "United
States Person." A "United States Person" is an individual who is a citizen or
resident of the United States, a corporation, partnership or other entity
treated as such, created or organized in or under the laws of the United States
or any political subdivision of the United States, an estate of income which is
subject to United States federal income taxation regardless of its source and
any trust with respect to which:
o a court within the United States is able to exercise primary
supervision over the administration of the trust, and
o one or more United States persons have the authority to control
all substantial decisions of the trust.
A "Non-United States Holder" means a Non-United States Person that is a Note
Owner.
On October 6, 1997, the 1997 Withholding Regulations were issued which
affect the United States taxation of Non-United States Holders. The 1997
Withholding Regulations are generally proposed to be effective for payments
after December 31, 1999, regardless of the issue date of the Note with respect
to which payments are made, subject to some related transition rules. The
discussion under this heading and under "-- Backup Withholding and Information
Reporting", below, is not intended to be a complete discussion of the provisions
of the 1997 Withholding Regulations, and prospective investors are urged to
consult their tax advisors with respect to the effect of the 1997 Withholding
Regulations.
Subject to the discussion of backup withholding below, and assuming
the Certificates represent debt obligations of the Depositor, or the Seller, for
federal income tax purposes, foreign investors ("Foreign Investors ") generally
will not be subject to United States federal withholding tax with respect to
payments of principal and interest on Certificates, provided that some specified
conditions are met. Under United States federal income tax law now in effect,
payments of principal and interest, including original issue discount, with
respect to a Certificate to any Foreign Investor will not be subject to United
States federal withholding tax, provided, in the case of interest, including
original issue discount, that:
(a) the Investor does not actually or constructively own 10% or more
of the total combined voting power of all classes of equity of the Depositor, or
the Seller,
(b) the Investor is not for federal income tax purposes a controlled
foreign corporation related, directly or indirectly, to the Depositor, or the
Seller, through equity ownership,
(c) the Investor is not a bank receiving interest described in Section
881(c)(3)(A) of the Code and
(d) either,
o the Foreign Investor certifies, under penalties of perjury, to
the Depositor, or the Seller, or paying agent, as the case may
be, that the Investor is a Foreign Investor and provides the
Investor's name and address, or
o a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business and holds the Certificate,
certifies, under penalties of perjury, to the Trust or paying
agent, as the case may be, that the related Certificate has been
received from the beneficial owner by it or by a financial
institution between it and the beneficial owner and furnishes the
payor with a copy of the Certificate.
A certificate described in this paragraph is effective only with respect to
payments of interest, including original issue discount, made to the certifying
Foreign Investor after the issuance of the certificate in the calendar year of
its issuance and the two immediately succeeding calendar years. Under temporary
Treasury Regulations, the forgoing certification may be provided by the
beneficial owner of a Note on IRS Form W-8.
The 1997 Withholding Regulations provide optional documentation
procedures designed to simplify compliance by withholding agents. The 1997
Withholding Regulations add "intermediary certification" options for qualifying
withholding agents. Under one option, a withholding agent will be allowed to
rely on IRS Form W-8 furnished by a financial institution or other intermediary
on behalf of one or more beneficial owners, or other intermediaries, without
having to obtain the beneficial owner certificate described in the preceding
paragraph, provided that the financial institution or intermediary has entered
into a withholding agreement with the IRS and is thus a "qualified
intermediary". Under another option, an authorized foreign agent of a United
States withholding agent will be permitted to act on behalf of the United States
withholding agent, provided some specified conditions are met.
The 1997 Withholding Regulations also provide specific presumptions
with respect to withholding for holders not providing the required
certifications to qualify for the withholding exemption described above. In
addition, the 1997 Withholding Regulations will replace a number of current tax
certification forms, including IRS Form W-8, IRS Form 1001 and IRS Form 4224,
with restated forms and standardize the period of time for which withholding
agents can rely on these certifications.
Notwithstanding the foregoing, interest described in Section 871(h)(4)
of the Code will be subject to United States withholding tax at a 30% rate, or a
lower rate as may be provided by an applicable treaty. In general, interest
described in Section 871(h)(4) of the Code includes, subject to some exceptions,
any interest the amount of which is determined by reference to receipts, sales
or other cash flow of the issuer or a related person, any income or profits of
the issuer or a related person, any change in the value of any property of the
issuer or a related person or any dividends, partnership distribution or similar
payments made by the issuer or a related person. Interest described in Section
871(h)(4) of the Code may include other types of contingent interest identified
by the IRS in future Treasury Regulations. If the Trust issues Certificates the
interest on which is described in Section 871(h)(4) of the Code, the United
States withholding tax consequences of any related Certificates will be
described in the applicable prospectus supplement.
If a Foreign Investor is engaged in a trade or business in the United
States and interest, including original issue discount, on the Certificate is
effectively connected with the conduct of the trade or business, the Foreign
Investor, although exempt from the withholding tax discussed above, will be
subject to United States federal income tax on the interest, including original
issue discount, in the same manner as if it were a United States person. In lieu
of the certificate described above, the Investor will be required to provide a
properly executed IRS Form 4224 annually in order to claim an exemption from
withholding tax. In addition, if the Investor is a foreign corporation, it may
be subject to a branch profits tax equal to 30%, or a lower rate as may be
specified by an applicable treaty, of its effectively connected earnings and
profits for the taxable year, subject to adjustments. For this purpose,
interest, including original issue discount, on a Certificate will be included
in the earnings and profits of the Investor if the interest, including original
issue discount, is effectively connected with the conduct by the Investor of a
trade or business in the United States.
Generally, any gain or income, other than that attributable to accrued
interest or original issue discount, realized upon the sale, exchange,
retirement or other disposition of a Certificate will not be subject to United
States federal income tax unless:
o the gain or income is effectively connected with a trade or
business in the United States of the Foreign Investor, or
o in the case of a Foreign Investor who is a nonresident alien
individual, the Foreign Investor is present in the United States
for 183 days or more in the taxable year of the sale, exchange,
retirement or other disposition the individual has a "tax home"
(as defined in Section 911(d)(3) of the Code) in the United
States.
If the IRS were to contend successfully that the Certificates
represent interests in a partnership, not taxable as a corporation, a
Certificate Owner that is a nonresident alien, foreign corporation or foreign
estate or trust might be required to file a U.S. individual or corporate income
tax return and pay tax on its share of partnership income at regular U.S. rates,
including the branch profits tax in the case of a corporation, and would be
subject to withholding tax on its share of partnership income. If the
Certificates were recharacterized as interests in a "publicly traded
partnership" taxable as a corporation, to the extent distributions under the
Agreement were treated as dividends, a nonresident alien individual or foreign
corporation would generally be subject to withholding tax on the gross amount of
the dividends at the rate of 30%, or lower rate as provided by an applicable
treaty, unless dividends are effectively connected with the holder's United
States trade or business, in which case the dividends would be taxed at
graduated rates applicable to U.S. persons. In either case, and assuming the
Certificates are recharacterized as partnership interests, a Certificate Owner
that is a nonresident alien, foreign corporation, foreign partnership or foreign
estate or trust might be subject to federal income tax on any gain from the sale
of the Certificates.
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 Certificate Owners fail to comply with particular identification
procedures, unless the Owner is an exempt recipient under applicable provisions
of the Code.
The 1997 Withholding Regulations alter the forgoing rules in some
respects. In particular, the 1997 Withholding Regulations provide specific
presumptions under which Non-United States Holders may be subject to backup
withholding in the absence of required certifications.
CERTAIN STATE AND LOCAL TAX CONSIDERATIONS
An investment in the Securities may have state or local income,
franchise, personal property or other tax consequences. These consequences may
depend upon, among other things, the tax laws of the jurisdiction where the
Security Owners reside or are doing business, the characterization of the Trust
(e.g., as a trust, partnership or other entity) for state or local tax purposes,
whether the Trust is considered to be doing business in a particular
jurisdiction, and the classification of the Securities as equity or debt or as
an undivided interest in the underlying Base Assets under the laws of a
jurisdiction.
Generally the tax treatment of the Securities for federal income tax
purposes should apply for state and local tax purposes. Thus, if the
Certificates or Notes are treated as indebtedness for federal income tax
purposes, they should likewise be treated as indebtedness for state and local
tax purposes. In this case, Certificate Owners and Note Owners not otherwise
subject to state or local tax would not become subject to the tax solely because
of their ownership of the Securities. However, except as described in the
following paragraph, a Security Owner already subject to tax in a state or
locality could be required to pay additional tax as a result of the holder's
ownership or disposition of Securities.
Interest income, including original issue discount, earned on
obligations of the United States Treasury Department and of other government
sponsored enterprises is generally exempt from state and local income taxation.
Therefore, where a Grantor Trust holds Government Securities or Private Label
Custody Receipt Securities as part of the Trust Property, interest income
attributable to Government Security or Private Label Custody Receipt Security
earned on Certificates may be exempt from state and local taxation, depending on
the form of the Government Security. However, some states or localities may take
a contrary position. Investors should consult their own tax advisors concerning
exemptions from state and local income taxes.
If some or all of the Securities are treated as equity interests in a
partnership, not treated as a publicly traded partnership taxable as a
corporation, for federal income tax purposes, the related Securities generally
should be treated as partnership interests for state and local income tax
purposes. In this case, the partnership should be viewed as a passive holder of
investments and, as a result, should not be subject to state or local taxation
and the Security Owners should not be subject to taxation on income received
through the partnership unless they are already subject to tax in the
jurisdiction. However, if the state or local jurisdiction viewed the partnership
as doing business in the jurisdiction, Security Owners would normally be subject
to taxation in the jurisdiction on their allocable share of the partnership's
income even though they otherwise had no contact with the jurisdiction.
Furthermore, depending on the allocation and apportionment formula, if any, used
by the jurisdiction, it is possible that Security Owners in this case may be
subject to tax in the jurisdiction on their income from other sources.
Additionally, notwithstanding the flow-through treatment that generally applies
to partnerships, some states and localities impose an entity level tax on
partnerships and trusts doing business within their jurisdiction.
The foregoing discussion presents some of the state and local tax
consequences that might apply to Security Owners. However, because of the
variation in each state's and locality's tax laws based in whole or in part upon
income, it is impossible to predict the tax consequences to Note Owners and
Certificate Owners in all of the taxing jurisdictions in which they are already
subject to tax. Accordingly, Security Owners are strongly urged to consult their
own tax advisors with respect to state and local tax consequences arising out of
the purchase, ownership and disposition of Securities.
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTE OWNER'S OR
CERTIFICATE OWNER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF NOTES OR
CERTIFICATES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND
CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Set forth below are some consequences under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and the Code that a fiduciary
(a "Plan Fiduciary") of an "employee benefit plan" (as defined in and subject to
ERISA) or of a "plan" (as defined in Section 4975 of the Code) who has
investment discretion should consider before deciding to invest the plan's
assets in Securities. The following summary is intended to be a summary of
relevant ERISA issues and does not purport to address all ERISA considerations
that may be applicable to a particular plan.
In general, the terms "employee benefit plan" as defined in ERISA and
"plan" as defined in Section 4975 of the Code (a "Plan") refer to any plan or
account of various types which provide retirement benefits or welfare benefits
to an individual or to an employer's employees and their beneficiaries. Plans
include corporate pension and profit-sharing plans, "simplified employee pension
plans", Keogh plans for self-employed individuals, including partners in a
partnership, individual retirement accounts described in Section 408 of the Code
and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts
and circumstances that are relevant to an investment in the Securities,
including the role that an investment in the Securities plays in the Plan's
investment portfolio. Each Plan Fiduciary, before deciding to invest in the
Securities, must be satisfied that investment in the Securities is a prudent
investment for the Plan, that the investments of the Plan, including the
investment in the Securities, are diversified so as to minimize the risks of
large losses and that an investment in the Securities complies with the Plan and
related trust documents.
Each Plan considering acquiring a Security should consult its own
legal and tax advisors before doing so.
Exempt Plans
ERISA and Section 4975 of the Code do not apply to governmental plans
and some church plans, each as defined in Section 3 of ERISA and Section 4975(g)
of the Code. However, fiduciaries with respect to these plans may be subject to
federal, state or other laws similar in effect to ERISA and Section 4975 of the
Code. The discussion below does not purport to address considerations under
federal, state or other laws.
Ineligible Purchasers
Securities may not be purchased with the assets of a Plan that is
sponsored by or maintained by the Depositor, the Trustee, the Issuer, the
Servicer or any of their respective affiliates. Securities may not be purchased
with the assets of a Plan if the Depositor, the Trustee, the Issuer, the
Servicer or any of their respective affiliates or any of their employees:
(a) has investment discretion with respect to the investment of the
Plan assets; or
(b) has authority or responsibility to give or regularly gives
investment advice with respect to the Plan assets for a fee, pursuant
to an appropriate agreement or understanding that the investment
advice will serve as a primary basis for investment decisions with
respect to the Plan assets and that the investment advice will be
based on the particular investment needs of the Plan.
A party that is described in clause (a) or (b) of the preceding sentence is a
fiduciary under ERISA and the Code with respect to the Plan, and any purchase
might result in a "prohibited transaction" under ERISA and the Code.
Plan Assets
It is possible that the purchase of a Security by a Plan will cause,
for purposes of Title I of ERISA and Section 4975 of the Code, the related Base
Assets to be treated as assets of that Plan. A regulation (the "DOL Regulation")
issued under ERISA by the United States Department of Labor (the "DOL") contains
rules for determining when an investment by a Plan in an entity will result in
the underlying assets of the entity being plan assets. Those rules provide that
the assets of an entity will not be "plan assets" of a Plan that purchases an
interest in those plan assets if the interest is not an "equity interest". The
DOL Regulation defines an equity interest as an interest other than an
instrument that is treated as indebtedness under applicable local law and that
has no substantial equity features. The DOL Regulation provides, with respect to
the purchase of an equity interest by a Plan, that the assets of an entity will
not be plan assets of a Plan that purchases an interest in those plan assets if
specific exceptions apply including the following:
a) the investment by all "benefit plan investors" is not
"significant"; or
b) the security issued by the entity is a "publicly offered
security".
The prospectus supplement will specify whether any of the exceptions set forth
in the regulation under ERISA may apply with respect to a Series of Securities.
With respect to clause (a) of the preceding paragraph, the term
"benefit plan investors" includes all plans and accounts of the types described
above as employee benefit plans and accounts, whether or not subject to ERISA,
as well as entities that hold "plan assets" due to investments made in these
entities by any plans or accounts. Investments by benefit plan investors will be
deemed not significant if benefit plan investors own, in the aggregate, less
than a 25% interest in the entity, determined without regard to the investments
of persons with discretionary authority or control over the assets of the
entity, of any person who provides investment advice for a fee with respect to
the assets and of "affiliates" of the persons, within the meaning of the DOL
Regulation. Because the availability of this exception to any Trust depends upon
the identity of the Certificateholders of the applicable Series at any time,
there can be no assurance that any Series or Class of Certificates will qualify
for this exception.
With respect to clause (b) of the second preceding paragraph, a
publicly offered security is one which is:
(a) "freely transferable",
(b) part of a class of securities that is "widely held", and
(c) either,
(1) part of a class of securities registered under Section 12(b)
or 12(g) of the Exchange Act, or
(2) sold to the Plan as part of a public offering pursuant to an
effective registration statement under the Securities Act and
registered under the Exchange Act within 120 days, or any later
time as may be allowed by the Securities and Exchange Commission,
after the end of the fiscal year of the issuer in which the
offering of the security occurred.
Whether a security is "freely transferable" is based on all relevant facts and
circumstances. A class of securities is "widely held" only if it is of a class
of securities owned by 100 or more investors independent of the issuer and of
each other.
The prospectus supplement will indicate if either of the exceptions
set forth in the DOL Regulation apply. If neither exception is applicable,
Securities which are Certificates will not be eligible to be purchased directly
or indirectly for, or on behalf of, or with the assets of a Plan.
Some transactions involving the purchase of Securities which are Notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the Base Assets were deemed to be assets of a Plan. Under the DOL Regulation,
the Base Assets 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 DOL Regulation is applicable.
The prospectus supplement will indicate whether the Notes will be treated as
indebtedness without substantial equity features for purposes of the DOL
Regulation.
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 Trustee, the Indentive Trustee or any of their respective affiliates
is or becomes a party in interest or a disqualified person with respect to the
Plan or in the event that a Note is purchased in the secondary market and the
purchase constitutes a sale or exchange between a Plan and a party in interest
or disqualified person with respect to the Plan. Some 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 Note.
Included among these exemptions are:
(a) Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts;
(b) PTCE 91-38 regarding investments by bank collective investment
funds;
(c) PTCE 95-60, regarding investments by insurance company general
accounts;
(d) PTCE 96-23, regarding transactions affected by in-house asset
managers; and
(e) PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
Before purchasing any Securities, a Plan Fiduciary should consult with
its counsel and determine whether there exists any prohibition to the
acquisition and holding of the Securities. In particular, a Plan Fiduciary
should determine whether a plan asset exception or prohibited transaction class
exemption is applicable in the Plan's particular circumstances and whether the
exception or exemption covers all potential prohibited transactions.
Except as otherwise set forth, the foregoing statements regarding the
consequences under ERISA of an investment in Securities are based on the
provisions of the Code and ERISA as currently in effect, and the existing
administrative and judicial interpretations under the Code and ERISA. No
assurance can be given that administrative, judicial or legislative changes will
not occur that would not make the foregoing statements incorrect or incomplete.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY THE DEPOSITOR THE ISSUER, THE TRUSTEE, THE SERVICER OR ANY
OTHER PARTY THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL REQUIREMENTS WITH
RESPECT TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THE INVESTMENT IS
APPROPRIATE FOR ANY PARTICULAR PLAN. EACH PLAN FIDUCIARY SHOULD CONSULT WITH
ATTORNEYS AND FINANCIAL ADVISORS AS TO THE PROPRIETY OF THIS TYPE OF INVESTMENT
IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND THE RESTRICTIONS OF
ERISA AND SECTION 4975 OF THE CODE.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the Notes, if any, of a given Series and an underwriting
agreement with respect to the Certificates of the Series (collectively, the
"Underwriting Agreements"), the Depositor will agree to cause the related Trust
to sell to the underwriters named in the Underwriting Agreements and in the
related prospectus supplement, and each underwriter will severally agree to
purchase, the principal amount of each Class of Notes and Certificates, as the
case may be, of the related Series set forth in the Underwriting Agreements and
in the related prospectus supplement.
In the Underwriting Agreements with respect to any given Series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth in the Underwriting Agreements, to purchase all of the
Notes and Certificates, as the case may be, described in the Underwriting
Agreements that are offered by this Prospectus and by the related prospectus
supplement if any Notes and Certificates, as the case may be, are purchased.
Each prospectus supplement will either:
o set forth the price at which each Class of Notes and
Certificates, as the case may be, being offered by the prospectus
supplement will be offered to the public and any concessions that
may be offered to dealers participating in the offering of the
Notes and Certificates, as the case may be, or
o specify that the related Notes and Certificates, as the case may
be, are to be resold by the underwriters in negotiated
transactions at varying prices to be determined at the time of
the sale.
After the initial public offering of any Notes and Certificates, as the case may
be, public offering prices and concessions may be changed.
Each Underwriting Agreement will provide that the related Seller will
indemnify the related underwriters against specified civil liabilities,
including liabilities under the Securities Act, or contribute to payments the
several underwriters may be required to make in respect of these liabilities.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a
given Series of Securities, the closing of the sale of any Class of Securities
will be conditioned on the closing of the sale of all other Classes under the
related Underwriting Agreement.
The place and time of delivery for the Notes and Certificates, as the
case may be, in respect of which this Prospectus is delivered will be set forth
in the related prospectus supplement.
If and to the extent required by applicable law or regulation, this
Prospectus and the applicable prospectus supplements will also be used by the
Underwriter after the completion of the offering in connection with offers and
sales related to market-making transactions in the offered Securities in which
the Underwriter acts as principal. Sales will be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Some related legal matters relating to the Securities of any Series
will be passed upon by Stroock & Stroock & Lavan LLP, New York, New York or any
other counsel set forth in the prospectus supplement. Some related federal
income tax and other matters will be passed upon for each Trust by Stroock &
Stroock & Lavan LLP, New York, New York or any other counsel set forth in the
prospectus supplement.
<PAGE>
INDEX OF DEFINED TERMS
1996 Contingent Debt Regulations............................................67
1997 Act....................................................................86
1997 Withholding Regulations................................................73
Account Balance.............................................................69
Accounts.....................................................................6
Accumulation Period.........................................................43
Acquisition Discount........................................................72
Additional Accounts..........................................................6
adjusted issue price........................................................69
Agreements...................................................................5
Ancillary Arrangements......................................................24
Base Assets..................................................................6
benefit plan investors......................................................96
Callable Treasury Strips....................................................13
Cash Collateral Account.....................................................22
Cash Collateral Guaranty....................................................22
Cede........................................................................47
Clearstream Luxembourg......................................................49
Clearstream Luxembourg Participants.........................................49
Certificate Interest Rate...................................................41
Certificate Owners..........................................................65
Certificate Payment Account.................................................55
Certificateholder...........................................................49
Certificates.................................................................5
Check-the-Box Regulations...................................................77
Class........................................................................5
Closing Date................................................................52
Code........................................................................66
Collateral Indebtedness Interests...........................................22
Collection Account..........................................................55
Commission...................................................................5
Controlled Accumulation Amount..............................................43
Controlled Accumulation Period..............................................42
Controlled Amortization Amount..............................................44
Controlled Amortization Period..............................................44
Controlled Deposit Amount...................................................43
Controlled Distribution Amount..............................................44
CRB Agreement................................................................9
CRB Issuer...................................................................9
CRB Schedule................................................................53
CRB Securities...............................................................6
CRB Servicer.................................................................9
CRB Trust....................................................................9
CRB Trustee..................................................................9
Credit Enhancement..........................................................21
Date of Processing..........................................................24
Defaulted Amount............................................................40
Defaulted Receivables.......................................................40
Deficit Controlled Accumulation Amount......................................43
Deficit Controlled Amortization Amount......................................44
Definitive Certificates.....................................................19
Definitive Securities.......................................................47
Depositaries................................................................48
Depositor....................................................................5
Depositor's Interest........................................................37
Distribution Date...........................................................24
DOL.........................................................................96
DOL Regulation..............................................................96
DTC.........................................................................47
Eligible Deposit Account....................................................56
Eligible Institution........................................................56
Eligible Investments........................................................55
Eligible Servicer...........................................................27
Enhancement Invested Amount.................................................21
ERISA.......................................................................94
Euroclear...................................................................50
Euroclear Operator..........................................................50
Euroclear Participants......................................................50
Events of Default...........................................................30
Exchange Act................................................................10
Expected Final Payment Date.................................................42
Fannie Mae..................................................................13
Farm Credit Act.............................................................17
FCA.........................................................................17
FCBs........................................................................17
FDIC........................................................................25
Federal Tax Counsel.........................................................65
FFCB........................................................................13
FFEL........................................................................15
FHLB........................................................................13
FHLMC Act...................................................................14
Final Scheduled Payment Date................................................36
Finance Charge Receivables..................................................39
financial institution.......................................................73
FIRREA......................................................................15
Fiscal Agent................................................................14
Floating Allocation Percentage..............................................40
Foreign Investors...........................................................91
Freddie Mac.................................................................13
freely transferable.........................................................97
Funding Corporation.........................................................17
Global Securities..........................................................106
Government Securities.......................................................11
Government Security Schedule................................................53
Grantor Trust...............................................................82
Grantor Trust Certificateholders............................................82
Grantor Trust Certificates..................................................82
GSE Bonds...................................................................11
GSE Issuer..................................................................13
GSEs........................................................................11
Holders.....................................................................51
Indenture....................................................................5
Indenture Trustee............................................................5
Indirect Participants.......................................................48
Initial Accounts.............................................................6
Insolvency Event............................................................45
Interest Component..........................................................19
Interest Funding Account....................................................42
intermediary certification..................................................74
Invested Amount.............................................................41
Investment Company Act......................................................45
Investment Earnings.........................................................56
Investor Certificateholders' Interest.......................................24
IRS.........................................................................65
issue price.................................................................69
L/C Bank....................................................................22
market discount.............................................................70
MBS.........................................................................14
miscellaneous itemized deductions...........................................78
Miscellaneous Payments......................................................40
Monthly Period..............................................................24
New Issuance................................................................37
Non-United States Holder....................................................73
Non-United States Owner.....................................................81
Non-United States Person....................................................72
Note Interest Rate..........................................................29
Note Owners.................................................................65
Note Payment Account........................................................55
Noteholder..................................................................49
Notes........................................................................5
objective rate..............................................................67
OID Regulations.............................................................67
original issue discount.....................................................68
Paired Series...............................................................46
Participants................................................................47
Participations...............................................................6
Pay Out Event...............................................................45
Paying Agent................................................................49
Payment Accounts............................................................20
Payment Dates...............................................................28
Plan........................................................................95
Plan Fiduciary..............................................................94
Pooling and Servicing Agreement..............................................5
Pre-funded Amount...........................................................52
Pre-Funding Account..........................................................6
premium.....................................................................83
Prepayment Assumption.......................................................69
Principal Allocation Percentage.............................................40
Principal Commencement Date.................................................42
Principal Component.........................................................19
Principal Funding Account...................................................43
Principal Only Certificates.................................................36
Principal Receivables.......................................................37
Principal Terms.............................................................38
Prior Series................................................................46
Private Label Custody Receipt Securities....................................11
Private Label Custody Receipt Security Schedule.............................54
Private Label Custody Strips................................................11
PTCE........................................................................97
publicly traded partnership.................................................90
qualified floating rate.....................................................67
qualified inverse floating rate.............................................67
qualified stated interest...................................................67
qualifying income...........................................................90
Qualifying Substitute Base Asset............................................55
Rapid Accumulation Period...................................................43
Rapid Amortization Period...................................................44
Rating Agency...............................................................12
Receivables..................................................................6
Receivables Pooling Certificates............................................11
REFCO.......................................................................11
REFCO Strip.................................................................19
REFCO Strips................................................................11
Registrar...................................................................28
Related Documents...........................................................32
Removed Accounts.............................................................6
Removed Base Asset..........................................................55
Reserve Account.............................................................23
Revolving Period............................................................42
RTC.........................................................................15
Sallie Mae..................................................................13
Securities...................................................................5
Securities Act...............................................................9
Security Owners.............................................................65
Securityholder..............................................................49
Seller.......................................................................6
Senior Class Percentage.....................................................85
Serial Treasury Strip.......................................................13
Series.......................................................................5
Series Cut-Off Date..........................................................7
Series Enhancement..........................................................20
Series Termination Date.....................................................47
Servicer Defaults...........................................................57
Servicing Fee...............................................................25
Shortfall Amount............................................................85
Short-Term Note.............................................................72
Special Payment Date........................................................45
Spread Account..............................................................23
stated redemption price at maturity.........................................69
Strip Notes.................................................................29
Stripped Certificates.......................................................84
stripping...................................................................13
STRIPS......................................................................13
Subordinate Certificates....................................................84
Subordinate Class Percentage................................................85
Supplement..................................................................37
System......................................................................17
Systemwide Debt Securities..................................................17
TEFRA.......................................................................19
Terms and Conditions........................................................50
TIN.........................................................................75
Transfer Agent..............................................................51
Treasury Bonds..............................................................11
Treasury Strips.............................................................11
Trust........................................................................5
Trust Accounts..............................................................55
Trust Agreement..............................................................5
Trust Stripped Bond.........................................................85
Trust Stripped Coupon.......................................................85
Trustee......................................................................5
TVA.........................................................................13
TVA Act.....................................................................16
UCC.........................................................................61
unconditionally payable.....................................................89
Underwriting Agreements.....................................................98
United States Person........................................................72
unrelated business taxable income...........................................78
widely held.................................................................97
Zero Coupon Certificates....................................................36
<PAGE>
ANNEX I
Global Clearance, Settlement and Tax Documentation Procedures
Except in limited circumstances, the globally offered Certificates
(the "Global Securities") will be available only in book entry form. Unless
otherwise specified in a prospectus supplement for a Series, investors in the
Global Securities may hold Global Securities through any of DTC, Clearstream
Luxembourg or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC participants holding Global Securities will be effected on a
delivery-against-payment basis through Citibank and Morgan as the respective
depositaries of Clearstream Luxembourg and Euroclear and as participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S.
withholding taxes, provided that the holders meet particular requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will he held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, Citibank and Morgan, which in turn will
hold these positions in accounts as participants of DTC.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional asset-backed
securities. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desire value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to conventional
asset-backed securities.
Trading between Clearstream Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a participant at least one business day prior to
settlement. Clearstream Luxembourg or Euroclear will instruct Citibank or
Morgan, respectively, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. Payment will then be made by Citibank or Morgan to the DTC participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Luxembourg Participant's or Euroclear Participant's account. The
Global Securities credit will appear the next day (European time) and the cash
debit will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Clearstream Luxembourg or Euroclear cash debit will
be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended
a line of credit to them, participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Clearstream Luxembourg Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases, the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of overdraft charges, although this result will depend on each participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global Securities
to Citibank or Morgan for the benefit of Clearstream Luxembourg Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading between Clearstream Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
and Euroclear Participants may employ their customary procedures for
transactions in which Global Securities are to be transferred by the respective
clearing system, through Citibank or Morgan, to a DTC participant. The seller
will send instructions to Clearstream Luxembourg or Euroclear through a
participant at least one business day prior to settlement. In these cases,
Clearstream Luxembourg or Euroclear will instruct Citibank or Morgan, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. The payment will then be reflected in the account of the Clearstream
Luxembourg Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Luxembourg or Euroclear Participant's
account would be back-valued to the value date, which would be the preceding
day, when settlement occurred in New York. Should the Clearstream Luxembourg or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Luxembourg or Euroclear Participant's account would instead be valued as of the
actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(1) borrowing through Clearstream Luxembourg or Euroclear for one day,
until the purchase side of the day trade is reflected in their Clearstream
Luxembourg or Euroclear accounts in accordance with the clearing system's
customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream Luxembourg or
Euroclear account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Clearstream Luxembourg
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear, or through DTC if the holder has an address
outside the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest, including original issue discount, on
registered debt issued by U.S. persons, unless the holder takes one of the
following steps to obtain an exemption or reduced tax rate:
(1) Exemption for non-U.S. persons (Form W-8). Non U.S. persons that
are beneficial owners can obtain a complete exemption from the withholding tax
by filing a signed Form W-8 (Certificate of Foreign Status) in the calendar year
in which the payment is made or collected or in either of the preceding two
calendar years.
(2) Exemption for non-U.S. persons with effectively connected income
(Form4224). A non-U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of a Trade or Business in the
United States) annually.
(3) Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate, depending on the treaty terms, by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate) every three years. If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the beneficial
owner or his agent.
(4) Exemption for U.S. persons (Form W-9). U.S. persons should file a
FormW-9 (Request for Taxpayer Identification Number and Certification) in order
to avoid backup withholding (see "Material Federal Income Tax Consequences --
Owner Trusts -- Tax Consequences to Note Owners -- Backup Withholding and
Information Reporting", above).
U.S. Federal Income Tax Reporting Procedure. The Global Security
holder, or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he holds, the
clearing agency, in the case of persons holding directly on the books of the
clearing agency. Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one taxable year.
On October 6, 1997, the 1997 Withholding Regulations were issued which
affect the documentation required from non-U.S. persons holding Global
Securities. The 1997 Withholding Regulations are generally proposed to be
effective for payments after December 31, 1998, regardless of the issue date of
the Global Security with respect to which the payments are made, subject to some
related transition rules. The 1997 Withholding Regulations will replace a number
of current tax certification forms, including IRS Form W-8, IRS Form 1001 and
IRS Form 4224, discussed above, with a single, restated form and standardize the
period of time for which withholding agents could rely on these certifications.
Prospective investors are urged to consult their tax advisors with respect to
the effect of the 1997 Withholding Regulations.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of these Global Securities.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, THIS INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR DEUTSCHE BANC ALEX. BROWN. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE THIS TYPE OF OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
UNDER THIS PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THEIR RESPECTIVE DATES.
Until 90 days after the date of this prospectus supplement, all dealers
effecting transactions in the securities described in this prospectus
supplement, whether or not participating in this distribution, may be required
to deliver this prospectus supplement and the Prospectus. This is in addition to
the obligation of dealers to deliver this prospectus supplement and the
Prospectus when acting as underwriters and with respect to their to their unsold
allotments of subscriptions.
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS SUPPLEMENT (to prospectus date [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
ACE SECURITIES CORP. DEALER FLOORPLAN
MASTER LOAN TRUST [ ]-[ ]
ASSET BACKED CERTIFICATES
[ ]
Seller
[ ]
Servicer
--------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The certificates will represent interests in the trust fund only and will
not represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the certificates
only if accompanied by the prospectus.
--------------------------------------------------------------------------------
The sources for payment of the certificates are a pool of wholesale receivables
generated or to be generated from time to time in a portfolio of revolving
financing arrangements with automobile dealers to finance their automobile and
light truck inventory held by the trust, and cash held by the trust. Interest
[and principal] on the certificates are scheduled to be paid [monthly] on the [
] day of the month. The first scheduled distribution will be made in [ ].
The Trust will issue:
Final
Scheduled
Principal Certificate Distribution
CERTIFICATES BALANCE RATE DATE
------------ ------- ---- ----
A $[ ] [ ] % [ ]
B $[ ] [ ] % [ ]
Deutsche Banc Alex. Brown will purchase the certificates from the trust at
approximately [ ] % of the principal amount of the certificates. Deutsche Banc
Alex. Brown will offer the certificates from time to time in negotiated
transactions or at varying prices which will be determined at the time of sale.
The aggregate proceeds to the trust, before deducting expenses payable by or on
behalf of the trust estimated at $[ ], will be approximately $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this prospectus
supplement in two separate documents that progressively provide more detail: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your certificates, and (2) this prospectus supplement, which
describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
--------------------------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
--------------------------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table
of contents included in the accompanying prospectus provide the pages on
which these captions are located.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary..............................................S-
Risk Factors.........................................S-
Maturity Considerations..............................S-
Master Trust Considerations..........................S-
The Identified Pool..................................S-
Use of Proceeds......................................S-
The Seller...........................................S-
The Servicer.........................................S-
The Depositor........................................S-
Description of the Certificates......................S-
Erisa Considerations.................................S-
Legal Investment Considerations......................S-
Underwriting.........................................S-
Legal Matters........................................S-
Rating...............................................S-
Index of Defined Terms...............................S-
PROSPECTUS
Risk Factors..........................................
The Trusts............................................
Trust Assets..........................................
Series Enhancement....................................
Servicing of Receivables..............................
Certain Matters Regarding the Service.................
Description of the Notes..............................
Description of the Certificates.......................
Certain Information Regarding the Securities..........
Description of the Trust Agreements or
Pooling and Servicing Agreements....................
Certain Legal Aspects of the Receivables..............
The Depositor.........................................
Use of Proceeds.......................................
Material Federal Income Tax Consequences..............
Certain State and Local Tax Considerations............
ERISA Considerations..................................
Plan of Distribution..................................
Legal Matters.........................................
Index of Defined Terms................................
Annex I...............................................
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED
TO CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT
YOU READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU
SHOULD READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH
FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
ISSUER
ACE Securities Corp. Dealer Floorplan Master Trust [ ].
SELLER AND ORIGINATOR
[ ].
DEPOSITOR
ACE Securities Corp., a special purpose Delaware corporation. ACE
Securities Corp. will sell the home equity loans to the issuing trust.
SERVICER
[ ].
TRUSTEE
[ ].
CLOSING DATE
[ ].
CUT-OFF DATE
The close of business on [ ].
DISTRIBUTION DATE
The [ ] day of each [month] [quarter] [semi-annual period] or if it is not
a business day, then the next succeeding business day. The first distribution
date for interest will be in [ ]. The first distribution date with respect to
principal is expected to occur in [ ].
RECORD DATE
With respect to any distribution date, the last business day of the month
immediately preceding the calendar month in which a distribution date occurs.
THE CERTIFICATES
GENERAL
On the closing date, the trust will issue the certificates. Each
certificate represents an undivided ownership interest in the trust.
DENOMINATION
The certificates will be offered for purchase in denominations of $1,000
and multiples thereof.
BOOK-ENTRY REGISTRATION
We will issue the certificates in book-entry form. You will hold your
interests through a depository. While the certificates are book-entry they will
be registered in the name of the applicable depository, or in the name of the
nominee of the depository. Transfers within any depository system will be in
accordance with the usual rules and operating procedures of that system.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
GENERAL
You will be entitled to receive payments of interest on each distribution
date. The amount of principal you will be entitled to receive will vary. If you
hold a certificate on the applicable record date, you will be entitled to
receive payments on the related distribution date.
INTEREST
The interest rate on any distribution date for a certificate will be the
interest rate set forth in this prospectus supplement.
You can use the following formula to calculate your current interest
payment on any distribution date:
N x IR x PB= your interest payment
------
360
N= [30], [the number of days from the last distribution date (or in the case of
the initial distribution date, from [ ]) until the current distribution date].
IR= the applicable per annum interest rate.
PB= the principal balance of immediately prior to any distributions on each
distribution date.
PRINCIPAL
On each distribution date, the trustee will distribute principal of the
classes of certificates depending on the amortization period and in the manner
and priority discussed under the caption "Description of the Certificates -
Distributions" in this prospectus supplement.
AMORTIZATION PERIOD
[CONTROLLED AMORTIZATION PERIOD
Unless a rapid amortization period begins, the certificates will have a
controlled amortization period. During a controlled amortization period,
collections of principal receivables that are allocable to the percentage
interest of a series of certificates will be used to make principal
distributions in scheduled amounts to the certificateholders entitled to those
distributions. The amount to be distributed on any distribution date during the
controlled amortization period will be limited to:
o an amount equal to [ ], plus
o any existing deficit controlled amortization amount arising from prior
payment dates.
The controlled amortization period will commence at the close of business
on [ ] and continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[PRINCIPAL AMORTIZATION PERIOD
Unless a rapid amortization period begins, the certificates will have an
amortization period during which collections of principal receivables allocable
to the percentage interest of the certificates will be used on each payment date
to make principal distributions to the holders of the certificates then entitled
to distributions. The principal amortization period will commence at the close
of business on [ ] and continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[ACCUMULATION PERIOD
Unless a rapid amortization period begins, the certificates will have an
accumulation period. During an accumulation period, collections of principal
receivables allocable to the percentage interest of such certificates will be
deposited on the business day immediately prior to each payment date in a
principal funding account. The principal funding account is established for the
benefit of the holders of the certificates. Amounts on deposit in the principal
funding account will be used to make distributions of principal to the holders
on the scheduled payment date. The amount to be deposited in the principal
funding account on any transfer date will be limited to an amount equal to [ ].
The accumulation period will commence at the close of business on [ ] and
continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[RAPID AMORTIZATION PERIOD
The rapid amortization period shall run from the day on which an
amortization event has occurred, to the earlier of the date on which
certificates have been paid in full or the related series termination date.
During the rapid amortization period, collections of principal receivables
allocable to the percentage interest of a series of certificates will be
distributed as principal payments to the holders of the certificates on each
payment date. During the rapid amortization period, distributions of principal
to holders of the certificates will not be subject to any controlled deposit
amount or controlled distribution amount. In addition, upon the commencement of
the rapid amortization period, any funds on deposit in a principal funding
account will be paid to the holders of certificates on the first payment date in
the rapid amortization period.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o a pool of wholesale receivables generated or to be generated from time
to time in a portfolio of revolving financing arrangements with
automobile dealers to finance their automobile and light truck
inventory transferred to the trust on the closing date;
o payments on the receivables after the cut-off date (other than
payments of interest due on or prior to [ ]);
o certain rights of the depositor under a loan purchase agreement;
o amounts on deposit in the accounts specified in this prospectus
supplement; and
o proceeds of the foregoing.
THE RECEIVABLES
On the closing date, the trust will purchase receivables having an
aggregate principal balance of approximately $[ ] as of the initial cut-off
date, from the depositor pursuant to the agreement. On and after the closing
date, pursuant to the agreement, the depositor will sell, if available, and the
trust will purchase, additional receivables from time to time during the funding
period specified in this prospectus supplement. We expect the amount of
additional receivables to be purchased with moneys in the pre-funding account to
have an aggregate principal balance equal to approximately $[ ].
The statistical information presented in this prospectus supplement is with
respect to the initial receivables as of the initial cut-off date. Certain of
the initial receivables may not be purchased by the trust and other receivables
may be purchased by the trust on the closing date.
The initial receivables have been selected, and the subsequent receivables
will be selected, from the receivables owned or originated by the seller based
on the criteria specified in the pooling and servicing agreement and described
in this prospectus supplement.
After the transfer of subsequent receivables to the trust, the
characteristics of the entire pool of receivables included in the trust may vary
significantly from those of the initial receivables.
The initial receivables will have the following characteristics as of the
cut-off date:
o number of receivables: [ ]
o aggregate principal balance: $[ ]
o average principal balance: $[ ]
o maximum principal balance: $____
o minimum principal balance: $[ ]
o latest maturity date: [ ]
o weighted average current interest rate:
o current interest rates range: [ ]% to [ ]%
o weighted average gross margin: [ ]% (approximate)
o gross margin range: [ ]
o weighted average maximum interest rate:
o maximum interest rate range: [ ]% to [ ]%
o weighted average minimum interest rate:
o minimum interest rate range: [ ]% to [ ]%
o weighted average remaining term: [ ]months (approximate)
o remaining term range: [ ] months to [ ] months
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
holders of certain classes of certificates against losses due to defaults by the
borrowers under the home equity loans.
The certificates have the benefit of [four] types of credit enhancement:
o [a cash collateral account],
o [ ]
o [ ]
o with respect to the class A certificates, subordination of the class B
certificates; and
OPTIONAL TERMINATION
On any date when the adjusted invested amount is less than or equal to [ ]%
of the invested amount on the closing date and to the extent certain conditions
specified in the agreement are satisfied, the [depositor] [seller] will have the
right to purchase the invested amount from the trust.
FEDERAL TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP has acted as counsel to the depositor and is
of the opinion that:
o The certificates will be treated as indebtedness of the seller that is
secured by the receivables.
ERISA CONSIDERATIONS
An employee benefit plan subject to the requirements of the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, or the provisions of Section 4975 of the Internal
Revenue Code of 1986 as amended, contemplating the purchase of the class A
certificates should consult its counsel before making a purchase, and the
fiduciary and such legal advisors should consider whether the class A
certificates will satisfy all of the requirements of the "publicly offered
securities" exemption described herein and the possible application of other
ERISA prohibited transaction exemptions described herein. Although the depositor
expects that the "publicly offered securities" exemption or the other ERISA
prohibited transaction exemptions will apply to certain purchases of the class A
certificates by employee benefit plans, there can be no assurance that such
exemption will apply to all purchases of the class A certificates by such plans.
The class B certificates are not eligible for purchase by plans. SEE "ERISA
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
CERTIFICATE RATING
Before the certificates can be issued, the trust must obtain the following
ratings:
CLASS A CERTIFICATES
o [the highest rating category by [ ]]
CLASS B CERTIFICATES
o [One of the four highest rating category by [ ]]
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE NOTES.
YOU MAY HAVE DIFFICULTY SELLING YOUR
CERTIFICATES.......................... The certificates will not be listed on
any securities exchange. As a result, if
you wish to sell your certificates, you
will have to find a purchaser that is
willing to purchase your certificates.
The underwriter intends to make a
secondary market for the offered
certificates. The underwriter may do so
by offering to buy the offered
certificates from investors that wish to
sell. However, the underwriter will not
be obligated to make offers to buy the
offered certificates and may stop making
offers at any time. In addition, the
prices offered, if any, may not reflect
prices that other potential purchasers,
were they to be given the opportunity,
would be willing to pay. There have been
times in the past where there have been
very few buyers of similar asset backed
securities, and there may be times again
in the future. As a result, you may not
be able to sell your certificates when
you wish to do so or you may not be able
to obtain the price you wish to receive.
[GEOGRAPHIC CONCENTRATION MAY
AFFECT PERFORMANCE.................... Discuss any geographic risks, if
applicable]
THE SUBORDINATED CERTIFICATES HAVE A
GREATER RISK OF LOSS THAN THE OTHER
CERTIFICATES.......................... The class B certificates will not be
paid any distributions of interest until
the class A certificates receive their
interest distributions and will not
receive any distributions of principal
until the class A certificates receive
their principal distributions. If the
available funds are insufficient to make
all of the required distributions on the
class A, and class B certificates, the
class B certificates will not receive
all of their distributions. In addition,
losses due to defaults by [ ], will be
allocated first to the class B
certificates to the extent not covered
by excess interest at that time. Any
allocation of a loss to class B
certificates will reduce the amount of
interest and, to the extent not
reimbursed from future excess interest,
principal they will receive. As a result
of the foregoing, the class B
certificates will be affected to a
larger degree by any losses on the
receivables. In addition, following the
exercise of the clean-up call, the class
B certificates and consequently, may not
receive amounts with respect to any
losses allocated to the class B
certificates that have not been
previously reimbursed.
THE TRUST ASSETS ARE THE ONLY
SOURCE OF PAYMENTS ON THE
CERTIFICATES.......................... All distributions on the certificates
will be made from payments by borrowers
under the receivables. The trust has no
other assets [other than [ ]] to make
distributions on the certificates. The
receivables are NOT insured or
guaranteed by any person. The trust is
the only person that is obligated to
make distributions on the certificates.
The certificates are NOT insured by any
governmental agency.
CERTIFICATE RATING.................... The rating of the certificates will
depend on an assessment by the rating
agencies of the receivables. The rating
by the rating agencies of the
certificates is not a recommendation for
you to purchase, hold or sell the
certificates, and the rating does not
comment as to the market price or
suitability for a particular investor.
There is no assurance that the ratings
will remain in place for any given
period of time or that the ratings will
not be lowered or withdrawn by the
rating agencies. The ratings do not
address the possibility that offered
certificateholders might realize a lower
than anticipated yield. The ratings of
the offered certificates do not address
the possibility of the imposition of
United States withholding tax with
respect to non-U.S. persons. No rating
of the originator, the servicer or the
company is required to maintain the
rating of the offered certificates.
THE CERTIFICATES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS......... The certificates are not suitable
investments for any investor that
requires a regular or predictable
schedule of payments or payment on any
specific date. The offered certificates
are complex investments that should be
considered only by investors who, either
alone or with their financial, tax and
legal advisors, have the expertise to
analyze the prepayment, reinvestment,
default and market risk, the tax
consequences of an investment, and the
interaction of these factors.
[THE RECEIVABLES, THE PRE-FUNDING
ACCOUNT AND THE RISK OF PREPAYMENT.... On the closing date, the depositor will
transfer to the trust the approximately
$[ ] of initial receivables and the
approximately $[ ] pre-funded amount on
deposit in the pre-funding account. If
the principal amount of eligible
receivables originated by [seller] and
acquired by the depositor during the
funding period is less than the
pre-funded amount, the depositor will
have insufficient receivables to sell to
the trust on the subsequent transfer
dates, resulting in a prepayment of
principal to the Certificateholders as
described in the following paragraph.
[To the extent that amounts on deposit
in the pre-funding account have not been
fully applied to the conveyance of
subsequent receivables to the trust by
the end of the funding period, you will
receive, on the distribution date on or
immediately following the last day of
the funding period, a prepayment of
principal from amounts remaining in the
pre- funding account. We anticipate that
the principal amount of subsequent
receivables sold to the trust will not
be exactly equal to the amount on
deposit in the pre-funding account and
that therefore there will be at least a
nominal amount of principal prepaid to
you.]
[RISKS ATTENDANT TO INVESTMENTS IN
INTEREST-ONLY OR PRINCIPAL-ONLY
CERTIFICATES.......................... [If certificates are interest-only or
principal-only certificates, discuss
risks attendant to these types of
certificates.]]
<PAGE>
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement (the "Agreement") and the series
supplement to the Agreement (the "Series Supplement" or a "Supplement") provide
that holders of Class A Certificates (the "Class A Certificateholders") will not
receive payments of principal until the first Distribution Date with respect to
the Controlled Amortization Period, which is the [ ]Distribution Date, unless a
Pay Out Event shall occur. Class A Certificateholders will receive payments of
principal on the [ ] day of each [month] [quarter] [semi-annual period] or if it
is not a business day, then the next succeeding business day (the "Distribution
Date") following the Monthly Period in which a Pay Out Event occurs (each
Distribution Date following a Pay Out Event, a "Special Payment Date") until the
Class A Invested Amount has been paid in full or until [ ] (the "Termination
Date"). The "Monthly Period" is [the calendar month preceding the Distribution
Date]. The holders of Class B Certificates (the "Class B Certificateholders",
and together with the Class A Certificateholders, the "Certificateholders"))
will not begin to receive payments of principal until the final principal
payment on the Class A Certificates has been made.
On each Distribution Date with respect to the Class A Accumulation
Period, amounts equal to the lesser of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the sum of the applicable Controlled Accumulation Amount for the
Monthly Period and any applicable Deficit Controlled Accumulation
Amount, (the "Controlled Deposit Amount") and
o the Class A Adjusted Invested Amount
will be deposited in the Principal Funding Account until the Principal Funding
Account Balance is equal to the Class A Invested Amount.
After the Class A Invested Amount has been paid in full, on each Distribution
Date with respect to the Class B Accumulation Period amounts equal to the lesser
of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the applicable Controlled Deposit Amount, and
o the Class B Adjusted Invested Amount
will be deposited in the Principal Funding Account until the Principal Funding
Account Balance equals the Class B Invested Amount.
See "Description of the Certificates -- Principal Payments" for a discussion of
circumstances under which the commencement of an Accumulation Period may be
delayed.
On each Distribution Date during the Controlled Amortization Period,
the Certificateholders will be entitled to receive monthly payments of
principal, until the Certificates have been paid in full, in an amount equal to
the lesser of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the sum of the applicable Controlled Distribution Amount and any
applicable Deficit Controlled Amortization Amount, and
o the Invested Amount.
The [Seller] [Depositor] may, at or after the time at which the
[Controlled Amortization Period] [Accumulation Period] commences for Series 200[
]- [ ], cause the Trust to issue another Series, or some portion of another
Series, to the extent that the full principal amount of the other Series is not
otherwise outstanding at that time, as a Paired Series with respect to Series
200[ ]- [ ] to be used to finance the increase in the Seller's Interest caused
by the accumulation of principal in the Principal Funding Account with respect
to Series 200[ ]- [ ]. No assurances can be given as to whether the other Series
will be issued and, if issued, the terms of the newly issued Series. Because the
terms of the Certificates may vary from the terms of the other series, the Pay
Out Events with respect to the series may vary from the Pay Out Events with
respect to Series 200[ ]- [ ] and may include Pay Out Events which are unrelated
to the status of the Seller, or the Servicer or the Receivables, such as Pay Out
Events related to the continued availability and rating of specific providers of
enhancement to the other Series. If a Pay Out Event does occur with respect to
any Paired Series prior to the payment in full of the Certificates, the final
payment of principal to the Certificateholders may be delayed.
Should a Pay Out Event occur with respect to the Certificates and the
Rapid Amortization Period commence,
o any amount on deposit in the Principal Funding Account will be paid to
the Certificateholders on the first Special Payment Date, and the
Certificateholders will be entitled to receive Available Principal
Collections on each Distribution Date with respect to the Rapid
Amortization Period or following the Expected Final Payment Date, as
the case may be, as described in this prospectus supplement until the
Class A Invested Amount and Class B Invested Amount are paid in full
or until the Termination Date occurs, and
o any amount on deposit in the Excess Funding Account will be released
and treated as Shared Principal Collections to the extent needed to
cover principal payments due to or for the benefit of any Series
entitled to the benefits of Shared Principal Collections.
In addition, on the first Special Payment Date following the occurrence of a Pay
Out Event, after giving effect to any payment of principal on that date,
(a) an amount equal to the lesser of:
(i) the Available Shared Collateral Amount, after giving effect to any
withdrawal from the Cash Collateral Account on that date of amounts to
fund the Class A Required Amount and the Class B Required Amount, and
(ii) the unpaid principal amount of the Class A Certificates, less the
Principal Funding Account Balance allocable to the Class A
Certificates, will be withdrawn from the Cash Collateral Account and
distributed to the Class A Certificateholders as a payment of
principal of the Class A Certificates, and
(b) an amount equal to the lesser of:
(i) the remainder of the Available Cash Collateral Amount, and
(ii) the unpaid principal amount of the Class B Certificates, less the
Principal Funding Account Balance, if any, allocable to the Class B
Certificates, will be withdrawn from the Cash Collateral Account and
distributed to the Class B Certificateholders as a payment of
principal of the Class B Certificates.
The ability of Certificateholders to receive payments of principal on
the applicable Expected Final Payment Date on each Distribution Date during the
Controlled Amortization Period depends on the payment rates on the Receivables,
the amount of outstanding Receivables, delinquencies, charge-offs and new
borrowings on the Accounts, the potential issuance by the Trust of additional
Series and the availability of Shared Principal Collections. The amount of
outstanding Receivables and the delinquencies, charge-offs and new borrowings on
the Accounts may vary from month to month due to seasonal variations, the
availability of other sources of credit, legal factors, general economic
conditions and spending and borrowing habits of individual accountholders.
Monthly payment rates on the Receivables may vary because, among other things,
accountholders may fail to make a required minimum payment, may only make
payments as low as the minimum required amount or may make payments as high as
the entire outstanding balance. Monthly payment rates may also vary due to
seasonal purchasing and payment habits of accountholders and to changes in any
terms of rebate programs in which accountholders participate. The Depositor
cannot predict, and no assurance can be given, as to the accountholder monthly
payment rates that will actually occur in any future period, as to the actual
rate of payment of principal of the Certificates or whether the terms of any
previously or subsequently issued Series might have an impact on the amount or
timing of any payment of principal. The foregoing factors will affect both the
Class A Certificates and the Class B Certificates.
There can be no assurance that collections of Principal Receivables
with respect to the Trust, and thus the rate at which Certificateholders could
expect to receive payments of principal on the Certificates during the Rapid
Amortization Period or the rate at which the Principal Funding Account could be
funded during the Accumulation Period, or the rate at which payments of
principal will be made during the Controlled Amortization Period, will be
similar to the historical experience set forth in the "Accountholder Monthly
Payment Rates for the Identified Pool" table under "The Identified Pool" in this
prospectus supplement. The Depositor may shorten the Class A Accumulation Period
and, in that event, there can be no assurance that there will be sufficient time
to accumulate all amounts necessary to pay the Class A Invested Amount on the
Class A Expected Final Payment Date.
The Trust, as a master trust, may issue additional Series from time to
time, and there can be no assurance that the terms of any additional Series
might not have an impact on the timing or amount of payments received by
Certificateholders. Further, if a Pay Out Event occurs, the average life and
maturity of the Class A Certificates and Class B Certificates, respectively,
could be significantly reduced.
Due to the reasons set forth above, there can be no assurance that
deposits in the Principal Funding Account will be made in accordance with the
applicable Controlled Accumulation Amount that payments of principal will be
made in accordance with the applicable Controlled Amortization Amount or that
the actual number of months elapsed from the date of issuance of the Class A
Certificates and the Class B Certificates to their respective final Distribution
Dates will equal the expected number of months.
MASTER TRUST CONSIDERATIONS
IMPACT OF ADDITIONAL SERIES. The Trust, as a master trust, may issue
additional Series from time to time. While the terms of any Series will be
specified in a Supplement, the provisions of a Supplement and, therefore, the
terms of any additional Series, will not be subject to prior review by, or
consent of, holders of the Certificates of any previously issued Series. These
terms may include methods for determining applicable investor percentages and
allocating collections, provisions creating different or additional security or
other credit enhancement for the Series ("Series Enhancement"), provisions
subordinating the Series to another Series or other Series, if the Supplement
relating to the Series so permits, to the Series, and any other amendment or
supplement to the Agreement which is made applicable only to the Series. The
obligation of the Trustee to issue any new Series is subject to the following
conditions, among others:
o the [Seller] [Depositor] shall have received written notice that the
new issuance will not result in any Rating Agency's reducing or
withdrawing its rating of the Certificates of any outstanding Series
(any reduction or withdrawal is referred to in this prospectus
supplement as a "Ratings Effect"), and
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the new issuance will not at the time of its occurrence
cause a Pay Out Event or an event that, after the giving of notice or
the lapse of time, would constitute a Pay Out Event, to occur with
respect to any Series.
There can be no assurance, however, that the terms of any other Series,
including any Series later issued, might not have an impact on the timing or
amount of payments received by a Certificateholder.
IMPACT OF DISCOUNT OPTION. Pursuant to the Agreement, the [Seller]
[Depositor] has the option from time to time to designate a fixed or variable
percentage of Receivables that otherwise would be treated as Principal
Receivables to be treated as Finance Charge Receivables. Any designation would
result in an increase in the amount of Finance Charge Receivables and a slower
payment rate of collections in respect of Principal Receivables than otherwise
would occur. Pursuant to the Agreement, the [Seller] [Depositor] can make a
designation without notice to or the consent of Certificateholders.
Subsequently, pursuant to the Agreement, the [Seller] [Depositor] may, without
notice to or the consent of Certificateholders, reduce or eliminate the
percentage of Receivables subject to this designation. The [Seller] [Depositor]
must provide 30 days prior written notice to the Servicer, the Trustee, any
provider of Series Enhancement and each Rating Agency of any designation or
reduction of Principal Receivables to be treated as Finance Charge Receivables,
and the designation or reduction will become effective only if:
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the designation or reduction would not at the time of its
occurrence cause a Pay Out Event or an event that, after the giving of
notice or the lapse of time would constitute a Pay Out Event, to occur
with respect to any Series,
o the [Seller] [Depositor] shall have received written notice from each
Rating Agency that the designation or reduction will not have a
Ratings Effect, and
o in the case of a reduction or withdrawal, the [Seller] [Depositor]
shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, in the reasonable belief of the [Seller]
[Depositor], the reduction or withdrawal shall not have adverse
regulatory implications for the [Seller] [Depositor].
IMPACT OF ADDITION OF TRUST ASSETS. The [Seller] [Depositor] expects,
and in some cases will be obligated to designate additional Accounts, the
Receivables in which will be conveyed to the Trust. These additional Accounts
may include accounts originated using criteria different from those which were
applied to the Accounts previously included in the Trust because the additional
Accounts were originated at a different date or were part of a portfolio of
accounts which were not part of the Seller's portfolio at the time Accounts were
previously conveyed to the Trust or which were acquired from other institutions.
Moreover, additional Accounts may or may not be accounts of the same type as
those previously included in the Trust. Consequently, there can be no assurance
that the additional Accounts will be of the same credit quality as the Accounts
previously included in the Trust. In addition, the additional Accounts may
consist of accounts which have characteristics different from the
characteristics of Accounts previously included in the Trust, including lower
periodic rate finance charges and other fees and charges, which may have the
effect of reducing the average yield on the portfolio of Accounts included in
the Trust, different payment rates and higher loss or delinquency experience,
which may have the effect of reducing the average yield on the portfolio of
accounts included in the Trust. The designation of additional Accounts will be
subject to the satisfaction of particular conditions, including that:
o the [Seller] [Depositor] shall have received written notice from each
Rating Agency that the addition will not have a Ratings Effect, and
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the addition will not at the time of its occurrence cause
a Pay Out Event or an event that, after the giving of notice or the
lapse of time, would constitute a Pay Out Event, to occur with respect
to any Series.
Although the addition of participations will require an amendment to the Pooling
and Servicing Agreement, no consent of Certificateholders will be required for
any amendment.
THE IDENTIFIED POOL
A pool of wholesale receivables (the "Receivables") generated or to be
generated from time to time in a portfolio of revolving financing arrangements
(the "Accounts") with automobile dealers ("Dealers") to finance their automobile
and light truck inventory transferred to the Trust by the Seller pursuant to the
Pooling and Servicing Agreement were or will be selected from extensions of
credit and advances made by the Seller, to approximately [ ] domestic motor
vehicle dealers. As of [ ], the principal balance of the Seller's outstanding
Receivables was approximately $[ ].
As of [ ], the average credit lines per dealer in the Seller's
portfolio for new and used vehicles were $[ ] and $[ ], respectively, and the
average balance of principal per dealer was $[ ]. As of [ ], the aggregate total
Receivables balance as a percentage of the aggregate total credit line was
approximately [ ]%.
The following table sets forth the percentages of dealer account
balances by year of credit line origination for the Seller's portfolio as of
[].
Portfolio Percentages by Year of Credit Line Origination
2000 1999 1998 1997 1996
------------- ---------- ---------- ------------ -------------
As of [ ], the weighted average spread over the Prime Rate charged to
Dealers was approximately [ ]%.
As of [ ], approximately [ ]% of all dealers participating in the
installment payment plan were remitting [ ]% of the Installment Balance
following the sale of the related vehicle.
Used vehicles represented approximately [ ]% of the aggregate
principal amount of Receivables in the Seller's portfolio as of [ ]. As of [ ],
used vehicles represented approximately [ ]% of the aggregate principal amount
of Receivables in the Trust.
The following table provides the percentage of dealers in the Seller's
portfolio that were subject to finance hold as of the dates indicated.
Finance Hold Experience
<TABLE>
<CAPTION>
As of As of
[ ], December 31,
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996 1995
------------- ------------ ----------- -----------------------------------
Percentage of Dealers
</TABLE>
The following table provides the number and percentage of Dealers in
Dealer Trouble Status in the Seller's portfolio as of the dates indicated.
Dealer Trouble Experience
<TABLE>
<CAPTION>
As of As of
[ ], December 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
Number of Dealers
Percentage of Dealers
</TABLE>
THE ACCOUNTS
As of [ ], with respect to the Accounts in the Trust:
o there were [ ] Accounts and the outstanding principal balance was
approximately $[ ] billion;
o the average credit lines per Dealer for new and used vehicles were
approximately $[ ] million and $[ ] million, respectively, and the
average balance of Principal Receivables per Dealer was approximately
$[ ] million; and
o the aggregate total Receivables balance as a percentage of the
aggregate total credit line was approximately [ ]%.
Unless otherwise indicated, the statistics included in this paragraph, in
the table below and under " -- Geographic Distribution" with respect to the
Accounts and the Receivables in the Trust give effect to approximately $[ ]
million of principal Receivables balances with respect to particular Dealers
(the "Excluded Receivables") and the "Excluded Dealers"), respectively) that are
in voluntary or involuntary bankruptcy proceedings or voluntary or involuntary
liquidation or that, subject to particular limitations, are being voluntarily
removed by the Seller, or the Servicer on its behalf, from the Trust. A portion
of the principal Receivables was created after the Dealers entered into this
status or were designated by the Seller, or the Servicer on its behalf, for
removal from the Trust and, as a result, are owned by the Seller and not the
Trust. Principal balances created prior to the Dealers entering into this status
or being designated for removal from the Trust are included in the Principal
Receivables balance. See "Description of the Certificates -- Removal of
Accounts" in the Prospectus for a description of the manner in which an Account
can be removed from the Trust.
The following table sets forth the percentages of Dealer account balances
by year of credit line origination for the accounts in the Trust as of [ ].
Portfolio Percentages by Year of Credit Line Origination
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
</TABLE>
As of [ ], the weighted average spread over the Prime Rate charged to
Dealers was approximately [ ]%.
Loss Experience
The following tables set forth the average outstanding principal balance
and loss experience for each of the periods shown on the Seller's portfolio.
Because the Eligible Accounts will be only a portion of the Seller's entire
portfolio, actual loss experience with respect to the Eligible Accounts may be
different. There can be no assurance that the loss experience for the
Receivables in the future will be similar to the historical experience set forth
below with respect to the Seller's portfolio.
Loss Experience for the Seller's portfolio
<TABLE>
<CAPTION>
[ ]Months
Ended
[ ], Year Ended December 31,
2000 1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Average Principal
Receivables Balance (1)
Net Losses (Recoveries)(2)
Net Losses (Recoveries)/
Liquidations
Net Losses (Recoveries)/
Average Principal
Receivables Balance(3)
</TABLE>
(1) "Average Principal Receivables Balance" is the average of the month-end
principal balances for the thirteen months ending on the last day of the period.
(2) "Net Losses" in any period are gross losses less recoveries for the period.
(3) Percentages are expressed on an annualized basis.
Aging Experience
The following table provides the age distribution of vehicle inventory for
all Dealers in the Seller's portfolio, as a percentage of total principal
outstanding at the date indicated. Because the Eligible Accounts will only be a
portion of the Seller's entire portfolio, actual age distribution with respect
to the Eligible Accounts may be different.
Age Distribution for the Seller's portfolio
<TABLE>
<CAPTION>
As of As of
[ ], December 31,
----------------------------------------------------------------
Days 2000 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
1-120..........................
121-180........................
181-270........................
Over 270.......................
</TABLE>
Geographic Distribution
The following table provides the geographic distribution of the vehicle
inventory for all Dealers in the Trust on the basis of Receivables outstanding
and the number of Dealers generating the portfolio.
Geographic Distribution of Accounts in the Trust
<TABLE>
<CAPTION>
As of [ ]
Percentage Percentage of Total
Receivables Receivables Number of Number of
Outstanding(2) Outstanding of Dealers(2)(4) Dealers(3)(4)
<S> <C> <C> <C> <C>
[ ]............... $
[ ]...............
[ ]...............
Other (1)............. -------------- ------------ ------------ ---------------
Total................ $
============== ============ ============ ===============
(1) No other state includes more than 5% of the outstanding Receivables.
(2) Includes Excluded Receivables.
(3) Includes Excluded Dealers.
(4) May not add to 100.0% due to rounding.
</TABLE>
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be paid to the
Depositor. The Depositor will use the net proceeds to pay the Seller the
purchase price of the Receivables [and the Seller will use the net proceeds for
general corporate purposes.]
THE SELLER
The "Seller" is [ ]. [Insert description of the Seller.]
THE SERVICER
The "Servicer" is [ ]. [Insert description of the Servicer, if different
from the Seller.]
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own and
sell loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in loans and
other financial assets, collections on the loans and related assets; and to
engage in any acts that are incidental to, or necessary, suitable or convenient
to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE CERTIFICATES
Pursuant to the Agreement and the Series Supplement, ACE Securities Corp.
Dealer Floorplan Master Trust [ ] - [ ] (the "Trust") will issue Class A
Certificates (the "Class A Certificates") and Class B Certificates (the "Class B
Certificates", and together with the Class A Certificates, the "Certificates" or
the "Securities") which are a separate series (the "Series") of securities
issued under the Prospectus. The following summary describes the material terms
of the Certificates, the Agreement and the Series Supplement. The summaries do
not purport to be complete descriptions of all of the terms of the Certificates,
the Agreement and the Series Supplement and therefore are subject to, and
qualified in their entirety by reference to, all the provisions of the
Certificates, the Agreement and the Series Supplement. Reference should be made
to the Prospectus for additional information concerning the Certificates, the
Agreement and the Series Supplement.
The final expected Payment Date for the Class A Certificates is [ ] (the
"Class A Expected Final Payment Date") and the final expected Payment Date for
the Class B Certificates is [ ] (the "Class B Expected Final Payment Date" and
together with the Class A Expected Final Payment Date, the "Expected Final
Payment Date").
Interest Payments
Interest on the Class A Certificates and the Class B Certificates will
accrue from the [Issuance Date] [Closing Date] on the Class A Invested Amount
and Class B Invested Amount, respectively, at the Class A Certificate Rate and
Class B Certificate Rate, respectively. ").] Interest with respect to the
Certificates will be distributed on the [ ] day of each [month] [quarter]
[semi-annual period] (an "Interest Period") (or if such a day is not a business
day, the next succeeding business day) commencing on [ ] and on each [ ]
thereafter (each a "Distribution Date"). The "Class A Certificate Rate" for an
Interest Period will be a rate per annum equal to [insert Class A Certificate
Rate formula] for a period of [one] [three] [six] months [or following a Pay Out
Event, for a period of one month]. The "Class B Certificate Rate" for an
Interest Period will be a rate per annum equal to [insert Class B Certificate
Rate formula] for a period of [one] [three] [six] months [or following a Pay Out
Event, for a period one month.]. Interest will be distributed on [ ] the [ ] day
of each month (the "Interest Payment Date"), and on each subsequent Interest
Payment Date, or if any of these days is not a business day, the next succeeding
business day, commencing on the [ ] Distribution Date, to Certificateholders in
whose names the Certificates were registered at the close of business on the
last day of the calendar month preceding the date of payment (a "Record Date").
Interest for any Interest Payment Date or Special Payment Date will accrue from
and including the preceding Interest Payment Date or Special Payment Date, or in
the case of the first Interest Payment Date, from and including the [Issuance
Date] [Closing Date], to but excluding the Interest Payment Date or Special
Payment Date.
Interest payments or deposits with respect to the Class A Certificates for
each Distribution Date will be calculated on the Class A Invested Amount as of
the preceding Record Date, or in the case of the initial Distribution Date, on
the initial Class A Invested Amount, based upon the Class A Certificate Rate.
Interest payments or deposits with respect to each Distribution Date will be
calculated on the basis of [the actual number of days in the period from and
including the preceding Distribution Date, or in the case of the initial
Distribution Date the Closing Date, to but excluding the Distribution Date and a
360-day year] [a 360-day year of twelve 30-day months]. On each Distribution
Date, Class A Monthly Interest and Class A Monthly Interest previously due but
not deposited in the Interest Funding Account or distributed in respect of Class
A Certificates will be:
a) paid to Class A Certificateholders from Class A Available Funds if the
Distribution Date is an Interest Payment Date or Special Payment Date,
or
b) deposited in an Eligible Deposit Account in the name of the [ ] (the
"Trustee") and for the benefit of the Certificateholders (the
"Interest Funding Account"), if the Distribution Date is not an
Interest Payment Date or a Special Payment Date.
"Eligible Deposit Account" means either:
o a segregated account with an eligible institution, or
o a segregated trust account with the corporate trust department of a
depository institution organized under the laws of the United States
or any one of the states of the United States or the District of
Columbia, or any domestic branch of a foreign bank, having corporate
trust powers and acting as trustee for funds deposited in the account,
so long as any of the securities of the depository institution have a
credit rating from each Rating Agency in one of its generic rating
categories which signifies investment grade.
To the extent Class A Available Funds allocated to the Class A
Certificateholders' Interest for the Monthly Period are insufficient to pay the
interest, Excess Spread and Excess Finance Charges allocated to Series 200[ ]-
[ ], amounts, if any, on deposit in the Cash Collateral Account up to the
Available Shared Collateral Amount and Reallocated Principal Receivables will be
used to make these payments.
"Class A Available Funds" means, with respect to any Monthly Period,
an amount equal to the sum of:
a) the Class A Floating Percentage of collections of Finance Charge
Receivables allocated to the Certificates with respect to the Monthly
Period, including any investment earnings and other amounts that are
to be treated as collections of Finance Charge Receivables in
accordance with the Agreement and the Series Supplement, but excluding
the portion of collections of Finance Charge Receivables attributable
to Interchange that is allocable to Servicer Interchange;
b) [if the Monthly Period relates to a Distribution Date that occurs
prior to the Class B Principal Commencement Date,] the Principal
Funding Investment Proceeds, if any, with respect to the related
Distribution Date; [and]
c) amounts, if any, to be withdrawn from the Reserve Account which are
required to be included in Class A Available Funds pursuant to the
Series Supplement with respect to the Distribution Date; [and
d) Excess Spread, if any, for the Monthly Period.]
[Interest payments on the Class B Certificates for each Payment Date
will be calculated on the Class B Invested Amount as of the preceding Record
Date, or in the case of the initial Interest Payment Date, on the initial Class
B Invested Amount, based upon the Class B Certificate Rate. Interest will be
calculated on the basis of [the actual number of days in the period from and
including the preceding Distribution Date or in the case of the initial
Distribution Date the Closing Date, to but excluding the Distribution Date and
360-day year] [a 360-day year of twelve 30-day months]. On each Distribution
Date, Class B Monthly Interest and Class B Monthly Interest previously due but
not distributed to Class B Certificateholders will be paid from Class B
Available Funds for the related Distribution Date and, if necessary, from Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and amounts,
if any, on deposit in the Cash Collateral Account up to the Available Cash
Collateral Amount.
["Class B Available Funds" (together with the Class A Available Funds,
the "Available Funds") means, with respect to any Monthly Period, an amount
equal to the sum of:
a) the Class B Floating Percentage of collections of Finance Charge
Receivables allocated to the Certificates with respect to the Monthly
Period, including any investment earnings and other amounts that are
to be treated as collections of Finance Charge Receivables in
accordance with the Agreement, but excluding the portion of
collections of Finance Charge Receivables attributable to Interchange
that is allocable to Servicer Interchange;
b) if the Monthly Period relates to a Distribution Date that occurs on or
after the Class B Principal Commencement Date, the Principal Funding
Investment Proceeds, if any, with respect to the related Distribution
Date; [and]
c) amounts, if any, to be withdrawn from the Reserve Account which are
required to be included in Class B Available Funds pursuant to the
Series Supplement with respect to the Distribution Date; [and
d) Excess Spread, if any, for the Monthly Period].]
Principal Payments
The "Revolving Period" begins on the close of business on [ ] (the
"Cut-Off Date"), and ends on the day before the commencement of the [Controlled
Amortization Period] [Accumulation Period] or, if earlier, the Rapid
Amortization Period. During the Revolving Period no principal payments will be
made to Certificateholders.
[On each Distribution Date during the Revolving Period, unless a
reduction in the Required Cash Collateral Amount has occurred, collections of
Principal Receivables allocable to the Certificateholders' Interest and the
Collateral Indebtedness Interest will, subject to limitations, including the
allocation of any Reallocated Principal Collections with respect to the related
Monthly Period to pay the Required Amount, be paid to the Seller to purchase
additional Receivables in order to maintain the Invested Amount, and if
necessary, be treated as Shared Principal Collections. If a reduction in the
Required Cash Collateral Amount has occurred, collections of Principal
Receivables allocable to the Collateral Indebtedness Amount will be applied in
accordance with a collateral agreement to reduce the Collateral Indebtedness
Amount to the Required Cash Collateral Amount.]
[Unless a Pay Out Event occurs and the Rapid Amortization Period
commences, the Certificates will have an accumulation period (the "Accumulation
Period"), which will commence at the close of business on [ ]; provided, that
subject to the conditions set forth in this prospectus supplement, the day on
which the Revolving Period ends and the Accumulation Period begins may be
delayed to no later than the close of business on [ ]. The Accumulation Period
will end on the earliest of:
(a) the commencement of the Rapid Amortization Period,
(b) payment in full of the Invested Amount, and
(c) the Termination Date.
During the Accumulation Period, until the Certificates are paid in full,
collections of Principal Receivables and certain other amounts allocable to the
Certificateholders' Interest will be deposited on each Distribution Date in a
trust account (the "Principal Funding Account") and used to make principal
distributions to the Certificateholders when due.]
[During the Accumulation Period, on or prior to the respective
Expected Final Payment Dates, principal will be deposited in the Principal
Funding Account as described below and on the Class A Expected Final Payment
Date will be distributed to Class A Certificateholders up to the Class A
Invested Amount [and then to Class B Certificateholders on the Class B Expected
Final Payment Date up to the Class B Invested Amount]. During any Rapid
Amortization Period, which will begin upon the occurrence of a Pay Out Event,
and until the Termination Date occurs, principal will be paid [first] to the
Class A Certificateholders until the Class A Invested Amount has been paid in
full[, and then to the Class B Certificateholders until the Class B Invested
Amount has been paid in full].]
The "Controlled Amortization Period" is scheduled to commence at the
close of business on the last day of the [ ]. The Controlled Amortization Period
will end on the earliest of"
(a) the commencement of the Rapid Amortization Period,
(b) the payment in full of the Invested Amount, or
(c) the Termination Date.
[During the Controlled Amortization Period, which is scheduled to
begin on [ ], and during any Rapid Amortization Period, which will begin upon
the occurrence of a Pay Out Event, and until the Termination Date, principal
will be paid to the Certificateholders on each Distribution Date until the
Invested Amount has been paid in full.]
[On each Distribution Date during the Controlled Amortization Period,
unless a Rapid Amortization Period commences, the Certificateholders will be
entitled to receive [for each related Monthly Period since the previous Interest
Payment Date] the lesser of:
o collections of Principal Receivables received during each Controlled
Amortization Period allocated to the Series 200[ ]- [ ] Certificates
[Shared Principal Collections allocated to Series 200[ ]- [ ]], [and
o miscellaneous payments allocated to Series 200[ ]- [ ] other
amounts].]
[On each Distribution Date with respect to the "Class A Accumulation
Period", amounts equal to the least of:
o Available Investor Principal Collections for the related Distribution
Date on deposit in the Collection Account,
o the applicable Controlled Deposit Amount for the Distribution Date,
and
o the Class A Adjusted Invested Amount, will be deposited in the
Principal Funding Account until the Principal Funding Account Balance
is equal to the Class A Invested Amount.
Amounts on deposit in the Principal Funding Account will be paid to the Class A
Certificateholders on the Class A Expected Final Payment Date. [After the Class
A Invested Amount has been paid in full, on each Distribution Date with respect
to the "Class B Accumulation Period" an amount equal to the least of:
o Available Investor Principal Collections for the related Distribution
Date on deposit in the Collection Account, minus the portion of
Available Investor Principal Collections applied to Class A Monthly
Principal on the Distribution Date,
o the applicable Controlled Deposit Amount for the Monthly Period, and
o the Class B Adjusted Invested Amount will be deposited in the
Principal Funding Account until the Principal Funding Account Balance
equals the Class B Invested Amount.
Amounts on deposit in the Principal Funding Account in respect of the Class B
Certificates will be paid to the Class B Certificateholders on the Class B
Expected Final Payment Date].]
[If a Pay Out Event occurs with respect to Series 200[ ]- [ ] during
the Accumulation Period, the Rapid Amortization Period will commence and any
amount on deposit in the Principal Funding Account will be paid [first] to the
Class A Certificateholders on the first Special Payment Date [and then, to the
extent the Class A Invested Amount is paid in full, to the Class B
Certificateholders]. If, on any Expected Final Payment Date, monies on deposit
in the Principal Funding Account are insufficient to pay the scheduled principal
amount, a Pay Out Event will occur and the Rapid Amortization Period will
commence. [After payment in full of the Class A Invested Amount, the Class B
Certificateholders will be entitled to receive an amount equal to the Class B
Invested Amount].]
The "Rapid Amortization Period" is the period beginning with the
occurrence of any Pay Out Event and ending on the earlier of:
(a) the day after the Payment Date on which the Invested Amount has
been paid in full, and
(b) the Termination Date.
"Available Principal Collections" means, with respect to any Monthly
Period, an amount equal to [the sum of:
a) ]an amount equal to the Principal Allocation Percentage of all
collections of Principal Receivables received during the Monthly
Period, minus the amount of Reallocated Principal Collections with
respect to the Monthly Period used to fund the Class A Required
Amount, [plus
b) the amount of miscellaneous payments, if any, for the Monthly Period
allocated to Series 200[ ]- [ ],] [plus
c) any Shared Principal Collections with respect to other Series that are
allocated to Series 200[ ]- [ ],] [plus
d) any other amounts which pursuant to the Series Supplement are to be
treated as Available Investor Principal Collections with respect to
the related Distribution Date].
[The Accumulation Period is scheduled to commence at the close of
business on [ ]; however, the [Depositor] [Seller] may, upon notice to [the
Trustee,] [the Seller,] [the Servicer,] [the Depositor,] [each Rating Agency]
[and the Cash Collateral Holder] elect to postpone the commencement of the
Accumulation Period, and extend the length of the Revolving Period. The
Depositor may make an election only if the Accumulation Period Length
(determined as described below) is less than [ ]. On each Determination Date
until the Accumulation Period begins, the [Depositor] [Seller] [Servicer] will
determine the "Accumulation Period Length"), which is the number of months
expected to be required to fully fund the Principal Funding Account no later
than the Expected Final Payment Date, based on:
o expected Monthly Period collections of Principal Receivables expected
to be distributable to the Certificateholders of all Series, excluding
other Series, assuming a principal payment rate no greater than the
lowest Monthly Principal payment rate on the Receivables for the
preceding twelve months, and
o the amount of principal expected to be distributable to
Certificateholders of all Series, excluding other Series, which are
not expected to be in their revolving period during the Accumulation
Period.
If the Accumulation Period Length is less than [ ], the [Depositor] [Seller]
may, at its option, postpone the commencement of the Accumulation Period so that
the number of months included in the Accumulation Period will be equal to or
exceed the Accumulation Period Length. The effect of the foregoing calculation
is to permit the reduction of the length of the Accumulation Period based on the
Invested Amounts of other Series which are expected to be in their revolving
periods during the Accumulation Period or on increases in the principal payment
rate occurring after the Series Issuance Date. The [Depositor] [Seller] may not
postpone or further postpone the commencement date of the Accumulation Period
after a Pay Out Event, as defined with respect to each other outstanding Series,
shall have occurred and is continuing with respect to any other outstanding
Series. The length of the Accumulation Period will not be less than one month.
If the commencement of the Accumulation Period is delayed in accordance with the
foregoing, and if a Pay Out Event occurs after the date originally scheduled as
the commencement of the Accumulation Period, then it is probable that the
Certificateholders would receive some of their principal later than if the
Accumulation Period had not been delayed.]
On each Distribution Date with respect to the Rapid Amortization
Period until the Class A Invested Amount has been paid in full or the
Termination Date occurs, the Class A Certificateholders will be entitled to
receive Available Investor Principal Collections in an amount up to the Class A
Invested Amount. [After payment in full of the Class A Invested Amount, the
Class B Certificateholders will be entitled to receive on each Distribution
Date, Available Principal Collections until the earlier of the date on which the
Class B Invested Amount is paid in full or the Termination Date.] In addition,
on the first Special Payment Date following the occurrence of a Pay Out Event,
after giving effect to any payment of principal on that date, principal payments
will be made to the Class A Certificateholders [and the Class B
Certificateholders] from amounts on deposit in the Cash Collateral Account.
[On the Distribution Date following the Class A Expected Final Payment
(the "Class B Principal Commencement Date"), unless a Pay Out Event has
occurred, a withdrawal will be made from the Cash Collateral Account to pay
principal with respect to the Class B Certificates to the extent that the amount
initially invested in Class B (the "Class B Initial Invested Amount") minus the
sum of the aggregate amount of principal payments previously distributed to
Class B Certificateholders or deposited in the Principal Funding Account in
respect of the Class B Certificates exceeds the Class B Invested Amount on the
last day of the related Monthly Period, determined after giving effect to any
change made to the Class B Invested Amount as a result of unreimbursed
charge-offs on the following Distribution Date.]
[During the Rapid Amortization Period, collections of Principal
Receivables allocable to the Collateral Indebtedness will be deposited in the
Cash Collateral Account. Amounts will be retained in the Cash Collateral Account
at its required level and be made available to cover shortfalls with respect to
the Certificates. [In addition, on the first Special Payment Date following the
occurrence of any Pay Out Event, after giving effect to any payment of principal
on that date as described under "Application of Collections--Payments of
Principal," principal payments will be made to the Certificateholders from
amounts on deposit in the Cash Collateral Account as described under "Cash
Collateral Account" below.]]
[Subordination of the Class B Certificates]
[The Class B Certificateholders' Interest will be subordinated, other
than with respect to the Initial Class B Collateral Amount, to the extent
necessary to fund specified payments with respect to the Class A Certificates.
Some principal payments otherwise allocable to the Class B Certificateholders
may be reallocated to the Class A Certificateholders and the Class B Invested
Amount may be decreased. To the extent the Class B Invested Amount is reduced,
the percentage of collections of Finance Charge Receivables allocated to the
Class B Certificateholders in subsequent Monthly Periods will be reduced.
Moreover, to the extent the amount of the reduction in the Class B Invested
Amount is not reimbursed, the amount of principal and interest distributable to
the Class B Certificateholders will be reduced.]
Allocation Percentages
Pursuant to the Agreement, the [Seller] [Servicer] will allocate among
the Certificateholders' Interest, the certificateholders' interest for all other
Series of certificates issued and outstanding and the Seller's Interest [and the
Collateral Interest], all collections of Finance Charge Receivables and
Principal Receivables and the Defaulted Amount with respect to each Monthly
Period.
Collection of Finance Charge Receivables and the Defaulted Amount with
respect to any Monthly Period will be allocated to Series 200[ ]- [ ] based on
the Floating Allocation Percentage. The "Floating Allocation Percentage" means,
with respect to any Monthly Period, the percentage equivalent, which percentage
shall never exceed 100%, of a fraction, the numerator of which is the sum of the
Adjusted Invested Amount and the Collateral Invested Amount, if any, as of the
last day of the preceding Monthly Period, or with respect to the first Monthly
Period, the Initial Invested Amount as of the Issuance Date, and the denominator
of which is the sum of the total amount of the Principal Receivables in the
Trust as of the day, or with respect to the first Monthly Period, the total
amount of Principal Receivables in the Trust on the Cut-Off Date, and the
principal amount on deposit in an account (the "Excess Funding Account"), the
[Seller] [Servicer] [Depositor] will establish and maintain in the name of the
Trustee, on behalf of the Trust as an Eligible Account held for the benefit of
the Certificateholders. [These amounts so allocated will be further allocated
between the Class A Certificateholders and the Class B Certificateholders in
accordance with the Class A Floating Percentage and the Class B Floating
Percentage, respectively. The "Class A Floating Percentage" means, with respect
to any Monthly Period, the percentage equivalent, which percentage shall never
exceed 100%, of a fraction, the numerator of which is equal to the Class A
Adjusted Investment Amount as of the close of business on the last day of the
preceding Monthly Period, or with respect to the first Monthly Period, as of the
Issuance Date, and the denominator of which is equal to the Adjusted Invested
Amount as of the close of business on the day, or with respect to the first
Monthly Period, the Initial Invested Amount. The "Class B Floating Percentage"
means, with respect to any Monthly Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of which is
equal to the Class B Adjusted Invested Amount as of the close of business on the
day, or with respect to the first Monthly Period, the Initial Invested Amount.]
Collections of Principal Receivables will be allocated to Series 200[
]-[ ] based on the Principal Allocation Percentage. The "Principal Allocation
Percentage" means, with respect to any Monthly Period, the percentage
equivalent, which percentage shall never exceed 100%, of a fraction, the
numerator of which is:
(a) during the Revolving Period, the Invested Amount as of the
last day of the immediately preceding Monthly Period, or, in the case
of the first Monthly Period, the Issuance Date, and
(b) during the [Controlled Amortization Period] [Accumulation
Period] or the Rapid Amortization Period, the Invested Amount as of
the last day of the Revolving Period, and the denominator of which is
the greater of:
(1) the sum of the total amount of Principal Receivables in
the Trust as of the last day of the immediately preceding Monthly
Period and the principal amount on deposit in the Excess Funding
Account as of the last day, or, in the case of the first Monthly
Period, the Cut-Off Date, and
(2) the sum of the numerators used to calculate the
principal allocation percentages for all Series outstanding as of
the date as to which a determination is being made;
provided, however, that because the Certificates offered by this prospectus
supplement are subject to being paired with a future Series, if a Pay Out Event
occurs with respect to the Paired Series during the [Controlled Amortization
Period] [Accumulation Period] with respect to Series 200[ ]- [ ], [the
Depositor] [the Seller] [the Servicer] may, by written notice delivered to [the
Trustee] [and] [the Seller] [and] [the Servicer], designate a different
numerator for the foregoing fraction, provided that the numerator is not less
than the Adjusted Invested Amount as of the last day of the revolving period for
the Paired Series and [the Depositor] [the Seller] [the Servicer] shall have
received written notice from each Rating Agency that the designation will not
have a Ratings Effect, and [the Depositor] [the Seller] [the Servicer] shall
have delivered to the Trustee a certificate of an authorized officer to the
effect that, based on the facts known to the officer at the time, in the
reasonable belief of [the Depositor] [the Seller] [the Servicer], the
designation will not cause a Pay Out Event or an event that, after the giving of
notice or the lapse of time, would constitute a Pay Out Event, to occur with
respect to Series 200[ ]- [ ].
[Amounts so allocated to the Certificateholders will be further
allocated between the Class A Certificateholders and the Class B
Certificateholders based on the Class A Principal Percentage and the Class B
Principal Percentage, respectively. The "Class A Principal Percentage" means,
with respect to any Monthly Period:
o during the Revolving Period, the percentage equivalent, which shall
never exceed 100%, of a fraction, the numerator of which is equal to
the Class A Invested Amount as of the last day of the immediately
preceding Monthly Period, or, in the case of the first Monthly Period,
the amount initially invested in Class A (the "Class A Initial
Invested Amount"), and the denominator of which is equal to the
Invested Amount as of the day, or, in the case of the first Monthly
Period, the Initial Invested Amount, and
o during the [Controlled Amortization Period] [Accumulation Period] or
the Rapid Amortization Period, the percentage equivalent, which shall
never exceed 100%, of a fraction, the numerator of which is the Class
A Invested Amount as of the last day of the Revolving Period, and the
denominator of which is the Invested Amount as of the last day.
The "Class B Principal Percentage" means, with respect to any Monthly Period,
o during the Revolving Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of
which is the Class B Invested Amount as of the last day of the
immediately preceding Monthly Period, or, in the case of the first
Monthly Period, the Class B Initial Invested Amount, and the
denominator of which is the Invested Amount as of that day, or, in the
case of the first Monthly Period, the Initial Invested Amount, and
o during the [Controlled Amortization Period] [Accumulation Period] or
the Rapid Amortization Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of
which is the Class B Invested Amount as of the last day of the
Revolving Period, and the denominator of which is the Invested Amount
as of that last day.]
As used in this prospectus supplement, the following terms have the
meanings indicated:
"Class A Invested Amount" for any date means an amount equal to:
(a) the Class A Initial Invested Amount, minus
(b) the aggregate amount of principal payments made to the Class
A Certificateholders on or prior to the date, minus
(c) the excess, if any, of the aggregate amount of Class A
Investor Charge-Offs for all prior Distribution Dates over the
aggregate amount of any reimbursements of Class A Investor Charge-Offs
for all Distribution Dates prior to that date.
["Class B Invested Amount" for any date means an amount equal to:
(a) the Initial Class B Invested Amount, minus
(b) the aggregate amount of principal payments made to Class B
Certificateholders on or prior to the date, other than principal
payments made from the proceeds of amounts received from the Cash
Collateral Account for the purpose of reimbursing previous reductions
in the Class B Invested Amount, minus
(c) the excess, if any, of the aggregate amount of Class B
Investor Charge-Offs for all prior Distribution Dates over the
aggregate amount of any reimbursement of Class B Investor Charge-Offs
for all Distribution Dates preceding the date, minus
(d) the amount of Reallocated Principal Receivables for all prior
Distribution Dates which have been used to fund the Class A Required
Amount with respect to the Distribution Dates, excluding any
Reallocated Principal Receivables that have resulted in a reduction of
the Collateral Invested Amount, minus
(e) an amount equal to the amount by which the Class B Invested
Amount has been reduced to fund the Class A Default Amount on all
prior Distribution Dates as described under "Class A Investor
Charge-Offs ", plus
(f) the amount of Excess Spread and Excess Finance Charges
allocated to Series 200[ ]- [ ] and available on all prior
Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clauses (c), (d) and (e).]
"Class A Adjusted Invested Amount", for any date of determination,
means an amount equal to:
(a) then current Class A Invested Amount, minus
(b) the funds on deposit in the Principal Funding Account of the
date.
["Class B Adjusted Invested Amount"(together with the Class A Adjusted
Invested Amount, the "Adjusted Invested Amount"), for any date of determination,
means:
(a) if the date occurs prior to the Class B Principal
Commencement Date, an amount equal to the Class B Invested Amount, and
(b) if the date occurs on or after the Class B Principal
Commencement Date, an amount equal to the Class B Invested Amount
minus the funds on deposit in the Principal Funding Account on the
date.]
["Collateral Indebtedness Amount" means an amount equal to:
(a) the initial Collateral Indebtedness Amount, minus
(b) the aggregate amount of deposits made to the Cash Collateral
Account from Principal Collections, minus
(c) the aggregate amount of Reallocated Principal Collections
allocable to the Collateral Indebtedness Amount for all prior
Distribution Dates which have been used to fund the Required Amount,
minus
(d) an amount equal to the aggregate amount by which the
Collateral Indebtedness Amount has been reduced to fund the Investor
Default Amount on all prior Distribution Dates as described under "--
Defaulted Receivables; Investor Charge-Offs", minus
(e) an amount equal to the product of the Collateral Floating
Percentage and the Investor Default Amount (the "Collateral Defaulted
Amount") with respect to any Distribution Date that is not funded out
of Available Funds [and Excess Finance Charges allocated to Series
200[ ]- [ ] and available for the purpose on the related Distribution
Date], plus
(f) the aggregate amount of Available Funds [and Excess Finance
Charges] allocated and available to reimburse amounts deducted
pursuant to the foregoing clauses (c), (d) and (e) provided, however,
that the Collateral Indebtedness Amount may not be reduced below
zero.]
["Collateral Invested Amount" means for any date, an amount equal to:
(a) the amount withdrawn from the Cash Collateral Account and
applied to the payment of principal of the Certificates on the first
Special Payment Date following an Pay Out Event, minus
(b) the aggregate amount of principal payments made to the
Collateral Interest Holder prior to the date, minus
(c) the amount by which the Collateral Invested Amount has been
reduced to fund the Class A Default Amount [and the Class B Default
Amount] on all prior Distribution Dates as described below, minus
(d) the amount by which the Collateral Invested Amount has been
reduced by Reallocated Principal Receivables applied to reimburse the
Required Amount, plus
(e) the aggregate amount of Excess Spread and Excess Finance
Charges allocated to Series 200[ ]- [ ] and available on all prior
Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clauses (c) and (d).
In the absence of the occurrence of a Pay Out Event and a related withdrawal
from the Cash Collateral Account to pay principal of the Certificates, the
Collateral Invested Amount will be zero.]
["Invested Amount", for any date, means an amount equal to the sum of:
(a) the Class A Invested Amount,
(b) the Class B Invested Amount,] and
(c) [the Collateral Invested Amount].]
(d) [Principal Funding Account]
[The [Seller] [Servicer] [Depositor] will establish and maintain in
the name of the Trustee, on behalf of the Trust, the Principal Funding Account,
as an Eligible Account held for the benefit of the Certificateholders. During
the Accumulation Period, the Servicer will transfer collections from one or more
accounts, established and maintained on behalf of the related Certificateholders
and, into which payments are made on or with respect to the related Receivables
(each, a "Collection Account"), in respect of Principal Receivables, Shared
Principal Collections allocated to Series 200[ ]-[ ], [miscellaneous payments
allocated to Series 200[ ]- [ ]] and other amounts described in this prospectus
supplement, to be treated in the same manner as collections of Principal
Receivables, to the Principal Funding Account.
[Unless a Pay Out Event has occurred with respect to the Certificates,
all amounts on deposit in the Principal Funding Account (the "Principal Funding
Account Balance") on any Distribution Date, after giving effect to any deposits
to, or withdrawals from the Principal Funding Account to be made on the
Distribution Date, will be invested until the following Distribution Date by the
Trustee at the direction of [the Seller] [the Servicer] [the Depositor] in
investments specified in the Pooling and Servicing Agreement and limited to
investments which meet the criteria of each Rating Agency from time to time as
being consistent with its then-current ratings of the Certificates (the
"Eligible Investments"). On each Distribution Date with respect to the
Accumulation Period [, on or prior to the Class B Expected Final Payment Date,]
the interest and other investment income, net of investment expenses and losses,
earned on the investments (the "Principal Funding Investment Proceeds") will be
withdrawn from the Principal Funding Account and will be treated as a portion of
Class A Available Funds, [prior to the Class B Principal Commencement Date and,
after, as a portion of Class B Available Funds]. If the investments with respect
to any Distribution Date yield less than the applicable Certificate Rate, the
Principal Funding Investment Proceeds with respect to the Distribution Date will
be less than the Covered Amount for the following Distribution Date. It is
intended that any shortfall will be funded from Class A Available Funds [or
Class B Available Funds, as the case may be], including a withdrawal from the
Reserve Account, if necessary, [or a withdrawal from the Cash Collateral
Account] [other sources]. The Available Reserve Account Amount at any time will
be limited and there can be no assurance that sufficient funds will be available
to fund any shortfall.
The "Covered Amount" shall mean:
(a) for any Distribution Date with respect to the Class A Accumulation
Period or the first Special Payment Date, [if the related Special
Payment Date occurs prior to the Class B Principal Commencement Date,]
an amount equal to one [twelfth] [quarter] [half] of the product of,
(1) the Class A Certificate Rate, and
(2) the Principal Funding Account Balance, if any, as of the
preceding Distribution Date, [and
(b) for any Distribution Date with respect to the Class B Accumulation
Period or the first Special Payment Date, if this Special Payment Date
occurs on or after the Class B Principal Commencement Date, an amount
equal to one [twelfth] [quarter] [half] of the product of,
(1) the Class B Certificate Rate, and
(2) the Principal Funding Account Balance, if any, as of the
preceding Distribution Date].
[Reserve Account]
The [Seller] [Servicer] [Depositor] will establish and maintain in the
name of the Trustee, on behalf of the Trust, an Eligible Deposit Account for the
benefit of the Certificateholders (the "Reserve Account"). The Reserve Account
is established to assure the subsequent distribution of interest on the
Certificates as provided in this prospectus supplement during the Accumulation
Period. On each Distribution Date from and after the Reserve Account Funding
Date, but prior to the termination of the Reserve Account, the Trustee, acting
pursuant to the [Servicer's] [Seller's] [Depositor's] instructions, will apply
Excess Spread and Excess Finance Charges allocated to Series 200[ ]-[ ] (to the
extent described below under "Application of Collections--Payment of Interest,
Fees and Other Items") to increase the amount on deposit in the Reserve Account,
to the extent the amount is less than the Required Reserve Account Amount. [In
addition, on each Distribution Date, the [Seller] [Depositor] will have the
option, but will not be required, to make a deposit in the Reserve Account, to
the extent that the amount on deposit in the Reserve Account is less than the
Required Reserve Account Amount.]
[The "Reserve Account Funding Date" will be the Distribution Date with
respect to the Monthly Period which commences no later than three months prior
to the Distribution Date with respect to the Monthly Period which commences the
Class A Accumulation Period or an earlier date as the Servicer may designate.
The "Required Reserve Account Amount" for any Distribution Date on or after the
Reserve Account Funding Date will be equal to the product of [ ]% of the Class A
Invested Amount as of the preceding Distribution Date and the Reserve Account
Factor as of the Distribution Date, or a lower amount approved by each Rating
Agency. On each Distribution Date, after giving effect to any deposit to be made
to, and any withdrawal to be made from, the Reserve Account on the Distribution
Date, the Trustee will withdraw from the Reserve Account an amount equal to the
excess, if any, of the amount on deposit in the Reserve Account over the
Required Reserve Account Amount and shall distribute the excess to, or at the
direction of, [the Seller] [the Depositor]. The "Reserve Account Factor for any
Distribution Date will be equal to the percentage, not to exceed 100%,
equivalent of a fraction, the numerator of which is the number of Monthly
Periods scheduled to be included in the Accumulation Period, which may have been
postponed at the option of the [Seller] [Depositor] [Servicer], as of the
Distribution Date and the denominator of which is [ ] .]
[Provided that the Reserve Account has not terminated as described
below, all amounts on deposit in the Reserve Account on any Distribution Date,
after giving effect to any deposits to, or withdrawals from, the Reserve Account
to be made on the Distribution Date, will be invested until the following
Distribution Date by the Trustee at the direction of the [Seller] [Servicer]
[Depositor] in Eligible Investments. The interest and other investment income,
net of investment expenses and losses, earned on the investments will be
retained in the Reserve Account, to the extent the amount on deposit in the
Reserve Account is less than the Required Reserve Account Amount, or deposited
in the Collection Account and treated as collections of Finance Charge
Receivables.]
[On or before each Distribution Date with respect to the Accumulation
Period, on or prior to the Class A Expected Final Payment Date, and on the first
Special Payment Date, a withdrawal will be made from the Reserve Account, and
the amount of the withdrawal will be deposited in the Collection Account and
included in Class A Available Funds, prior to the Class B Principal Commencement
Date, and, then, in Class B Available Funds,] in an amount equal to the lesser
of:
(a) the Available Reserve Account Amount with respect to the
Distribution Date or Special Payment Date, and
(b) the excess, if any, of the Covered Amount with respect to the
Distribution Date or Special Payment Date over the Principal Funding
Investment Proceeds with respect to the Distribution Date or Special
Payment Date;
provided that the amount of the withdrawal shall be reduced to the extent that
funds otherwise would be available to be deposited in the Reserve Account on the
Distribution Date or Special Payment Date. On each Distribution Date, the amount
available to be withdrawn from the Reserve Account (the "Available Reserve
Account Amount") will be equal to the lesser of the amount on deposit in the
Reserve Account, before giving effect to any deposit to be made to the Reserve
Account on the Distribution Date, and the Required Reserve Account Amount for
the Distribution Date.]
[The Reserve Account will be terminated following the earlierto occur
of:
(a) the termination of the Trust pursuant to the Agreement,
(b) the date on which the Certificates are paid in full, and
(c) if the Accumulation Period has not commenced, the occurrence of a
Pay Out Event with respect to Series 200[ ]- [ ] or, if the
Accumulation Period has commenced, the earlier of the first Special
Payment Date and the [Class B] Expected Final Payment Date.
Upon the termination of the Reserve Account, all amounts on deposit in the
Reserve Account, after giving effect to any withdrawal from the Reserve Account
on the date as described above, will be distributed to, or at the direction of,
the Depositor. Any amounts withdrawn from the Reserve Account and distributed
to, or at the direction of, the Depositor as described above will not be
available for distribution to the Certificateholders.]
Reallocation of Cash Flows; Class B Invested Amount
With respect to each Distribution Date, on each Determination Date,
the Servicer will determine the "Class A Required Amount," which will be equal
to the amount, if any, by which, the sum of:
(a) Class A [Monthly] [Quarterly] [Semi-Annual] Interest for the
Distribution Date,
(b) any Class A [Monthly] [Quarterly] [Semi-Annual] Interest
previously due but not paid to Class A Certificateholders on a prior
Distribution Date,
(c) any Class A additional Interest,
(d) the Class A Servicing Fee for the Distribution Date and any unpaid
Class A Servicing Fee, and
(e) the Class A Default Amount, if any, for the Distribution Date,
exceeds the Class A Available Funds. If the Class A Required Amount is greater
than zero, Excess Spread and Excess Finance Charges allocated to Series 200[ ]-
[ ] and available for that purpose will be used to fund the Class A Required
Amount with respect to the Distribution Date. If the Excess Spread and Excess
Finance Charges available with respect to the Distribution Date are less than
the Class A Required Amount, then amounts, if any, on deposit in the Cash
Collateral Account available to pay amounts in respect of the Class A
Certificates will then be used to fund the remaining Class A Required Amount.
[If the Excess Spread and Excess Finance Charges and amounts available from the
Cash Collateral Account are insufficient to fund the Class A Required Amount,
then collections of Principal Receivables allocable to the Class B Certificates
for the related Monthly Period will then be used to fund the remaining Class A
Required Amount ("Reallocated Principal Receivables").] If Reallocated Principal
Receivables with respect to the related Monthly Period, together with Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and amounts
available from the Cash Collateral Account, are insufficient to fund the Class A
Required Amount for the related Monthly Period, then the Collateral Invested
Amount, if any, will be reduced by the amount of the excess, but not by more
than the Class A Default Amount for the Distribution Date. In the event that the
reduction would cause the Collateral Invested Amount to be a negative number,
the Collateral Invested Amount will be reduced to zero, and the Class B Invested
Amount will be reduced by the amount by which the Collateral Invested Amount
would have been reduced below zero, but not by more than the excess of the Class
A Default Amount, if any, for the Distribution Date over the amount of the
reduction, if any, of the Collateral Invested Amount with respect to the
Distribution Date. In the event that the reduction would cause the Class B
Invested Amount to be a negative number, then the Class B Invested Amount will
be reduced to zero, and the Class A Invested Amount will be reduced by the
amount by which the Class B Invested Amount would have been reduced below zero,
but not by more than the excess, if any, of the Class A Default Amount for the
Distribution Date over the amount of the reductions, if any, of the Collateral
Invested Amount and the Class B Invested Amount with respect to the Distribution
Date as described above. Any reduction in the Class A Invested Amount will have
the effect of slowing or reducing the return of principal and interest to the
Class A Certificateholders. In this case, the Class A Certificateholders will
bear directly the credit and other risks associated with their undivided
interest in the Trust.
[The "Class B Required Amount" (and together with the Class A Required
Amount, the "Required Amount") means, with respect to any Distribution Date, the
amount, if any, by which the sum of:
(a) current and overdue Class B Monthly Interest,
(b) current and overdue Class B Additional Interest,
(c) current and overdue Class B Servicing Fee, and
(d) the Class B Default Amount
exceeds Class B Available Funds. If the Class B Required Amount is greater than
zero, then Excess Spread and Excess Finance Charges allocable to the Series 200[
]- [ ], and not required to pay the Class A Required Amount or reimburse Class A
Charge-Offs, will be applied to fund the deficiency. [If Excess Spread and
Excess Finance Charges allocable to Series 200[ ]- [ ] with respect to the
Distribution Date and not required to pay the Class A Required Amount are less
than the Class B Required Amount, then the amounts, if any, on deposit in the
Cash Collateral Account and available to make payments with respect to the Class
B Certificates with respect to that Distribution Date will be withdrawn and
applied to fund the Class B Required Amount.] If [amounts, if any, in deposit in
the Cash Collateral Account and available to make payments with respect to the
Class B Certificates with respect to the Distribution Date (together with]
Excess Spread and Excess Finance Charges with respect to the Distribution Date
[)] are insufficient to fund the remaining Class B Required Amount, then the
[Collateral] Invested Amount, if any, will be reduced by the amount of the
deficiency, but not more than the Class B Default Amount for the relevant
Monthly Period. If the reduction would cause the [Collateral] Invested Amount to
be reduced below zero, then the Class B Invested amount will be reduced by the
amount by which the [Collateral] Invested Amount would have been reduced below
zero, but not by more than the excess of the Class B Default Amount for the
related Monthly Period over the reduction in the [Collateral] Invested Amount
with respect to the Monthly Period, (this reduction, a "Class B Charge-Off"). In
the event of a reduction of the Class B Invested Amount, the amount of principal
and interest available to fund payments with respect to the Class B Certificates
will be decreased.]
Reductions of the Class A or Class B Invested Amount shall
subsequently be reimbursed and the Class A [or Class B] Invested Amount will be
increased on each Distribution Date by the amount, if any, of Excess Spread and
Excess Finance Charges. See "Application of Collections -- Excess Spread; Excess
Finance Charges". When reductions of the Class A and Class B Invested Amount
have been fully reimbursed, reductions of the [Collateral] Invested Amount shall
be reimbursed and the [Collateral] Invested Amount increased in a similar
manner.
Application of Collections
Payment of Interest, Fees and Other Items. On each Distribution Date,
the Trustee, acting pursuant to the [Seller's] [Servicer's] instructions, will
apply the Class A Available Funds [and Class B Available Funds] (see "--Interest
Payments" above) on deposit in the Collection Account in the following priority:
(a) On each Distribution Date, an amount equal to the Class A
Available Funds with respect to the Distribution Date will be distributed in the
following priority:
(1) an amount equal to Class A Monthly Interest for the
Distribution Date, plus the amount of any Class A Monthly Interest
previously due but not distributed to the Class A Certificateholders
on a prior Distribution Date, plus any additional interest with
respect to interest amounts that were due but not distributed to the
Class A Certificateholders on a prior Distribution Date at a rate
equal to the Class A Certificate Rate [plus [ ]% per annum ("Class A
Additional Interest"),] will be:
[(A)] distributed to Class A Certificateholders [if the
Distribution Date is an Interest Payment Date, or
(B) deposited in the Interest Funding Account, if the
Distribution Date is not an Interest Payment Date or Special
Payment Date for distribution to Class A Certificateholders on
the next Interest Payment Date or Special Payment Date];
(2) an amount equal to the Class A Servicing Fee for the
Distribution Date, plus the amount of any Class A Servicing Fee
previously due but not distributed to the Servicer on a prior
Distribution Date, will be distributed to the Servicer, unless the
amount has been netted against deposits to the Collection Account;
(3) an amount equal to the Class A Default Amount for the
Distribution Date will be treated as a portion of Available Investor
Principal Collections for the Distribution Date; and
(4) the balance, if any, shall constitute Excess Spread and shall
be allocated and distributed as described under "--Excess Spread;
Excess Finance Charges" below.
[(b) On each Distribution Date, an amount equal to the Class B
Available Funds with respect to the Distribution Date will be distributed in the
following priority:]
[(1) an amount equal to Class B Monthly Interest for the
Distribution Date, plus the amount of any Class B Monthly Interest
previously due but not distributed to the Class B Certificateholders
on a prior Distribution Date, plus any additional interest with
respect to interest amounts that were due but not distributed to the
Class B Certificateholders on a prior Distribution Date at a rate
equal to the Class B Certificate Rate plus [ ]% per annum ("Class B
Additional Interest"), will be:]
[(A)] distributed to Class B Certificateholders [if the
Distribution Date is an Interest Payment Date, or
(B) deposited in the Interest Funding Account, if the
Distribution Date is not an Interest Payment Date or Special
Payment Date for distribution to Class B Certificateholders on
the next Interest Payment Date or Special Payment Date];]
[(2) an amount equal to the Class B Servicing Fee for the
Distribution Date, plus the amount of any Class B Servicing Fee
previously due but not distributed to the Servicer on a prior
Distribution Date, will be distributed to the Servicer, unless the
amount has been netted against deposits to the Collection Account;
and]
[(3) the balance, if any, shall constitute Excess Spread and
shall be allocated and distributed as described under "--Excess
Spread; Excess Finance Charges" below.]
"Class A Monthly Interest" means, with respect to any Distribution
Date, an amount equal to the product of:
(a) a fraction, the numerator of which is the actual number of
days in the period from and including the prior Distribution Date
to but excluding Distribution Date and the denominator of which
is 360,
(b) the Class A Certificate Rate, and
(c) the Class A Invested Amount as of the preceding Record Date.
["Class B Monthly Interest" means, with respect to any Distribution
Date, an amount equal to the product of:
(a) a fraction, the numerator of which is the actual number of
days in the period from and including the prior Distribution Date
to but excluding that Distribution Date and the denominator of
which is 360,
(b) the Class B Certificate Rate, and
(c) the Class B Invested Amount as of the preceding Record Date.]
"Excess Spread" means, with respect to any Distribution Date, an
amount equal to the sum of the amounts described in clause (a)(4) above [and
clause (b)(3) above,] [in the definition of Class A Monthly Interest [and Class
B Monthly Interest]].
Excess Spread; Excess Finance Charges. On each Distribution Date, the
Trustee, acting pursuant to the Servicer's instructions, will apply Excess
Spread and Excess Finance Charges allocated to Series 200[ ]-[ ] with respect to
the related Monthly Period to make the following distributions in the following
priority to the extent funds are available:
[(a)] an amount equal to the Class A Required Amount, if
any, with respect to the Distribution Date will be used to fund
any deficiency pursuant to clauses (a) (1), (2) and (3) above in
the order of priority;
[(b)] [an amount equal to the aggregate amount of Class A
Investor Charge-Offs which have not been previously reimbursed,
after giving effect to the allocation on the Distribution Date of
other amounts applied for that purpose, will be treated as a
portion of Available Investor Principal Collections for the
Distribution Date as described under "--Payments of Principal"
below;]
[(c)] [an amount equal to the Class B Required Amount, if
any, with respect to the Distribution Date will be used first;
(1) to fund any deficiency pursuant to clauses (b) (1)
and (2) above under "--Payment of Interest, Fees and Other
Items" in the order of priority, and
(2) second to pay any Class B Default Amount with
respect to the Distribution Date];
[(d)] [an amount equal to the aggregate by which the Class B
Invested Amount has been reduced pursuant to clauses (4), (5) and
(6) of the definition of "Class B Invested Amount" under
"--Allocation Percentages" above, but not in excess of the
aggregate amount of the reductions which have not been previously
reimbursed, shall be treated as a portion of Available Investor
Principal Collections for the Distribution Date;]
[(e)] [an amount equal to the "Cash Collateral Fee" as
described in the [Loan] Agreement among the [Depositor] [Seller],
[ ] (the "Cash Collateral Depositor") and the Trustee for the
Distribution Date shall be distributed to the Cash Collateral
Depositor for application in accordance with the [Loan]
Agreement;]
[(f)] [an amount equal to the aggregate amount by which the
Collateral Invested Amount has been reduced pursuant to clauses
(c) and (d) of the definition of "Collateral Invested Amount"
under "--Allocation Percentages" above, but not in excess of the
aggregate amount of the reductions which have not been previously
reimbursed, shall be treated as a portion of Available Principal
Collections for the Distribution Date;]
[(g)] [an amount equal to the Monthly Servicing Fee due but
not paid to the Servicer on the Distribution Date or a prior
Distribution Date shall be paid to the Servicer;]
[(h)] [an amount up to the excess, if any, of the Required
Cash Collateral Amount over the remaining Available Cash
Collateral Amount shall be deposited into the Cash Collateral
Account;]
[(i)] [on each Distribution Date from and after the Reserve
Account Funding Date, but prior to the date on which the Reserve
Account terminates, an amount up to the excess, if any, of the
Required Reserve Account Amount over the Available Reserve
Account Amount shall be deposited into the Reserve Account;]
[(j)] [an amount equal to the aggregate of any other amounts
then due to the Collateral Interest Holder pursuant to the [Loan]
Agreement, to the extent these amounts are payable pursuant to
the [Loan] Agreement out of Excess Spread and Excess Finance
Charges, shall be distributed to the Collateral Interest Holder
for application in accordance with the [Loan] Agreement; and
[(k)] the balance, if any, will constitute a portion of
Excess Finance Charges for the Distribution Date and will be
available for allocation to other Series in the Group [ ] or to
the [Seller] [Depositor] as described in "Description of the
Certificates -- Sharing of Excess Finance Charges" in the
Prospectus.
Payments of Principal. On each Distribution Date, the Trustee, acting
pursuant to the [Seller's] [Servicer's] instructions, will distribute Available
Principal Collections (see "--Principal Payments" above) on deposit in the
Collection Account in the following priority:
(a) on each Distribution Date with respect to the Revolving Period,
all Available Principal Collections will be distributed [or deposited]
in the following priority:
[(1)] [an amount equal to the excess, if any, of the Collateral
Invested Amount over the Required Collateral Invested Amount will
be paid to the Collateral Interest Holder; and]
[(2)] [the balance] [these Available Principal Collections] will
be treated as Shared Principal Collections and applied in
accordance with the Agreement and the Series Supplement.]
(b) on each Distribution Date with respect to the [Controlled
Amortization Period] [Accumulation Period] or the Rapid Amortization
Period, all Available Principal Collections will be distributed [or
deposited] in the following priority:
[(1)] [an amount equal to Class A Monthly Principal, up to the
Class A Adjusted Invested Amount on the Distribution Date will be
distributed to Class A Certificateholders [if the Distribution
Date is a Principal Distribution Date or deposited in the
Principal Funding Account if the Distribution Date is not a
Principal Distribution Date], during the Class A Accumulation
Period, or distributed to the Class A Certificateholders, during
the Rapid Amortization Period[; and]]
[(2) for each Distribution Date after the Class A Adjusted
Invested Amount has been paid in full, an amount equal to Class B
Monthly Principal, up to the Class B Adjusted Invested Amount on
the Distribution Date, will be distributed to Class B
Certificateholders if the Distribution Date is a Principal
Distribution Date or deposited in the Principal Funding Account
if the Distribution Date is not a Principal Distribution Date,
during the Class B Accumulation Period, or distributed to the
Class B Certificateholders, during the Rapid Amortization
Period;]
[(c)] [an amount equal to Class A Monthly Principal, up to the Class A
Adjusted Invested Amount on the Distribution Date will be deposited in
the Principal Funding Account, during the Class A Accumulation Period,
or distributed to the Class A Certificateholders, during the Rapid
Amortization Period;]
[(d)] [for each Distribution Date beginning on the Class B Principal
Commencement Date, an amount equal to Class B Monthly Principal for
the Distribution Date, up to the Class B Adjusted Invested Amount on
that Distribution Date, will be deposited in the Principal Funding
Account, during the Class B Accumulation Period, or distributed to the
Class B Certificateholders, during the Rapid Amortization Period;]
(e) for each Distribution Date with respect to the Rapid Amortization
Period, beginning with the Distribution Date on which the Invested
Amount is paid in full, an amount equal to the balance, if any, of the
Available Principal Collections then on deposit in the Collection
Account, to the extent of the Collateral Invested Amount, if any,
shall be distributed to the Collateral Interest Holder for application
in accordance with the [Loan] Agreement; and
(f) for each Distribution Date, after giving effect to paragraphs (c),
(d) and (e) above, an amount equal to the balance, if any, of the
Available Principal Collections will be allocated to Shared Principal
Collections and applied in accordance with the Agreement.
"Class A Monthly Principal" with respect to any Distribution Date
relating to the Class A [Controlled Amortization Period] [Accumulation Period]
or the Rapid Amortization Period will equal the lesser of:
(a) the Available Principal Collections on deposit in the Collection
Account with respect to the Distribution Date,
(b) for each Distribution Date with respect to the Class A [Controlled
Amortization Period] [Accumulation Period], [and on or prior to the
Class A Expected Final Payment Date,] the [Controlled Distribution
Amount] [Controlled Deposit Amount] for the Distribution Date, and
(c) the Class A Adjusted Invested Amount on that Distribution Date.
["Class B Monthly Principal" with respect to any Distribution Date
relating to the Class B [Controlled Amortization Period] [Accumulation Period]
or the Rapid Amortization Period, after the Class A Certificates have been paid
in full, will equal the lesser of:
(a) the Available Principal Collections on deposit in the Collection
Account with respect to the Distribution Date, minus the portion of
the Available Principal Collections applied to Class A Monthly
Principal on the Distribution Date,
(b) for each Distribution Date with respect to the Class B [Controlled
Amortization Period] [Accumulation Period], [and on or prior to the
Class B Expected Final Payment Date,] the [Controlled Distribution
Amount] [Controlled Deposit Amount] for the Distribution Date, and
(c) the Class B Adjusted Invested Amount on the Distribution Date.]
["Controlled Accumulation [Amortization] Amount" means:
[(a)] for any Distribution Date with respect to the Class A
Accumulation Period, $ [ ] ; provided, however, that, if the commencement of the
Class A Accumulation Period is delayed as described above under "--Principal
Payments", the Accumulation Amount for each Distribution Date may be different
for each Distribution Date with respect to the Class A Accumulation Period and
will be determined by the [Seller] [Servicer] [Depositor] in accordance with the
[Agreement] [and the Series Supplement] based on the principal payment rates for
the Accounts and on the Invested Amounts of other Principal Sharing Series that
are scheduled to be in their revolving periods and then scheduled to create
Shared Principal Collections during the Class A Accumulation Period[; and
(b) for any Distribution Date with respect to the Class B Accumulation
Period, an amount equal to $ [ ] [the Class B Invested Amount] as of the Class B
Principal Commencement Date].]
["Deficit Controlled Accumulation Amount" means:
(a) on the first Distribution Date with respect to the Class A
Accumulation Period [or the Class B Accumulation Period,] the excess, if any, of
the Controlled Accumulation Amount for the Distribution Date over the amount
[deposited in the Principal Funding Account on the Distribution Date]
[distributed from the Collection Account as Class A Monthly Principal [or Class
B Monthly Principal, as the case may be,] for the Distribution Date, and
(b) on each subsequent Distribution Date with respect to the Class A
Accumulation Period [or the Class B Accumulation Period,] the excess, if any, of
the Controlled Deposit Amount for a subsequent Distribution Date plus any
Deficit Controlled Accumulation Amount for the prior Distribution Date over the
amount [deposited in the Principal Funding Account on the Distribution Date]
[distributed from the Collection Account as Class A Monthly Principal [or Class
B Monthly Principal, as the case may be,] for the subsequent Distribution
Date].]]
"Controlled Distribution Amount") is equal to the sum of the
Controlled Amortization Amount and any existing Deficit Controlled Amortization
Amount.
["Controlled Deposit Amount" means, for any Distribution Date with
respect to the Accumulation Period, an amount equal to the sum of:
(a) the Controlled Accumulation Amount for the Distribution Date, and
(b) any Deficit Controlled Accumulation Amount for the immediately
preceding Distribution Date.]
["Shared Principal Collections" means, Collections of Principal
Receivables and certain other amounts otherwise allocable to other Series, to
the extent such collections are not needed to make payments to or deposits for
the benefit of the certificateholders of such other Series, [will] [may] be
applied to cover principal payments due to or for the benefit of the holders of
the Certificates.]
[Cash Collateral Account]
[The Trust will have the benefit of the Cash Collateral Account for
the benefit of the Certificateholders [and the Collateral Interest Holder], as
their interests appear in the Series Supplement, and in the case of the
Collateral Interest Holder, in the [Loan] Agreement, which interest, in the case
of the Collateral Interest Holder, will be subordinated to the interests of the
Certificateholders as provided in the Series Supplement. The "Cash Collateral
Account" will be one or more Eligible Deposit Accounts. Funds on deposit in the
Cash Collateral Account will be invested in specified Eligible Investments that
mature on or before the business day immediately preceding the next
Distribution[, accrued since the preceding Distribution Date on funds on deposit
in the Cash Collateral Account shall be paid to the Collateral Interest Holder
for application in accordance with the [Loan] Agreement].]
[The Cash Collateral Account will be funded on the Issuance Date in
the amount of $[ ] (the "Initial Cash Collateral Amount"), [of which not less
than $[ ] (the "Initial Shared Collateral Amount") will be for the benefit of
both the Class A Certificates and the Class B Certificates and the remaining $[
] (the "Initial Class B Collateral Amount") will be for the exclusive benefit of
the Class B Certificates], which amount will include the proceeds of an advance
to be made by one or more lenders to be selected by the [Depositor] (the lender
or lenders, the "Collateral Interest Holders"). The advance will be repaid
pursuant to the [Loan] Agreement. The Cash Collateral Account will be terminated
following the earliest to occur of:
(a) the date on which the Certificates are paid in full,
(b) the date on which the entire Available Cash Collateral Amount is
distributed to the Certificateholders as a result of the occurrence of any Pay
Out Event,
(c) the Termination Date, and
(d) the termination of the Trust pursuant to the Agreement.]
[On each Distribution Date, the amount available to be withdrawn from
the Cash Collateral Account (the "Available Cash Collateral Amount") will be
equal to the lesser of the amount on deposit in the Cash Collateral Account,
before giving effect to any deposit to be made to, or withdrawal from, the Cash
Collateral Account on the related Distribution Date, or the Required Cash
Collateral Amount.]
[The "Required Cash Collateral Amount" means, with respect to any
Distribution Date, the lesser of:
(a) [the sum of] [the Required Shared Collateral Amount] [and] [the
Initial Class B Collateral Amount] as of the Distribution Date, and
(b) the adjusted Invested Amount as of the Distribution Date.]
[The "Required Shared Collateral Amount means, with respect to any
Distribution Date, the product of:
(a) the Adjusted Invested Amount as of the Distribution Date after
taking into account distributions made on that date, and
(b) [ ]% or any higher percentage specified by each Rating Agency;
provided, however, that:
(1) if there are any withdrawals from the Cash Collateral Account
to fund the Class A Required Amount [or the Class B Required Amount,] or a
Pay Out Event occurs with respect to Series 200[ ]- [ ], then the Required
Shared Collateral Amount for any Distribution Date shall equal the Required
Shared Collateral Amount on the Distribution Date immediately preceding a
withdrawal from the Cash Collateral Account or Pay Out Event, and
(2) notwithstanding the foregoing, the Required Shared Collateral
Amount with respect to any Distribution Date will not be less than $[ ].]
[The Required Shared Collateral Amount [and the Initial Class B
Collateral Amount] may be reduced without the consent of the Certificateholders,
if the [Depositor] [Seller] shall have received written notice from each Rating
Agency that the reduction will not have a Ratings Effect and the [Depositor]
[Seller] shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, based on the facts known to the officer at the time,
in the reasonable belief of the [Depositor] [Seller], the reduction will not
cause a Pay Out Event or an event that, after the giving of notice of the lapse
of time, would constitute a Pay Out Event, to occur with respect to Series 200[
]- [ ].]
[On each Distribution Date, one or more withdrawals will be made from
the Cash Collateral Account in an amount up to the Available Shared Collateral
Amount, to fund the following amounts in the following priority:]
[(a)] the excess, if any, of the Class A Required Amount with
respect to the related Distribution Date over the amount of Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and
available to fund the Class A Required Amount will be used first to
fund any deficiency in current Class A Monthly Interest, overdue Class
A Monthly Interest and any current or overdue Class A Additional
Interest, second to fund any deficiency in the Class A Servicing Fee
and any overdue Class A Servicing Fee and third to pay the Class A
Default Amount, if any, for the Distribution Date[; and]
[(b) the excess, if any, of the Class B Required Amount with
respect to the related Distribution Date over the amount of Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and
available to fund the Class B Required Amount will be used first to
fund any deficiency in current Class B Monthly Interest, overdue Class
B Monthly Interest and any current or overdue Class B Additional
Interest, second to fund any deficiency in the Class B Servicing Fee
and any overdue Class B Servicing Fee, and third to pay the Class B
Default Amount, if any, for the Distribution Date.]
On each Distribution Date, the "Available Shared Collateral Amount"
shall equal the lesser of:
(a) the Required Shared Collateral Amount, and
(b) the excess, if any, of the amount on deposit in the Cash
Collateral Account for the relevant Distribution Date over the Initial
Class B Collateral Amount.
On the first Special Payment Date following a Pay Out Event described
in clause (e) under "--Pay Out Events" after giving effect to any payment of
principal on the date described under "--Application of Collections - --
Payments of Principal", the Available Shared Collateral Amount, after giving
effect to any withdrawal from the Cash Collateral Account on the date to fund
the Required Amount, will be applied to pay principal of the Class A
Certificates [and the remainder of the Available Cash Collateral Amount will be
applied to pay principal of the Class B Certificates].
[On each Distribution Date commencing with the Class B Principal
Commencement Date, unless a Pay Out Event has occurred, a withdrawal will be
made from the Cash Collateral Account, to the extent of the Available Cash
Collateral Amount, in an amount equal to the excess, if any, of the Class B
Initial Invested Amount, minus the sum of the aggregate amount of principal
payments previously deposited to the Principal Funding Account or distributed in
respect of the Class B Certificates, over the Class B Invested Amount on the
last day of the related Monthly Period, determined after giving effect to any
changes to be made in the Class B Invested Amount pursuant to clauses (c), (d),
(e) or (f) of the definition of "Class B Invested Amount" under "--Allocation
Percentages" on the following Distribution Date.]
[In the event of:
(a) a sale of the Receivables and an early termination of the Trust
due to an Insolvency event,
(b) an optional repurchase of the Certificateholders' Interest by the
[Depositor] [Seller] [Servicer],
(c) a sale of a portion of the Receivables in connection with the
Termination Date,
(d) a repurchase or sale of the Certificateholders' Interest and the
certificateholders' interest of all other Series in connection with a Servicer
Default, or,
(e) a reassignment of the Certificateholders' Interest and the
certificateholders' interest of all other Series in connection with a breach by
the [Seller] [Depositor] [Servicer] of related representations and warranties,
any Available Cash Collateral Amount on the related Distribution Date, after
giving effect to all other withdrawals from the Cash Collateral Account on the
Distribution Date as described above, will be withdrawn from the Cash Collateral
Account and the proceeds withdrawn from the Cash Collateral Account will be
distributed to Class B Certificateholders to the extent of all previous
reductions of the Class B Invested Amount pursuant to clauses (c), (d) or (e) of
the definition of "Class B Invested Amount" under "--Allocation Percentages"
above.]
On each Distribution Date, the [Seller] [Servicer] or the Trustee,
acting pursuant to the [Seller's] [Servicer's] instructions, will apply Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] (to the extent
described above under "--Application of Collections -- Excess Spread; Excess
Finance Charges") to increase the amount on deposit in the Cash Collateral
Account to the extent that amount is less than the Required Cash Collateral
Amount. In addition, if on any Distribution Date the amount on deposit in the
Cash Collateral Account exceeds the Required Cash Collateral Amount, this excess
will be withdrawn and paid to the Collateral Interest Holder for application in
accordance with the [Loan] Agreement.
Defaulted Receivables Charge-Offs
On each Determination Date, the Servicer will calculate the Investor
Default Amount for the preceding Monthly Period. The term "Investor Default
Amount" means, for any Monthly Period, the product of:
(a) the Floating Allocation Percentage with respect to the
related Monthly Period, and
(b) the Defaulted Amount for that Monthly Period.
[A portion of the Investor Default Amount will be allocated to the Class A
Certificateholders (the "Class A Default Amount") on each Distribution Date in
an amount equal to the product of the Class A Floating Percentage applicable
during the related Monthly Period and the Investor Default Amount for that
Monthly Period.
A portion of the Investor Default Amount will be allocated to the Class B
Certificateholders (the "Class B Default Amount") in an amount equal to the
product of the Class B Floating Percentage applicable during the related Monthly
Period and the Investor Default Amount for that Monthly Period. An amount equal
to the Class A Default Amount for each Monthly Period will be paid from Class A
Available Funds, Excess Spread and Excess Finance Charges allocated to Series
200[ ]-[ ] or from amounts available under the Cash Collateral Account and
Reallocated Principal Receivables and applied as described above in
"--Application of Collections -- Payment of Interest, Fees and Other Items" and
"--Reallocation of Cash Flows; Class B Invested Amount". An amount equal to the
Class B Default Amount for each Monthly Period will be paid from Excess Spread
and Excess Finance Charges allocated to Series 200[ ]-[ ] or from amounts, if
any, available under the Cash Collateral Account and applied as described above
in "--Application of Collections -- Payment of Interest, Fees and Other Items".]
On each Distribution Date, if the Class A Required Amount for that
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charges
allocable to Series 200[ ]-[ ], then amounts, if any, on deposit in the Cash
Collateral Account up to the Available Shared Collateral Amount and Reallocated
Principal Receivables, the Collateral Invested Amount, if any, will be reduced
by the amount of the excess, but not by more than the Class A Default Amount for
the related Distribution Date. [In the event that a reduction would cause the
Collateral Invested Amount to be a negative number, the Collateral Invested
Amount will be reduced to zero, and the Class B Invested Amount will be reduced
by the amount by which the Collateral Invested Amount would have been reduced
below zero, but not by more than the excess, if any, of the Class A Default
Amount for the Distribution Date over the amount of the reduction, if any, of
the Collateral Invested Amount with respect to the Distribution Date. In the
event that a reduction would cause the Class B Invested Amount to be a negative
number, the Class B Invested Amount will be reduced to zero, and the Class A
Invested Amount will be reduced by the amount by which the Class B Invested
Amount would have been reduced below zero, but not by more than the excess, if
any, of the Class A Default Amount for the Distribution Date over the amount of
the reductions, if any, of the Collateral Invested Amount and the Class B
Invested Amount with respect to the Distribution Date as described above (a
"Class A Charge-Off"),] which will have the effect of slowing or reducing the
return of principal to the Class A Certificateholders.] If the Class A Invested
Amount has been reduced by the amount of any Class A Charge-Offs, it will
subsequently be increased on any Distribution Date, but not by an amount in
excess of the aggregate Class A Charge-Offs, by the amount of Excess Spread and
Excess Finance Charges allocated to Series 200[ ]- [ ] and available for that
purpose.
[On each Distribution Date, if the Class B Required Amount for that
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charges
allocable to Series 200[ ]- [ ] and not required to pay the Class A Required
Amount and amounts, if any, on deposit in the Cash Collateral Account which are
allocated and available to fund the amount, then the Collateral Invested Amount,
if any, will be reduced by the amount of any excess. In the event that a
reduction would cause the Collateral Invested Amount to be a negative number,
the Collateral Invested Amount will be reduced to zero, and the Class B Invested
Amount will be reduced by the amount by which the Collateral Invested Amount
would have been reduced below zero, but not by more than the excess, if any, of
the Class B Default Amount for the relevant Distribution Date over the amount of
the reduction, if any, of the Collateral Invested Amount with respect to the
Distribution Date.]
[If on any Distribution Date Reallocated Principal Receivables for
that Distribution Date are applied to fund the Required Amount, the Collateral
Invested Amount, if any, will be reduced by the amount of the Reallocated
Principal Receivables. In the event the reductions would cause the Collateral
Investment Amount to be a negative number, the Collateral Invested Amount shall
be reduced to zero, and the Class B Invested Amount will be reduced by the
amount by which the Collateral Invested Amount would have been reduced below
zero.]
[The Class B Invested Amount will subsequently be reimbursed, but not
in excess of the aggregate unreimbursed Class B Charge-Offs, on any Distribution
Date by the amount of Excess Spread and Excess Finance Charges allocated to
Series 200[ ]- [ ] and available for that purpose.]
[Any reductions of the Collateral Invested Amount shall subsequently
be reimbursed and the Collateral Invested Amount increased, but not by any
amount in excess of the aggregate reductions of the Collateral Invested Amount,
on any Distribution Date by the amount of Excess Spread and Excess Finance
Charges allocated to Series 200[ ]- [ ] and available for that purpose as
described under "--Application of Collections -- Payment of Interest, Fees and
Other Items".]
Issuance of Additional Certificates
The Series Supplement provides that from time to time during the
Revolving Period, the [Depositor] [Seller] may, subject to specific conditions
described below, cause the Trustee to issue additional Certificates, each an
"Issuance". When issued, the additional Certificates [of each class] will be
identical in all respects to the other outstanding Certificates [of that class]
and will be equally and ratably entitled to the benefits of the Agreement and
the Series Supplement without preference, priority or distinction.
In connection with each additional Issuance, the outstanding principal
amounts of the Class A Certificates [and the Class B Certificates] and the
aggregate amount of Credit Enhancement will all be increased pro rata. The
additional Credit Enhancement provided in connection with an additional Issuance
may take the form of an increase in the Required Cash Collateral Amount or
another form of Credit Enhancement, provided that the form and amount of
additional Credit Enhancement will not cause a Ratings Effect.
Following an additional Issuance, the [Controlled Amortization Amount]
[Controlled Accumulation Amounts] of each Class will be increased
proportionately to reflect the principal amount of additional Certificates.
Additional Certificates may be issued only upon the satisfaction of
specific conditions provided in the Series Supplement, including the following:
(a) on or before the fifth business day immediately preceding the date
on which the additional Certificates are to be issued, the [Depositor] [Seller]
shall have given the Trustee, [the Seller,] [the Servicer,] each Rating Agency
and any provider of Credit Enhancement written notice of the issuance and the
date upon which it is to occur;
(b) after giving effect to the additional Issuance, the total amount
of Principal Receivables shall be at least equal to the Required Principal
Balance;
(c) the [Depositor] [Seller] shall have delivered to the Trustee an
amended Series Supplement, executed by each of the parties to the agreement;
(d) the [Depositor] [Seller] shall have received written notice from
each Rating Agency that this additional Issuance will not have a Ratings Effect;
(e) the [Depositor] [Seller] shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, based on the facts
known to the officer at the time, in the reasonable belief of the [Depositor]
[Seller], the additional Issuance will not cause a Pay Out Event or an event
that, after the giving of notice or the lapse of time, would constitute a Pay
Out Event, to occur with respect to Series 200[ ]- [ ];
(f) as of the date of the additional Issuance and taking the
additional Issuance into account, the amount of Credit Enhancement with respect
to Series 200[ ]- [ ], together with any additional Credit Enhancement, shall
not be less than the amount required so that the additional issuance will not
result in a Ratings Effect;
(g) as of the date of the additional Issuance, all amounts due and
owing to the holders of Certificates shall have been paid, and there shall not
be any unreimbursed Class A Charge-Offs [or Class B Charge-Offs];
(h) the excess of the principal amount of the additional Certificates
over their issue price shall not exceed the maximum amount permitted under the
Code without the creation of original issue discount;
(i) the [Seller's] remaining interest in Principal Receivables shall
not be less than [ ]% of the total amount of Principal Receivables, in each case
as of the date upon which the additional Issuance is to occur after giving
effect to the issuance;
(j) the [Depositor] [Seller] shall have delivered to the Trustee, each
Rating Agency and any provider of Credit Enhancement, a Tax opinion with respect
to the additional Issuance;
(k) the [Depositor] [Seller] shall have obtained additional Credit
Enhancement for the benefit of the holders of Certificates, provided that the
ratio of the sum of the Required Cash Collateral Amount and the amount of the
additional Credit Enhancement to the Invested Amount, after giving effect to the
additional Issuance, shall be greater than or equal to the ratio of the Required
Cash Collateral Amount to the Invested Amount, before giving effect to the
additional Issuance;
(l) the [Depositor] [Seller] shall have delivered to each Rating
Agency:
(1) an opinion of counsel to the effect that the Issuance will
not violate applicable Federal Securities laws, and
(2) any other documents as the Rating Agencies may request; and
(m) the ratio of the [Controlled Amortization Amount] [Controlled
Accumulation Amount], after giving effect to the Additional Issuance, to the
Invested Amount, after giving effect to the Additional Issuance, shall be equal
to the ratio of the [Controlled Amortization Amount] [Controlled Accumulated
Amount], before giving effect to the Additional Issuance, to the Invested
Amount, before giving effect to the Additional Issuance.
There are no restrictions on the time or amount of any Additional
Issuance, provided that the conditions described above are met. As of the date
of any Additional Issuance, the Class A Invested Amount [and the Class B
Invested Amount] will be increased to reflect the initial principal balance of
the Additional Certificates of the respective classes.
[Paired Series]
[The Series 200[ ]- [ ] Certificates may be paired with one or more
other Series (each a "Paired Series"). Each Paired Series either will be
prefunded with an initial deposit to a prefunding account in an amount up to the
initial principal balance of each Paired Series and primarily from the proceeds
of the sale of the Paired Series or will have a variable principal amount. Any
prefunding account will be held for the benefit of the Paired Series and not for
the benefit of Certificateholders. As funds are accumulated in the Principal
Funding Account, either:
(a) in the case of a prefunded Paired Series, an equal amount of
funds on deposit in any prefunding account for that prefunded Paired
Series will be released, which funds will be distributed to the
Seller, or
(b) in the case of a Paired Series having a variable principal
amount, an interest in that variable Paired Series, in an equal or
lesser amount may be sold by the Trust, and the proceeds distributed
to the Seller, and, in either case, the Invested Amount in the Trust
of the Paired Series will increase by up to a corresponding amount.
Upon payment in full of Series 200[ ]- [ ], assuming that there have been no
unreimbursed charge-offs with respect to any related Paired Series, the
aggregate Invested Amount of the related Paired Series will have been increased
by an amount up to an aggregate amount equal to the Series 200[ ]- [ ] Invested
Amount paid to the Certificateholders. There can be no assurance, however, that
the terms of any Paired Series might not have an impact on the timing or amount
of payments received by Certificateholders. See "Maturity Considerations" in
this prospectus supplement.]
Required Principal Balance; Addition to Accounts
The obligation of the Trustee to authenticate certificates of a new
Series and to execute and deliver the related Series Supplement shall be subject
to the conditions described in the Prospectus and to the additional condition
that, as of the Series Issuance Date and after giving effect to the issuance,
the aggregate amount of Principal Receivables in the Trust equals or exceeds the
Required Principal Balance. The "Required Principal Balance means, as of any
date of determination, the sum of:
(a) the initial Invested Amount (see the relevant Supplement) of
each Series outstanding on that date, other than any Series or portion of a
Series (an "Excluded Series") which is designated in the relevant Supplement as
then being an Excluded Series, minus
(b) the principal amount on deposit in the Excess Funding Account
on that date;
provided, however, that if at any time the only Series outstanding are Excluded
Series and a Pay Out Event has occurred with respect to one or more Series, the
Required Principal Balance shall mean the sum of:
(a) the "Invested Amount" (see the relevant Supplement) of each
Excluded Series as of the earliest date on which any Pay Out Event is deemed to
have occurred, minus
(b) the principal amount on deposit in the Excess Funding
Account;
and provided further that the Required Principal Balance may be reduced to a
lesser amount without the consent of the Certificateholders, if the [Depositor]
[Seller] shall have received written notice from each Rating Agency that the
reduction will not have a Ratings Effect.
If, as of the close of business on the last business day of any
Monthly Period, the aggregate amount of Principal Receivables in the Trust is
less than the Required Principal Balance on that date, the [Depositor] [Seller]
shall on or before the [ ] business day following that day, unless the amount of
Principal Receivables in the Trust equals or exceeds the Required Principal
Balance as of the close of business on any day after the last business day of
the Monthly Period and prior to the tenth business day, make an addition to the
Trust so that, after giving effect to the addition, the amount of Principal
Receivables in the Trust is at least equal to the Required Principal Balance.
Pay Out Events
The "Pay Out Events" with respect to the Certificates will include
each of the events specified in the Prospectus and the following:
(a) failure on the part of the [Depositor] [Seller] [Servicer],
(1) to make any payment or deposit required by it under the
Agreement or the Series Supplement within [ ] business days after
the day a payment or deposit is required to be made; or
(2) to observe or perform any of its other covenants or
agreements set forth in the Agreement or the Series Supplement,
which failure has a material adverse effect on the Series 200[ ]-
[ ] Certificateholders and which continues unremedied for a
period of [ ] days, or for a longer period, not in excess of [ ]
days, as may be reasonably necessary to remedy the failure;
provided that the failure is capable of remedy within [ ] days or
less and the [Seller] [Servicer] [Depositor] delivers an
officer's certificate to the effect that the [Seller] [Servicer]
[Depositor] has commenced, or will promptly commence and
diligently pursue, all reasonable efforts to remedy the failure,
after the earlier to occur of the discovery of the failure by the
[Seller] [Servicer] [Depositor] or written notice;
(b) any representation or warranty made by [Seller] [Servicer]
[Depositor] in the Agreement or the Series Supplement or any
information required to be given by the [Depositor] [Seller]
[Servicer] to the Trustee to identify the Accounts proves to have been
incorrect in any material respect when made and continues to be
incorrect in any material respect for a period of [ ] days, or for a
longer period, not in excess of [ ] days, as may be reasonably
necessary to remedy the breach; provided that the misrepresentation is
capable of remedy within [ ] days or less and the [Seller] [Servicer]
[Depositor] delivers an officer's certificate to the effect that the
[Seller] [Servicer] [Depositor] has commenced or will promptly
commence and diligently pursue, all reasonable efforts to remedy the
misrepresentation, after the earlier to occur of discovery of the
breach by the [Seller] [Servicer] [Depositor] or written notice and as
a result of which the interests of the Certificateholders are
materially and adversely affected; provided, however, that a Pay Out
Event shall not be deemed to occur if the [Seller] [Servicer]
[Depositor] has repurchased the related Receivables or all
Receivables, if applicable, during the period in accordance with the
provisions of the Agreement;
(c) a failure by the [Depositor] [Seller] to make an addition to
the Trust within five business days after the day on which it is
required to make an addition pursuant to the Agreement or the Series
Supplement;
(d) the occurrence of any Servicer Default with respect to the
Certificates;
(e) the average Portfolio Yield for any three consecutive Monthly
Periods is less than the average of the Base Rates with respect to
Series 200[ ]- [ ] for the Monthly Periods;
(f) the failure to pay in full the Class A Invested Amount on the
Class A Expected Final Payment Date[, or the Class B Invested Amount
on the Class B Expected Final Payment Date]; and
(g) the [Depositor] [Seller] is unable for any reason to transfer
Receivables to the Trust in accordance with the Agreement or the
Series Supplement.
Then, in the case of any event described in subparagraph (a), (b) or
(d), after the applicable grace period, if any, set forth in those
subparagraphs, either the Trustee or the holders of Certificates evidencing more
than 50% of the aggregate unpaid principal amount of Series 200[ ]- [ ] by
notice then given in writing to the [Seller] [Servicer] [Depositor], and to the
Trustee if given by the Certificateholders, may declare that a Pay Out Event has
occurred with respect to Series 200[ ]- [ ] as of the date of notice, and, in
the case of any event described in subparagraph (c), (e), (f) or (g), a Pay Out
Event shall occur with respect to Series 200[ ]- [ ], without any notice or
other action on the part of the Trustee immediately upon the occurrence of the
event.
For purposes of the Pay Out Event described in clause (e) above, the
terms "Base Rate" and "Portfolio Yield" will be defined as follows with respect
to the Certificates:
"Base Rate" means, with respect to any Monthly Period, the annualized
percentage equivalent of a fraction, the numerator of which is equal to the sum
of Class A Monthly Interest, [Class B Monthly Interest] and the Monthly
Servicing Fee with respect to Series 200[ ]- [ ] for the related Distribution
Date and the denominator of which is the Invested Amount as of the last day of
the preceding Monthly Period.
"Portfolio Yield" means, with respect to any Monthly Period, the
annualized percentage equivalent of a fraction, the numerator of which is equal
to:
(a) the Floating Allocation Percentage of collections of Finance
Charge Receivables, including any investment earnings and other
amounts that are to be treated as Finance Charge Receivables in
accordance with the Agreement, for the Monthly Period calculated on a
billed basis, plus
(b) the amount of Principal Funding Investment Proceeds for the
related Distribution Date, plus
(c) the amount of funds withdrawn from the Reserve Account and
which are required to be included as Class A Available Funds [or Class
B Available Funds], in each case for the Distribution Date with
respect to the relevant Monthly Period, minus
(d) the Investor Default Amount for the Distribution Date with
respect to the Monthly Period, and the denominator of which is the
Invested Amount as of the last day of the preceding Monthly Period.
If the proceeds of any sale of the Receivables following the
occurrence of an Insolvency event with respect to the [Depositor] [Seller]
[Servicer] allocated to the Class A Invested Amount and the proceeds of any
collections on the Receivables in the Collection Account are not sufficient to
pay in full the remaining amount due on the Class A Certificates, then the Class
A Certificateholders will suffer a corresponding loss [and no proceeds will be
available to the Class B Certificateholders].
Servicing Compensation and Payment of Expenses
The share of the Servicing Fee allocable to Series 200[ ]- [ ] with
respect to any Distribution Date (the "Monthly Servicing Fee") shall be equal to
one twelfth of the product of:
(a) [ ]% (the "Servicing Fee Rate"), and
(b) the sum of the Adjusted Invested Amount and the Collateral
Invested Amount, if any, as of the last day of the Monthly Period
preceding the Distribution Date (the amount calculated pursuant to
this clause (b) is referred to as the "Servicing Base Amount");
provided, however, that the Monthly Servicing Fee with respect to the first
Distribution Date will be $[ ] [equal to the Servicing Fee accrued on the
Initial Invested Amount at the Servicing Fee Rate for the period from the
Issuance Date to but excluding the first Distribution Date calculated on the
basis of the actual number of days in the period from the Issuance Date to the
first Distribution Date and a 360-day year]. On each Distribution Date, but only
if [ ] or the Trustee is the Servicer, Interchange with respect to the related
Monthly Period that is on deposit in the Collection Account shall be withdrawn
from the Collection Account and paid to the Servicer as payment of a portion of
the Monthly Servicing Fee with respect to the Monthly Period. The "Servicer
Interchange" for any Monthly Period for [ ]or the Trustee is the Servicer will
be equal to the product of:
(a) the Floating Allocation Percentage for the Monthly Period,
and
(b) the portion of Finance Charge Receivables allocated to the
Trust with respect to the Monthly Period that is attributed to
Interchange; provided, however, that Servicer Interchange for a
Monthly Period shall not exceed one twelfth of the product of:
(1) the sum of the Invested Amount and the Collateral
Investment amount, if any, as of the last day of the Monthly Period,
and
(2) [ ]%.
In the case of any insufficiency of Servicer Interchange on deposit in the
Collection Account, a portion of the Monthly Servicing Fee with respect to the
Monthly Period will not be paid to the extent of that insufficiency and in no
event shall the Trust, the Trustee or the Certificateholders be liable for the
share of the Servicing Fee to be paid out of the Servicer Interchange.
[The share of the Monthly Servicing Fee allocable to the Class A
Certificateholders, after giving effect to the distribution of any Servicer
Interchange to the Servicer, with respect to any Distribution Date (the "Class A
Servicing Fee") shall be equal to one twelfth of the product of:
(a) the Class A Floating Percentage,
(b) [ ]%, or if [ ] or the Trustee is not the Servicer, [ ]% (the
"Net Servicing Fee Rate"), and
(c) the Servicing Base Amount;
provided, however, with respect to the first Distribution Date, the Class A
Servicing Fee shall be equal to the Class A Certificateholders' share of the
Monthly Servicing Fee for the period from the Issuance Date to but excluding the
first Distribution Date.
[The share of the Monthly Servicing Fee allocable to the Class B
Certificateholders, after giving effect to any distribution of Servicer
Interchange to the Servicer, with respect to any Distribution Date (the "Class B
Servicing Fee", and together with the Class A Servicing Fee, the "Servicing
Fee") shall be equal to one twelfth of the product of:
(a) the Class B Floating Percentage,
(b) the Net Servicing Fee Rate, and
(c) the Servicing Base Amount;
provided, however, with respect to the first Distribution Date, the Class B
Servicing Fee shall be equal to the Class B Certificateholders' share of the
Monthly Servicing Fee for the period from the Series Issuance Date to but
excluding the first Distribution Date.
The remainder of the Servicing Fee shall be paid by the [Depositor] [Seller] or
the certificateholders of other Series, as provided in the related Supplements,
or, to the extent of any insufficiency of the Servicer Interchange as described
above, not be paid and in no event shall the Trust, the Trustee or the
Certificateholders be liable for the share of the Servicing Fee to be paid by
the [Depositor] [the Seller] or the Certificateholders of any other Series or to
be paid out of the Servicer Interchange. The Class A Servicing Fee and the Class
B Servicing Fee shall be payable to the Servicer solely to the extent amounts
are available for distribution of the servicing fees.]
Series Termination
If on the Distribution Date which is two months prior to the
Termination Date, the Invested Amount or the Collateral Invested Amount, if any,
in each case after giving effect to all changes in these amounts on that date,
exceeds zero, the Servicer will, within the 40-day period beginning on that
date, solicit bids for the sale of interests in the Principal Receivables or
particular Principal Receivables, together in each case with the related Finance
Charge Receivables, in an amount equal to the sum of the Invested Amount and the
Collateral Invested Amount, if any, at the close of business on the last day of
the Monthly Period preceding the Termination Date, after giving effect to all
distributions required to be made on the Termination Date. The [Depositor]
[Seller], provided that the sum of the Invested Amount and the Collateral
Invested Amount, if any, is less than or equal to [ ] % of the Initial Invested
Amount, and the Collateral Interest Holder will be entitled to participate in,
and to receive notice of each bid submitted in connection with, the bidding.
Upon the expiration of the 40-day period, the Trustee will determine:
o which bid is the highest cash purchase offer (the "Highest Bid"),
and
o the amount (the "Available Final Distribution Amount") which
otherwise would be available in the Collection Account on the
Termination Date for distribution to the Certificateholders and
the Collateral Interest Holder.
The Servicer will sell the Receivables on the Termination Date to the bidder who
provided the Highest Bid and will deposit the proceeds of the sale in the
Collection Account for allocation, together with the Available Final
Distribution Amount, to the Certificateholders' Interest.
Reports
No later than the third business day prior to each Distribution Date,
the Servicer will forward to the Trustee, [the Collateral Interest Holder] [the
Cash Collateral Depositor] [the Depositor] the Paying Agent and each Rating
Agency a statement (the "Monthly Report") prepared by the Servicer setting forth
information with respect to the Trust and the Certificates, including:
(a) the aggregate amount of Principal Receivables and Finance
Charge Receivables in the Trust as of the end of the Monthly Period;
(b) the Class A Invested Amount [and] [the Class B Invested
Amount] [and] [the Collateral Invested Amount] at the close of business on the
last day of the preceding Monthly Period;
(c) the Floating Allocation Percentage and, during the
[Controlled Amortization Period] [Accumulation Period] or Rapid Amortization
Period with respect to the Series, the Principal Allocation Percentage with
respect to the Certificates;
(d) the amount of collections of Principal Receivables and
Finance Charge Receivables processed during the related Monthly Period and the
portion of these Receivables allocated to the Certificateholders' Interest;
(e) the aggregate outstanding balance of Accounts which were 30,
60, and 90 days or more delinquent as of the end of the Monthly Period;
(f) the Defaulted Amount with respect to the Monthly Period and
the portion of this Defaulted Amount allocated to the Certificateholders'
Interest [and the Collateral Interest Holder];
(g) the amount, if any, of Class A Charge-Offs [and Class B
Charge-Offs];
(h) the Monthly Servicing Fees;
(i) the Portfolio Yield for the Monthly Period;
(j) the amount to be withdrawn from the Cash Collateral Account,
if any, to fund the Class A Required Amount [or the Class B Required Amount] for
the Distribution Date;
(k) the Available Cash Collateral Amount, the Available Shared
Collateral Amount and the Required Cash Collateral with respect to Series 200
[]- [ ] and
(l) Reallocated Principal Receivables.
ERISA CONSIDERATION
[State whether the Notes may be classified as indebtedness without
substantial equity features for ERISA purposes.]
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them.
UNDERWRITING
Subject to the terms and conditions set forth in the "Underwriting
Agreement" between the Depositor and the underwriters named below (the
"Underwriters"), the Depositor has agreed to sell to the Underwriters, and each
of the Underwriters has severally agreed to purchase, the principal amount of
the Class A Certificates [and Class B Certificates] set forth opposite its name
(the "Underwritten Certificates"):
Principal Amount Principal Amount
UNDERWRITER OF CLASS A CERTIFICATES OF CLASS B CERTIFICATES
----------- ----------------------- -----------------------
Deutsche Banc Alex. Brown....
[Other underwriter]..........
Total........................
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Underwritten Certificates are
subject to the approval of related legal matters by their counsel and to other
conditions. All of the Certificates offered by this prospectus supplement will
be issued if any are issued. Under the terms and conditions of the Underwriting
Agreement, the Underwriters are committed to take and pay for all the
Underwritten Certificates offered by this prospectus supplement, if any are
taken.
The Underwriters propose initially to offer the Class A Certificates
to the public at the price set forth on the cover page of this prospectus
supplement and to some Dealers at price less concessions not in excess of [ ] %
of the principal amount of the Class A Certificates. The Underwriters may allow,
and Dealers may reallow, concessions not in excess of [ ] % of the principal
amount of the Class A Certificates to specific brokers and Dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Underwriters.
[The Underwriters propose initially to offer the Class B Certificates
to the public at the price set forth on the cover page of this prospectus
supplement and to some Dealers at price less concessions not in excess of [ ]%
of the principal amount of the Class B Certificates. The Underwriters may allow,
and Dealers may reallow, concessions not in excess of [ ]% of the principal
amount of the Class B Certificates to some brokers and Dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Underwriters.]
The Depositor will indemnify the Underwriters against specific
liabilities, including liabilities under the Securities Act of 1933, or
contribute to payments the Underwriters may be required to make.
In the ordinary course of their respective businesses, the
Underwriters and their respective affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with the Depositor and
its affiliates.
If and to the extent required by applicable law or regulation, this
prospectus supplement and the Prospectus will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the offered Certificates in which the
Underwriter acts as principal. Sales will be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Some related legal matters with respect to the Certificates will be
passed upon by [ ], New York, New York.
RATING
It is a condition to issuance that the Class A Certificates be rated
in the highest rating category by [Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, Inc.] [Duff & Phelps Credit Rating Co.] [Moody's
Investors Service, Inc.], referred to as the "Rating Agencies". [It is a
condition to issuance that the Class B Certificates be rated in one of the three
highest rating categories by a Rating Agency.]
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Securities. The rating takes into
consideration the characteristics of the Securities and the structural, legal
and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however constitute statements regarding the possibility
that Certificateholders might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
<PAGE>
Index of Defined Terms
Accounts..................................................................S-18
Accumulation Period.......................................................S-27
Accumulation Period Length................................................S-30
Adjusted Invested Amount..................................................S-35
Agreement.................................................................S-13
Available Cash Collateral Amount..........................................S-50
Available Final Distribution Amount.......................................S-63
Available Funds...........................................................S-26
Available Principal Collections...........................................S-29
Available Reserve Account Amount..........................................S-39
Available Shared Collateral Amount........................................S-51
Average Principal Receivables Balance.....................................S-21
Base Rate.................................................................S-60
Cash Collateral Account...................................................S-49
Cash Collateral Depositor.................................................S-45
Cash Collateral Fee.......................................................S-45
Certificateholders........................................................S-13
Certificates..............................................................S-23
Class A Accumulation Period...............................................S-28
Class A Additional Interest...............................................S-42
Class A Adjusted Invested Amount..........................................S-35
Class A Available Funds...................................................S-25
Class A Certificate Rate..................................................S-24
Class A Certificateholders................................................S-13
Class A Certificates......................................................S-23
Class A Charge-Off........................................................S-54
Class A Default Amount....................................................S-53
Class A Floating Percentage...............................................S-32
Class A Initial Invested Amount...........................................S-33
Class A Invested Amount...................................................S-34
Class A Investor Charge-Offs..............................................S-35
Class A Monthly Interest..................................................S-43
Class A Monthly Principal.................................................S-47
Class A Principal Percentage..............................................S-33
Class A Required Amount...................................................S-40
Class A Servicing Fee.....................................................S-62
Class B Accumulation Period...............................................S-28
Class B Additional Interest...............................................S-43
Class B Adjusted Invested Amount..........................................S-35
Class B Available Funds...................................................S-26
Class B Certificate Rate..................................................S-24
Class B Certificateholders................................................S-13
Class B Certificates......................................................S-23
Class B Charge-Off........................................................S-42
Class B Default Amount....................................................S-53
Class B Floating Percentage...............................................S-32
Class B Initial Invested Amount...........................................S-31
Class B Invested Amount...................................................S-34
Class B Monthly Interest..................................................S-44
Class B Monthly Principal.................................................S-47
Class B Principal Commencement Date.......................................S-31
Class B Principal Percentage..............................................S-33
Class B Required Amount...................................................S-41
Class B Servicing Fee.....................................................S-62
Collateral Defaulted Amount...............................................S-36
Collateral Indebtedness Amount............................................S-35
Collateral Interest Holders...............................................S-49
Collateral Invested Amount................................................S-36
Collection Account........................................................S-37
Controlled Accumulation [Amortization] Amount.............................S-48
Controlled Amortization Period............................................S-27
Controlled Deposit Amount.................................................S-49
Controlled Distribution Amount............................................S-49
Covered Amount............................................................S-37
Cut-Off Date..............................................................S-26
Dealers...................................................................S-18
Deficit Controlled Accumulation Amount....................................S-48
Distribution Date.....................................................S-13, 24
Eligible Investments......................................................S-37
Excess Funding Account....................................................S-32
Excess Spread.............................................................S-44
Excluded Dealers..........................................................S-20
Excluded Receivables......................................................S-20
Excluded Series...........................................................S-58
Finance Charge Receivables................................................S-17
Floating Allocation Percentage............................................S-31
Highest Bid...............................................................S-63
Initial Cash Collateral Amount............................................S-49
Initial Class B Collateral Amount.........................................S-49
Initial Shared Collateral Amount..........................................S-49
Interest Funding Account..................................................S-25
Interest Payment Date.....................................................S-24
Interest Period...........................................................S-24
Invested Amount...........................................................S-36
Investor Default Amount...................................................S-53
Issuance..................................................................S-55
Monthly Period............................................................S-13
Monthly Report............................................................S-63
Monthly Servicing Fee.....................................................S-61
Net Losses................................................................S-21
Net Servicing Fee Rate....................................................S-62
Paired Series.............................................................S-57
Pay Out Events............................................................S-58
Portfolio Yield...........................................................S-60
Principal Allocation Percentage...........................................S-32
Principal Funding Account.................................................S-27
Principal Funding Account Balance.........................................S-37
Principal Funding Investment Proceeds.....................................S-37
Rating Agencies...........................................................S-66
Ratings Effect............................................................S-17
Reallocated Principal Receivables.........................................S-40
Receivables...............................................................S-18
Record Date...............................................................S-24
Required Amount...........................................................S-41
Required Cash Collateral Amount...........................................S-50
Required Principal Balance................................................S-57
Required Reserve Account Amount...........................................S-38
Required Share Collateral Account.........................................S-50
Reserve Account...........................................................S-38
Reserve Account Factor....................................................S-38
Reserve Account Funding Date..............................................S-38
Revolving Period..........................................................S-26
Securities................................................................S-23
Seller....................................................................S-23
Series....................................................................S-23
Series Enhancement........................................................S-16
Series Supplement.........................................................S-13
Servicer..................................................................S-23
Servicing Base Amount.....................................................S-61
Servicing Fee.............................................................S-62
Servicing Fee Rate........................................................S-61
Special Payment Date......................................................S-13
Supplement................................................................S-13
Termination Date..........................................................S-13
Trust.....................................................................S-23
Trustee...................................................................S-25
Underwriters..............................................................S-65
Underwriting Agreement....................................................S-65
Underwritten Certificates.................................................S-65
<PAGE>
=============================================
$[ ]
DEALER FLOORPLAN
RECEIVABLES TRUSTS
$[ ] [ ]% Floating Rate
Adjustable Rate Variable Rate
Asset Backed Certificates, Class A
$[ ] [ ]% Floating Rate
Adjustable Rate Variable Rate
Asset Backed Certificates, Class B
ACE SECURITIES CORP.
(DEPOSITOR)
PROSPECTUS SUPPLEMENT
[ ]
DEUTSCHE BANC ALEX. BROWN
==============================================
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS
DEALER FLOORPLAN RECEIVABLE
ASSET-BACKED CERTIFICATES AND ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it
by ACE Securities Corp. The assets in each trust fund will generally consist of
one or more of the following:
1. One or more pools of:
o consumer and commercial product receivables generated from time
to time in revolving financing arrangements with dealers,
manufacturers and distributors,
o participation certificates evidencing participation interests in
loans similar to the types of loans described above,
o government securities,
o private securities evidencing ownership interests in or secured
by loans similar to the types of loans described above;
2. All monies due under the above assets (which may be net of amounts
payable to the servicer); and
3. Funds or accounts established for the related trust or one or more
forms of enhancement.
The assets in your trust fund are specified in the prospectus
supplement for that particular trust fund, while the types of assets that may be
included in a trust fund, whether or not in your trust fund, are described in
greater detail in this prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE
OR COMPLETE. MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
The date of this Prospectus is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
LIMITED LIQUIDITY MAY RESULT IN
DELAYS IN YOUR ABILITY TO SELL
SECURITIES OR LOWER RETURNS There will be no market for the
securities of any series prior to their
issuance, and there can be no assurance
that a secondary market will develop. If
a secondary market does develop, there
can be no assurance that it will provide
holders with liquidity of investment or
that the market will continue for the
life of the securities of the related
series. Credit Suisse First Boston
Corporation presently expects to make a
secondary market in the securities, but
has no obligation to do so. Absent a
secondary market for the securities you
may experience a delay if you choose to
sell your securities or the price you
receive may be less than you would
receive for a comparable liquid
security.
LIMITED ASSETS FOR PAYMENTS - NO
RECOURSE TO DEPOSITOR, SELLER
OR SERVICER The depositor does not have, nor is it
expected to have, any significant
assets. The securities of a series will
be payable solely from the assets of the
trust for that series. Except for any
related insurance policies or credit
support, there will be no recourse to
the depositor or any other person for
any default on the notes or any failure
to receive distributions on the
certificates with respect to any series.
Consequently, holders of securities of
each series must rely solely upon
payments with respect to the assets
constituting the trust fund for a series
of securities, including, if applicable,
any amounts available pursuant to any
enhancement for that series, for the
payment of principal of and interest on
the securities of that series.
The only obligations, if any, of the
depositor with respect to the securities
of any series will be with respect to
its breach of specific representations
and warranties. The depositor does not
have, and is not expected in the future
to have, any significant assets with
which to meet any obligation to
repurchase assets with respect to which
there has been a breach of any
representation or warranty. If, for
example, the depositor were required to
repurchase a receivable, its only
sources of funds to make the repurchase
would be from funds obtained from the
enforcement of a corresponding
obligation, if any, on the part of the
originator of the receivable, the
servicer or the seller, as the case may
be, or from a reserve fund established
to provide funds for repurchases. If the
depositor does not have sufficient
assets and no other party is obligated
to repurchase defective assets, you may
experience a loss.
LIMITS ON ENHANCEMENT MAY
RESULT IN LOSSES TO YOU Although we intend the enhancement for
the securities to reduce the risk of
delinquent payments or losses to holders
of a series of securities entitled to
the benefit of the enhancement, the
amount of the enhancement will be
limited, as set forth in the related
prospectus supplement. In addition, the
amount available will decline and could
be depleted prior to the payment in full
of the related series of securities, and
losses on the primary assets could
result in losses to holders of those
securities.
TIMING AND RATE OF PREPAYMENTS
MAY RESULT IN LOWER YIELD The yield to maturity experienced by a
holder of securities may be affected by
the rate and timing of payments of
principal of the receivables or of the
underlying loans relating to the private
securities. The receivables or
underlying receivables may be paid at
any time and we can not assure you that
there will be new receivables created in
the related accounts or that new
receivables will be added to the related
trust or underlying trust. The rate and
timing of principal payments of the
securities of a series will be affected
by a number of factors, including the
following:
o the extent of repayments,
o the manner of allocating principal
payments among the classes of
securities of a series as specified
in the related prospectus supplement,
and
o the exercise of any right of optional
termination.
Prepayments may also result from
repurchases of receivables or underlying
receivables, as applicable, due to
material breaches of the seller's or the
depositor's representations or
warranties.
Interest payable on the securities of a
series on a distribution date will
include all interest accrued during the
period specified in the related
prospectus supplement. In the event
interest accrues during the calendar
month prior to a distribution date, the
effective yield to holders will be
reduced from the yield that would
otherwise be obtainable if interest
payable on the security were to accrue
through the day immediately preceding
each distribution date, and the
effective yield at par to holders will
be less than the indicated coupon rate.
RISK OF EARLY AMORTIZATION The continuation of the revolving period
for any series will depend on the
continued generation of new receivable
for the related trust. A decline in the
amount of receivables may result in the
commencement of a rapid amortization
period with respect to the related
series. Receivables are generally
prepaid upon the retail sale of the
underlying consumer or commercial
product. In these events, you would bear
the risk of reinvestment of the
principal amount of your securities. The
seller's or depositor's interest will
need to be maintained at a minimum level
equal to an amount specified in the
related prospectus supplement. If it
falls below the minimum level, the
seller or depositor will be required to
transfer additional accounts to the
Trust. In addition, subject to some
exceptions, which if applicable, will be
set forth in the related prospectus
supplement, a rapid amortization period
will commence if the seller or depositor
fails to transfer these additional
accounts to the trust.
POSSIBLE ADVERSE IMPACT OF
FUTURE SERIES Each trust that is a master trust may
issue new series from time to time. The
terms of any new series will not be
subject to your prior review or consent.
The terms may include methods for
determining applicable investor
percentages and allocating collections,
provisions creating different or
additional security or other series
enhancements, provisions subordinating
the series to other series or
subordinating other series if the
supplement relating to this series so
permits) to the new series, and any
other amendment or supplement to the
transaction documents which is made
applicable only to the new series. The
obligation of the trustee to issue any
new series is subject to the condition
that the issuance will not result in any
rating agency reducing or withdrawing
its then existing rating of your
securities. You can not be certain,
however, that the issuance of any other
series, from time to time, might not
have an impact on the timing or amount
of payments received by you.
RISKS OF SUBORDINATED SECURITIES To the extent specified in the
applicable prospectus supplement,
distributions of interest on and
principal of one or more classes of
securities of a series may be
subordinated in priority of payment to
interest and principal due on one or
more other classes of securities of the
related series. Any subordinated
securities will be affected to a greater
degree by any losses on the mortgage
loans, contracts or of the underlying
loans relating to the private
securities.
POTENTIAL LACK OF SECURITY The depositor will assign security
interests in the consumer and commercial
products the receivables to the related
trust. Generally, under applicable state
laws, a security interest in consumer
and commercial products which secures
wholesale financing obligations may be
perfected by the filing of UCC financing
statements. The seller will take all
actions necessary under applicable state
laws to perfect the seller's security
interest in the consumer and commercial
products. However, at the time a product
is sold, the seller's security interest
in the product will terminate.
Therefore, if a dealer fails to remit to
the seller amounts owed with respect to
products that have been sold, the
related receivables will no longer be
secured by products.
RISK OF INABILITY TO SELL PRODUCTS Payment of the receivables and
accordingly, your securities, is largely
dependent upon the retail sale of the
related consumer and commercial
products. The level of retail sales of
consumer and commercial products may
change as the result of a variety of
social and economic factors. These
factors include interest rates,
unemployment levels, the rate of
inflation and consumer perception of
economic conditions generally. In
addition, the use of incentive programs
(e.g., manufacturers' rebate programs)
may affect retail sales. However, the
depositor is unable to determine and has
no basis to predict the extent economic
or social factors will affect the level
of consumer and commercial product
sales.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST Issuance of the securities in book-entry
form may reduce the liquidity of these
securities in the secondary trading
market since investors may be unwilling
to purchase securities for which they
cannot obtain physical certificates.
Since transactions in the securities can
be effected only through The Depository
Trust Company and any other entities set
forth in the related prospectus
supplement, your ability to pledge a
security to persons or entities that do
not participate in The Depository Trust
Company or any other entities or
otherwise to take actions in respect of
the related securities may be limited
due to lack of a physical certificate
representing the securities.
You may experience some delay in the
receipt of distributions of interest and
principal on the securities since the
distributions will be forwarded by the
trustee to The Depository Trust Company
and The Depository Trust Company will
credit the distributions to the accounts
of its participants which will then
credit them to your account either
directly or indirectly through indirect
participants.
<PAGE>
THE TRUSTS
ACE Securities Corp., a Delaware corporation (the "Depositor") will
establish a trust or master trust (the "Trust") pursuant to a Trust Agreement or
a Master Trust Agreement (a "Trust Agreement"). The Trustee of each Trust will
be a commercial bank, savings and loan association or trust company identified
as the Trustee (the "Trustee") in the related prospectus supplement. The
property of the Trust will include Base Assets and may also include Series
Enhancements and other assets specified in the related prospectus supplement.
Each Trust will issue one or more series (each, a "Series") of asset
backed notes (the "Notes") and/or asset backed certificates (the "Certificates",
and together with the Notes, the "Securities"), that will include one or more
Classes of Certificates and may also include one or more Classes of Notes (each,
a "Class"). Any Notes included in a Series will be issued pursuant to an
indenture (the "Indenture") entered into between the related Trust and an
indenture trustee (the "Indenture Trustee"). The Indenture Trustee will also be
a commercial bank, savings and loan association or trust company identified as
the Indenture Trustee in the related prospectus supplement.
A form of the Pooling and Servicing Agreement and a form of the Series
Supplement to the Pooling and Servicing Agreement have each been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. If
applicable, the Trust Agreement, the Pooling and Servicing Agreement, the Series
Supplement and the Indenture (collectively the "Agreements"), relating to a
particular Series of Securities will be filed as an exhibit to a report on Form
8-K to be filed with the Securities and Exchange Commission (the "Commission")
within 15 days following the issuance of this Series of Securities.
TRUST ASSETS
The assets of the Trust for a Series of Certificates will include some
or all of the Base Assets described below and may include Series Enhancements
with respect to these Series and other assets described in the related
prospectus supplement.
The "Base Assets" for a Series will consist of one or more of the
following types of assets:
(a) extensions of credit under revolving credit agreements with
dealers, manufacturers and distributors of various consumer and commercial
products (the "Receivables") and/or participations ("Participations") in
Receivables,
(b) securitites backed by Receivables ("WALTR Securities"),
(c) Government Securities; and
(d) Private Label Custody Receipt Securities.
The Base Assets for a Series may be purchased by the Depositor from the Seller
identified in the related prospectus supplement or, with respect to WALTR
Securities, may be purchased by the Depositor in the open market or in privately
negotiated transactions, which may include transactions with affiliates of the
Depositor, and then, in each case, will be transferred by the Depositor to the
Trust in exchange for Securities issued by the Trust. Alternatively, the Trust
may purchase some or all of the Base Assets in the open market or in privately
negotiated transactions with cash obtained by the Trust in exchange for the
issuance of Securities of the Trust to the Depositor.
If so specified in the related prospectus supplement, the assets of
the Trust for a Series may include monies or government securities on deposit in
a Pre-Funding Account" established with the Trustee, or the Indenture Trustee,
which monies or government securities are to be used for the purchase of
additional Base Assets during a funding period specified in the related
prospectus supplement.
The following is a brief description of the Base Assets expected to be
included in Trusts. Specific information regarding the Base Assets with respect
to a Series of Securities will be provided in the related prospectus supplement
and, to the extent not contained in the related prospectus supplement, in a
report on Form 8-K to be filed with the Commission within 15 days after the
initial issuance of the Securities.
Receivables and Participations
The Base Assets for a Series may consist, in whole or in part, of
Receivables arising from time to time in the ordinary course of business in
wholesale receivables, generated from time to time in a portfolio of revolving
financing arrangements (collectively, the "Accounts") with consumer and
commercial product dealers, manufacturers and distributors (the "Dealers"). The
Dealers use the related advances to purchase new or used consumer and commercial
products (the "Products"). The Receivables may be payable in U.S. dollars or in
any other foreign currency. The Accounts will consist of the initial accounts
(the "Initial Accounts") described below, as well as any aditional accounts (the
"Additional Accounts") added to the Trust from time to time as provided below,
but will not include any Receivables in particular Accounts removed from the
Trusts (the "Removed Accounts") as provided below.
A seller or sellers designated in the related prospectus supplement
(collectively, the "Seller") will initially convey to the related Trust, or will
convey to the Depositor, which will promptly reconvey to the Trust all
Receivables existing on the series cut-off date specified in the related
prospectus supplement (the "Series Cut-Off Date") in the Initial Accounts,
together with all Receivables arising in these Initial Accounts from time to
time after the Series Cut-Off Date until the termination of the Trust. After the
Series Cut-Off Date, a Seller may convey to the related Trust, which conveyance
may be through the Depositor, Receivables arising in Additional Accounts, in
each case in accordance with the provisions of the applicable Pooling and
Servicing Agreement. In addition, pursuant to the related Pooling and Servicing
Agreement, a Seller in some circumstances will be obligated to designate
Additional Accounts, together with the Receivables arising in these Additional
Accounts, to convey to the related Trust. The Seller will convey to the Trust
all Receivables arising in any of the Additional Accounts, whether the
Receivables are then existing or later created. The addition to a Trust of
Receivables arising in Additional Accounts or Participations will be subject to
conditions set forth in the applicable Pooling and Servicing Agreement. Pursuant
to the related Pooling and Servicing Agreement and Series Supplement, the
Depositor will also have the right, subject to specified limitations and
conditions, but not the obligation, to remove the Receivables in any Account
that becomes a Removed Account. The amount of Receivables in a Trust will
fluctuate from day to day as new Receivables are generated or added to the Trust
and as existing Receivables are collected, charged-off as uncollectible, removed
or otherwise adjusted. If so specified in the related prospectus supplement, a
Seller will be able to include Participations in the related Trust in lieu of or
in addition to Receivables.
Additional Information Relating to Receivables
The related prospectus supplement for each Series will provide
information with respect to any Receivables that constitute Base Assets as of
the Series Cut-off Date, including, among other things, the aggregate principal
balance of the Receivables.
The eligibility criteria which shall apply with respect to the
inclusion of Receivables in the Base Assets for a Series will be specified in
the related prospectus supplement. The information provided in the related
prospectus supplement with respect to the Receivables will include, among other
things:
(a) underwriting criteria;
(b) the loss and delinquency experience for the portfolio of
Receivables;
(c) the composition of the portfolio by account balance; and
(d) the geographic distribution of Accounts and Receivables.
The related prospectus supplement will also specify any other limitations on the
types or characteristics of Receivables included in the Base Assets for a
Series.
If information of the nature described above respecting the
Receivables included in the Base Assets of a Series is not known to the Seller
at the time the Securities of the Series are initially offered, approximate or
more general information of the nature described above will be provided in the
related 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 Securities and to be filed with the Commission within 15 days
after the initial issuance of these Securities.
WALTR Securities
Base Assets for a Series may consist, in whole or in part, of
receivables backed securities consisting of Certificates evidencing an undivided
interest in, or Notes or loans secured by, Receivables generated in Accounts.
These certificates, notes or loans will have previously been offered and
distributed to the public pursuant to an effective registration statement
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or will be so registered, offered and distributed concurrently with the offering
of the related Series of Securities. WALTR Securities will have been issued
pursuant to a pooling and servicing agreement, a master pooling and servicing
agreement, a sale and servicing agreement, a trust agreement, indenture or
similar agreement (a "WALTR Agreement"). The WALTR Securities represent an
undivided interest in or obligation of a trust formed pursuant to a WALTR
Agreement (a "WALTR Trust"). The seller/servicer of the underlying Receivables
will have entered into the WALTR Agreement with the trustee under this WALTR
Agreement (the "WALTR Trustee"). Receivables underlying a WALTR Security will be
serviced by a servicer (the "WALTR Servicer") directly or by one or more
sub-servicers who may be subject to the supervision of the WALTR Servicer.
The issuer of the WALTR Securities (the "WALTR Issuer") will be a
financial institution, corporation or other entity engaged generally in the
business of the financing of Products, or a limited purpose corporation
organized for the purpose of, among other things, establishing trusts and
acquiring and selling receivables to these trusts, and selling beneficial
interests in these trusts, or one of these trusts. If so specified in the
related prospectus supplement, the WALTR Issuer may be an affiliate of the
Depositor. The obligations of the WALTR Issuer will generally be limited to
representations and warranties with respect to the assets conveyed by it to the
related trust. The WALTR Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the WALTR Securities issued under the
WALTR Agreement.
Distributions of principal and interest will be made on the WALTR
Securities on the dates specified in the related prospectus supplement. The
WALTR Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the WALTR Securities by the WALTR Trustee or the
WALTR Servicer. The WALTR Issuer or the WALTR Servicer may have the right to
repurchase assets underlying the WALTR Securities after a specified date or
under other circumstances specified in the related prospectus supplement.
UNDERLYING RECEIVABLES. The receivables underlying the WALTR
Securities will consist of Receivables.
CREDIT ENHANCEMENT RELATING TO WALTR SECURITIES. Credit Enhancement in
the form of reserve funds, subordination of other WALTR Securities, guarantees,
letters of credit, cash collateral accounts, insurance policies or other types
of Credit Enhancement may be provided with respect to the Receivables underlying
the WALTR Securities or with respect to the WALTR Securities themselves. The
type, characteristics and amount of Credit Enhancement will be a function of
characteristics of the Receivables and other factors and will have been
established for the WALTR Securities on the basis of requirements of the
applicable Rating Agencies.
ADDITIONAL INFORMATION. The related prospectus supplement for a Series
whose Base Assets include WALTR Securities will specify, to the extent relevant
and to the extent information is reasonably available to the Depositor, and to
the extent the Depositor reasonably believes the information to be reliable:
(a) the aggregate approximate principal amount and type of the WALTR
Securities to be included in the Base Assets;
(b) characteristics of the Receivables which comprise the underlying
assets for the WALTR Securities, including the servicing fee or range of
servicing fees with respect to these Receivables;
(c) the expected and final maturity of the WALTR Securities;
(d) the interest rate of the WALTR Securities;
(e) the WALTR Issuer, the WALTR Servicer, if other than the WALTR
Issuer, and the WALTR Trustee for the WALTR Securities;
(f) characteristics of the credit enhancement, if any, relating to the
Receivables underlying the WALTR Securities or relating to the WALTR Securities
themselves;
(g) the terms on which the underlying Receivables for the WALTR
Securities may be, or are required to be, purchased prior to their stated
maturity or the stated maturity of the WALTR Securities; and
(h) the terms on which Receivables may be substituted for those
originally underlying the WALTR Securities.
If information of the nature described above representing the WALTR
Securities is not known to the Depositor at the time the related Series of
Securities are initially offered, approximate or more general information of the
nature described above will be provided in the related prospectus supplement and
the additional information, to the extent available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related Series of Securities and to be filed with the Commission within
15 days of the initial issuance of the Securities.
As a general rule, each WALTR Issuer will be subject to the
information requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and in accordance with the Exchange Act, will file reports and other
information with the Commission. Reports and other information filed with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661 and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of the material
can be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of this site is (http://www.sec.gov). In the
event that any WALTR Issuer is not subject to the information requirements of
the Exchange Act on the date of issuance of the Certificates of the related
Series or ceases to be subject to the information requirements after that date,
the Depositor or the Trustee will provide, or cause to be provided, or make
available, or cause to be made available, to holders of the Securities upon
request, the information contained in all periodic trustee reports, or similar
reports, that are received by the Trustee with respect to the related WALTR
Securities where the WALTR Securities represent 20% or more of the aggregate
principal balance of the related Base Assets.
Government Securities
If so specified in the applicable prospectus supplement, the Base Assets for a
Series may include any combination of:
o receipts or other instruments created under the Department of the
Treasury's Separate Trading of Registered Interest and Principal
of Securities, or STRIPS, program ("Treasury Strips"), which
interest and/or principal strips evidence ownership of specific
interest and/or principal payments to be made on specified United
States Treasury Bonds ("Treasury Bonds");
o Treasury Bonds; and
o other debt securities ("GSE Bonds") of United States government
sponsored enterprises ("GSEs", and together with Treasury Strips
and Treasury Bonds, the "Government Securities").
The Government Securities, if any, included in a Trust Fund are intended to
assure investors that funds will be available to make suggested payments of
principal and/or interest due on the related Securities. Accordingly, the
Government Securities, if any, included in a Trust are intended both to:
o support the ratings assigned to the related Securities, and
o perform a function similar to that described in this Prospectus
under "Series Enhancement".
A description of the respective general features of Treasury Bonds, Treasury
Strips and GSE Bonds is set forth below. The specific terms of the Government
Securities, if any, and the private label custody receipt securities, if any,
included in Base Assets will be set forth in the applicable prospectus
supplement.
Private Label Custody
RECEIPT SECURITIES. Private Label Custody Receipt Securities will
consist of any combination of:
o receipts or other instruments, other than Treasury Strips,
evidencing ownership of specific interest and/or principal
payments to be made on Treasury Bonds held by a custodian
("Private Label Custody Strips"), and
o receipts or other instruments evidencing ownership of specific
interest and/or principal payments to be made on Resolution
Funding Corporation ("REFCO") bonds ("REFCO Strips"; and together
with Private Label Custody Strips, "Private Label Custody Receipt
Securities", also referred to as "Receivables Pooling
Certificates").
The specific terms of the Private Label Custody Receipt Securities, if any,
included in a Trust will be set forth in the applicable prospectus supplement.
The prospectus supplement for each Series of Securities, the Base
Assets of which include Government Securities will contain information as to:
(a) the title and series, the aggregate principal amount, denomination
and form of each Government Security;
(b) the limit, if any, upon the aggregate principal amount of the
related Government Security;
(c) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the related Government Security will be
payable;
(d) the rate or rates, or the method of determination of the rate or
rates, at which the related Government Security will be payable;
(e) the date or dates from which interest will accrue, and the dates
on which interest will be payable;
(f) whether the related Government Security was issued at a price
lower than the principal amount of that Government Security;
(g) material events of default or restrictive covenants provided for
with respect to the related Government Security;
(h) the rating of the Government Security, if any;
(i) the issuer of each Government Security;
(j) the material risks, if any, posed by the related Government
Securities and the issuers of those Government Securities, which risks, if
appropriate, will be described in the "Risk Factors" section of the related
prospectus supplements; and
(k) any other material terms of the related Government Security.
With respect to Base Assets which include a pool of Government Securities, the
related prospectus supplement will, to the extent applicable, describe the
composition of the Government Securities' pool, material events of default or
restrictive covenants common to the Government Securities, and, on an aggregate,
percentage or weighted average basis, as applicable, the characteristics of the
pool with respect to the terms set forth in (d), (e), and (f) of the preceding
sentence and any other material terms regarding the related pool.
The Government Securities included in a Trust will be senior
unsecured, nonredeemable obligations of the issuer of the Government Securities,
will be denominated in United States dollars and, if rated, will be rated at
least investment grade by at least one nationally recognized rating agency (a
"Rating Agency". In addition, the inclusion of Government Securities in the Base
Assets of a Series of Securities is conditioned upon their characteristics being
in form and substance satisfactory to the Rating Agency rating the related
series of Securities.
TREASURY BONDS. Treasury Bonds are issued by and are the obligations
of The United States of America. Accordingly, the payment of principal and
interest on each Treasury Bond will be guaranteed by the full faith and credit
of the United States of America. Interest is typically payable on the Bonds
semiannually. Treasury Bonds are issued in registered form in denominations of
$1,000, $5,000, $10,000, $100,000 and $1,000,000 and in book-entry form in
integral multiples of these amounts.
TREASURY STRIPS. In general, Treasury Strips are created by
separating, or "stripping", the principal and interest components of Treasury
Bonds that have an original maturity of 10 or more years from the date of issue.
A particular Treasury Strip evidences ownership of the principal payment or one
of the periodic interest payments, generally semiannual, due on the Treasury
Bond to which the Treasury Strip relates.
In 1985 the Department of the Treasury, announced that all new issues
of Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs (which
are described below under - "Private Label Custody Receipt Securities"), and
investment banks no longer sponsor new issues of custodial receipts.
Treasury Strips may be either "serial" or "callable". A serial
treasury strip (a "Serial Treasury Strip") evidences ownership of one of the
periodic interest payments to be made on a Treasury Bond. No payments are made
on the Treasury Strip, nor is it redeemable, prior to its maturity, at which
time the holder becomes entitled to receive a single payment of the face amount
of the Treasury Strip . Callable Treasury Strips relate to payments scheduled to
be made after the related Treasury Bonds have become subject to redemption.
Callable Treasury Strips (the "Callable Treasury Strips") evidence ownership of
both principal of the related Treasury Bonds and each of the related interest
payments commencing, typically, on the first interest payment date following the
first optional redemption date. If the underlying Treasury Bonds are actually
redeemed, holders of callable Treasury Strips generally receive a payment equal
to the principal portion of the total face amount of these Treasury Strips plus
the interest payment represented by the Treasury Strips maturing on the
redemption date. No callable Treasury Strips will be included in a Trust. The
face amount of any Treasury Strip is the aggregate of all payments scheduled to
be received on that Treasury Strip. Treasury Strips are available in registered
form and generally may be transferred and exchanged by the holders of the
Treasury Strips in accordance with procedures applicable to the particular issue
of the applicable Treasury Strips.
GSE BONDS. As specified in the applicable prospectus supplement, the
obligations of one or more of the following GSEs may be included in Base Assets:
The Federal National Mortgage Association ("Fannie Mae"), The Federal Home Loan
Mortgage Association ("Freddie Mac"), The Student Loan Marketing Association
("Sallie Mae"), REFCO, Tennessee Valley Authority ("TVA"), The Federal Home Loan
Banks ("FHLB"), to the extent the obligations represent the joint and several
obligations of the twelve Federal Home Loan Banks, and The Federal Farm Credit
Banks ("FFCB"). GSE debt securities are exempt from registration under the
Securities Act pursuant to Section 3(a)(2) of the Securities Act ,or are deemed
by statute to be so exempt, and are not required to be registered under the
Exchange Act. The securities of any GSE will be included in Base Assets only to
the extent that:
o its obligations are supported by the full faith and credit of the
United States government, or
o the organization makes publicly available its annual report which
shall include financial statements or similar financial
information with respect to the organization (a "GSE Issuer").
Unless otherwise specified in the related prospectus supplement, the GSE Bonds
will not be guaranteed by the United States and do not constitute a debt or
obligation of the United States or of any agency or instrumentality of the
United States other than the related GSE.
Unless otherwise specified in the related prospectus supplement, none
of the GSE Bonds will have been issued pursuant to an indenture, and no trustee
is provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be governed
by a fiscal agency agreement. A Fiscal Agent is not a trustee for the holders of
the GSE Bonds and does not have the same responsibilities or duties to act for
the holders as would a trustee.
GSE Bonds may be subject to contractual and statutory restrictions
which may provide some protection to securityholders against the occurrence or
effects of specified events. Unless otherwise specified in the related
prospectus supplement, each GSE is limited to activities that will promote its
statutory purposes as set forth in the publicly available information with
respect to the issuer. A GSE's promotion of its statutory purposes, as well as
its statutory, structural and regulatory relationships with the federal
government, may cause or require a GSE to conduct its business in a manner that
differs from what an enterprise which is not a GSE might employ.
THE FEDERAL NATIONAL MORTGAGE ASSOCIATION. Fannie Mae is a federally
chartered and stockholder owned corporation organized and existing under the
Federal National Mortgage Association Charter Act. It is the largest investor in
home mortgage loans in the United States. Fannie Mae originally was established
in 1938 as a corporation wholly owned by the United States government to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder owned and privately managed corporation by legislation enacted in
1968 and 1970. Fannie Mae provides funds to the mortgage market by purchasing
mortgage loans from lenders, thus replenishing their funds for additional
lending.
Fannie Mae acquires funds to purchase loans from many capital market
investors that ordinarily may not invest in mortgage loans, consequently
expanding the total amount of funds available for housing. Operating nationwide,
Fannie Mae helps to redistribute mortgage funds from capital-surplus to
capital-short areas. Fannie Mae also issues mortgage-backed securities ("MBS").
Fannie Mae receives guaranty fees for its guaranty of timely payment of
principal of and interest on MBS. Fannie Mae issues MBS primarily in exchange
for pools of mortgage loans from lenders. The issuance of MBS enables Fannie Mae
to further its statutory purpose of increasing the liquidity of residential
mortgage loans.
Fannie Mae prepares an Information Statement annually which describes
Fannie Mae, its business and operations and contains Fannie Mae's audited
financial statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge from the Office of Investor Relations, Fannie Mae,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016; telephone (202)752-7115.
Fannie Mae is not subject to the periodic reporting requirements of the Exchange
Act.
THE FEDERAL HOME LOAN MORTGAGE CORPORATION. Freddie Mac is a publicly
held government-sponsored enterprise created on July 24, 1970 pursuant to the
Federal Home Loan Mortgage Corporation Act, Title III of the Emergency Home
Finance Act of 1970, as amended (the "FHLMC Act"). Freddie Mac's statutory
mission is to provide stability in the secondary market for home mortgages, to
respond appropriately to the private capital market and to provide ongoing
assistance to the secondary market for home mortgages, including mortgages
secured by housing for low- and moderate-income families involving a reasonable
economic return to Freddie Mac, by increasing the liquidity of mortgage
investments and improving the distribution of investment capital available for
home mortgage financing. The principal activity of Freddie Mac consists of the
purchase of conventional residential mortgages and participation interests in
conventional residential mortgages from mortgage lending institutions and the
sale of guaranteed mortgage securities backed by the mortgages so purchased.
Freddie Mac generally matches and finances its purchases of mortgages with sales
of guaranteed securities. Mortgages retained by Freddie Mac are financed with
short- and long-term debt, cash temporarily held pending disbursement to
security holders, and equity capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Freddie Mac. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained from Freddie Mac by writing or calling Freddie Mac's Investor
Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia, 22102; outside
Washington, D.C. metropolitan area, telephone (800) 336-3672; within Washington,
D.C. metropolitan area, telephone (703)759-8160. Freddie Mac is not subject to
the periodic reporting requirements of the Exchange Act.
THE STUDENT LOAN MARKETING ASSOCIATION. Sallie Mae is a
stockholder-owned corporation established by the 1972 amendments to the Higher
Education Act of 1965, as amended, to provide liquidity, primarily through
secondary market and warehousing activities, for lenders participating in
federally sponsored student loan programs, primarily the Federal Family
Education Loan ("FFEL") program and the Health Education Assistance Loan
Program. Under the Higher Education Act, Sallie Mae is authorized to purchase,
warehouse, sell and offer participations or pooled interests in, or otherwise
deal in, student loans, including, but not limited to, loans insured under the
FFEL program, and to make commitments for any of the foregoing. Sallie Mae is
also authorized to buy, sell, hold, underwrite and otherwise deal in obligations
of eligible lenders, if these obligations are issued by the eligible lenders for
the purpose of making or purchasing federally guaranteed student loans under the
Higher Education Act. As a federally chartered corporation, Sallie Mae's
structure and operational authorities are subject to revision by amendments to
the Higher Education Act or other federal enactments.
Sallie Mae prepares an Information Statement annually which describes
Sallie Mae, its business and operations and contains Sallie Mae's audited
financial statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge upon written request to the Corporate and Investor
Relations Division of Sallie Mae at 1050 Thomas Jefferson Street, N.W.,
Washington, D.C. 20007; telephone (202) 298-3010. Sallie Mae is not subject to
the periodic reporting requirements of the Exchange Act.
THE RESOLUTION FUNDING CORPORATION. REFCO is a mixed-ownership
government corporation established by Title V of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). The sole purpose of
REFCO is to provide financing for the Resolution Trust Corporation (the "RTC").
REFCO is to be dissolved, as soon as practicable, after the maturity and full
payment of all obligations issued by it. REFCO is subject to the general
oversight and direction of the Oversight Board, which is comprised of the
Secretary of the Treasury, the Chairman of the Board of Governors of the Federal
Reserve System, the Secretary of Housing and Urban Development and two
independent members to be appointed by the President with the advice and consent
of the Senate. The day-to-day operations of REFCO are under the management of a
three-member Directorate comprised of the Director of the Office of Finance of
the FHLB and two members selected by the Oversight Board from among the
presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases
involving failed savings and loan institutions pursuant to policies established
by the Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the
Secretary/Treasurer, Resolution Funding Corporation, Suite 1000, 11921 Freedom
Drive, Reston, Virginia 22090; telephone (703) 487-9517. REFCO is not subject to
the periodic reporting requirements of the Exchange Act.
THE FEDERAL HOME LOAN BANKS. The Federal Home Loan Banks constitute a
system of twelve federally chartered corporations, each wholly owned by its
member institutions. The mission of the FHLB is to enhance the availability of
residential mortgage credit by providing a readily available, low-cost source of
funds to their member institutions. A primary source of funds for the FHLB is
the proceeds from the sale to the public of debt instruments issued as
consolidated obligations, which are the joint and several obligations of all the
FHLB. The FHLB are supervised and regulated by the Federal Housing Finance
Board, which is an independent federal agency in the executive branch of the
United States government, but obligations of the FHLB are not obligations of the
United States government.
The Federal Home Loan Bank System produces annual and quarterly
financial reports in connection with the original offering and issuance by the
Federal Housing Finance Board of consolidated bonds and consolidated notes of
the FHLB. Unless otherwise specified in the applicable prospectus supplement,
questions regarding these financial reports should be directed to the Deputy
Director, Financial Reporting and Operations Division, Federal Housing Finance
Board, 1777 F Street, N.W., Washington, D.C. 20006; telephone (202) 408-2901.
Unless otherwise specified in the applicable prospectus supplement, copies of
these reports may be obtained by written request to Capital Markets Division,
Office of Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive,
Reston, Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to
the periodic reporting requirements of the Exchange Act.
TENNESSEE VALLEY AUTHORITY. TVA is a wholly owned corporate agency and
instrumentality of the United States of America established pursuant to the
Tennessee Valley Authority Act of 1933, as amended (the "TVA Act"). TVA's
objective is to develop the resources of the Tennessee Valley region in order to
strengthen the regional and national economy and the national defense. The
programs of TVA consist of power and nonpower programs. For the fiscal year
ending September 30, 1995, TVA received $139 million in congressional
appropriations from the federal government for the nonpower programs. The power
program is required to be self-supporting from revenues it produces. The TVA Act
authorizes TVA to issue evidences of indebtedness that may be serviced only from
proceeds of its power program. TVA bonds are not obligations of or guaranteed by
the United States government.
TVA prepares an Information Statement annually which describes TVA,
its business and operations and contains TVA's audited financial statements.
From time to time TVA prepares supplements to its Information Statement which
include unaudited financial data and other information concerning the business
and operations of TVA. Unless otherwise specified in the applicable prospectus
supplement, these documents can be obtained by writing or calling Tennessee
Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee 37902-1499,
Attention: Vice President and Treasurer; telephone (423) 632-3366. TVA is not
subject to the periodic reporting requirements of the Exchange Act.
FEDERAL FARM CREDIT BANKS. The Farm Credit System is a nationwide
system of lending institutions and affiliated service and other entities (the
"System"). Through its Banks ("FCBs") and related associations, the System
provides credit and related services to farmers, ranchers, producers and
harvesters of aquatic products, rural homeowners, some farm-related businesses,
agricultural and aquatic cooperatives and rural utilities. System institutions
are federally chartered under the Farm Credit Act of 1971, as amended (the "Farm
Credit Act"), and are subject to regulation by a Federal agency, the Farm Credit
Administration (the "FCA"). The FCBs and associations are not commonly owned or
controlled. They are cooperatively owned, directly or indirectly, by their
respective borrowers. Unlike commercial banks and other financial institutions
that lend to the agricultural sector in addition to other sectors of the
economy, under the Farm Credit Act the System institutions are restricted solely
to making loans to qualified borrowers in the agricultural sector, to some
related businesses and to rural homeowners. Moreover, the System is required to
make credit and other services available in all areas of the nation. In order to
fulfill its broad statutory mandate, the System maintains lending units in all
50 states and the Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the
sale of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable on all
Systemwide Debt Securities. Systemwide Debt Securities are issued by the FCBs
through the Federal Farm Credit Banks Funding Corporation, as agent for the FCBs
(the "Funding Corporation").
Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent to the most recently issued annual
statement and press releases issued from time to time by the Funding
Corporation. Unless otherwise specified in the applicable prospectus supplement,
this information and the Farm Credit System Annual Report to Investors for the
current and two preceding fiscal years are available for inspection at the
Federal Farm Credit Banks Funding Corporation, Investment Banking Services
Department, 10 Exchange Place, Suite 1401, Jersey City, New Jersey 07302;
telephone (201) 200-8000. Upon request, the Funding Corporation will furnish,
without charge, copies of the above information. The FCBs are not subject to the
periodic reporting requirements of the Exchange Act.
Private Label Custody Receipt Securities
If so specified in the applicable prospectus supplement, the Trust for
a Series may include any combination of Private Label Custody Strips and Private
Label Custody Receipt Securities. The Private Label Custody Receipt Securities,
if any, included in a Trust Fund are intended to assure investors that funds are
available to make specified payments of principal and/or interest due on the
related Securities. Accordingly, the Private Label Custody Receipt Securities,
if any, included in a Trust are intended both to:
o support the ratings assigned to the relavant Securities, and
o perform a function similar to that described in this Prospectus
under "Series Enhancement".
A description of the respective general features of Private Label Custody Strips
and REFCO Strips is set forth below.
The prospectus supplement, for each Series of Securities of the Trust
Fund with respect to which contains Private Label Custody Receipt Securities,
will contain information as to:
(a) the title and series of each relevant Private Label Custody
Receipt Security, the aggregate principal amount, denomination and form of that
Private Label Custody Receipt Security;
(b) the limit, if any, upon the aggregate principal amount of the
relevant Private Label Custody Receipt Security;
(c) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the relevant Private Label Custody
Receipt Security will be payable;
(d) the rate or rates, or the method of determination of the rate or
rates, at which the relevant Private Label Custody Receipt Security will bear
interest, if any, the date or dates from which the relevant interest will
accrue; and the dates on which the relevant interest will be payable;
(e) whether the relevant Private Label Custody Receipt Security was
issued at a price lower than the principal amount of that Private Label Custody
Receipt Security;
(f) material events of default or restrictive covenants provided for
with respect to the relevant Private Label Custody Receipt Security;
(g) the rating of the Private Label Custody Receipt Security, if any;
(h) the issuer of the relevant Private Label Custody Receipt Security;
(i) the material risks, if any, posed by the Private Label Custody
Receipt Security and the issuer of the Private Label Custody Receipt Security,
which risks, if appropriate, will be described in the "Risk Factors" section of
the related prospectus supplement; and
(j) any other material terms of the relevant Private Label Custody
Receipt Security.
With respect to a Trust which includes a pool of Private Label Custody Receipt
Securities, the related prospectus supplement will, to the extent applicable,
describe the composition of the Private Label Custody Receipt Securities' pool,
material events of default or restrictive covenants common to the Private Label
Custody Receipt Securities, and, on an aggregate, percentage or weighted average
basis, as applicable, the characteristics of the pool with respect to the terms
set forth in (c), (d) and (e) of the preceding sentence and any other material
terms regarding the pool.
The Private Label Custody Receipt Securities included in a Trust will
be senior, unsecured, nonredeemable obligations of the issuers of the Private
Label Custody Receipt Securities, will be denominated in United States dollars
and, if rated, will be rated at least investment grade by at least one
nationally recognized rating agency. In addition, the inclusion of Private Label
Custody Receipt Securities in a Trust with respect to a Series of Securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related Series of Securities. Each Trust which
includes Private Label Custody Securities will be provided with an opinion of
Stroock & Stroock & Lavan LLP or other counsel specified in the related
prospectus supplement to the effect that the Private Label Custody Receipt
Securities included in the Trust are exempt from the registration requirements
of the Securities Act. A copy of the related opinion will be filed with the SEC
in a Current Report on Form 8-K or in a post-effective amendment to the
Registration Statement.
PRIVATE LABEL CUSTODY STRIPS. The first "stripping" of Treasury Bonds
occurred in the 1970s when government securities dealers physically separated
coupons from definitive certificates (the "Definitive Certificates ") and
offered them to investors as tax-deferred investments. Investors were able to
purchase the "strip" at a deep discount and pay no federal income tax until
resale or maturity. This tax treatment was limited in 1982 by the Tax Equity and
Fiscal Responsibility Act ("TEFRA") which required holders of these strips to
accrue a portion of the discount toward par annually and report the accrual,
even though unrealized, as taxable income. TEFRA also required that all new
Treasury issues be made available only in book-entry form.
The shift to "book-entry only" Treasury Bonds created a shortage of
the physical certificates needed for stripping. In response, various dealers
created custodial receipt programs in which Treasury Bonds in book-entry form
were deposited with custodians who would then issue certificates evidencing
rights in principal and interest payments. Some of the better known programs
first came to market in 1982 and 1983. Although available eventually in
denominations as small as $1,000, these custodial receipts lacked the liquidity
of the physical strips. While physical strips had multiple market-makers,
custodial receipts were proprietary and, accordingly, the sole market-maker
would usually be an affiliate of the program's sponsor. As a result, the market
that developed for custodial receipts was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security known
as a TR (Treasury Receipt). A large secondary market quickly developed in these
generic Treasury Strips.
Treasury Receipts, physical strips and the proprietary receipts trade
at varying discounts from STRIPS which reflect, among other things, lower levels
of liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip, as opposed to a STRIP,
cannot enforce payment on a Treasury Strip against the Treasury; instead, the
holder must look to the custodian for payment. The custodian and the holder of a
Private Label Custody Strip that obtains ownership of the underlying Treasury
Bond can enforce payment of the underlying Treasury Bond against the Treasury.
In the event any Private Label Custody Strips are included in a Trust with
respect to any Series of Securities, the prospectus supplement for that Series
will include the identity and a brief description of each custodian that issued
the related Private Label Custody Strips. In the event the Company knows that
the depositor of the Treasury Bonds underlying the related Private Label Custody
Strips is the Company or any of its affiliates, the Company will disclose this
fact in the applicable prospectus supplement.
REFCO STRIPS. A REFCO Bond may be divided into its separate
components, consisting of:
o each future semi-annual interest distribution (an "Interest
Component"); and
o the principal payment (the "Principal Component") (each component
individually referred to as a "REFCO Strip").
REFCO Strips are not created by REFCO; instead, third parties such as investment
banking firms create them. Each REFCO Strip has an identifying designation and
CUSIP number. REFCO Strips generally trade in the market for Treasury Strips at
yields of a few basis points over Treasury Strips of similar maturities. REFCO
Strips are viewed generally by the market as liquid investments.
For a REFCO Bond to be separated into its components, the par amount
of the REFCO Bond must be in an amount which, based on the stated interest rate
of the REFCO Bond, will produce a semi-annual interest payment of $1,000 or an
integral multiple of $1,000. REFCO Bonds may be separated into their components
at any time from the issue date until maturity. Once created, REFCO Strips are
maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on that REFCO Strip
against REFCO; instead, the holder must look to the custodian for payment . This
custodian and the holder of a REFCO Strip who obtains ownership of the
underlying REFCO Bond can enforce payment of the underlying REFCO Bond against
REFCO. The identity and a brief description of each custodian that has issued
any REFCO Strip included in a Trust will be set forth in the related prospectus
supplement. In the event the Company knows that the depositor of the REFCO Bonds
underlying the REFCO Strips included in the Trust is the Company or any of its
affiliates, the Company will disclose this fact in the related prospectus
supplement.
Collection and Payment Accounts
A separate Collection Account will be established by the Trustee, or,
in the case of a Series that includes Notes, the Indenture Trustee, or by the
Servicer in the name of the Trustee, or the Indenture Trustee, for each Series
of Securities for receipt of the amount of cash, if any, specified in the
related prospectus supplement to be initially deposited in the same Collection
Account by the Depositor, all amounts received on or with respect to the Base
Assets and, to the extent specified in the related prospectus supplement, any
income earned on the Collection Account. Specified amounts on deposit in the
Collection Account and specified amounts available pursuant to any Series
Enhancement, as provided in the related prospectus supplement, will be deposited
in one or more related payment accounts (the "Payment Accounts "), which will
also be established by the Trustee, or the Indenture Trustee, for the related
Series of Securities, for payment to the related holders of these Securities.
The Trustee, or Indenture Trustee, will invest the funds in the Collection and
Payment Accounts in Eligible Investments maturing, with some exceptions, in the
case of funds in the Collection Account, not later than the day preceding the
date the related funds are due to be deposited in the applicable Payment Account
or otherwise paid, and in the case of funds in a Payment Account, not later than
the day preceding the next Payment Date for the related Class or Classes of
Securities. Eligible Investments include among other investments, obligations of
the United States and some agencies of the United States, federal funds,
certificates of deposits, commercial paper, demand and time deposits and
banker's acceptances, specified repurchase agreements of United States
government securities and specified guaranteed investment contracts, in each
case, acceptable to the applicable Rating Agencies.
From time to time, various other accounts, which may include a
Pre-Funding Account may be created under the terms of the documents related to a
specific Series.
SERIES ENHANCEMENT
For any Series of Securities, "Series Enhancement" may be provided
with respect to one or more Classes of the related Series of Securities. Series
Enhancement may consist of Credit Enhancement, Ancillary Arrangements, or both.
Credit Enhancement
"Credit Enhancement" with respect to a Series of Securities or one or
more specific Classes of a Series may take the form of the subordination of one
or more Classes of Securities to other Classes of the same Series, a letter of
credit, the establishment of a cash collateral guaranty or account, a surety
bond, insurance, the use of cross support features or another method of Credit
Enhancement described in the related prospectus supplement, or any combination
of the foregoing. If so specified in the related prospectus supplement, any form
of Credit Enhancement may be structured so as to be drawn upon by more than one
Class of Securities of a Series to the extent described in the applicable
prospectus supplement
Credit Enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
Securities and interest on the Securities. If losses occur which exceed the
amount covered by the Credit Enhancement or which are not covered by the Credit
Enhancement, holders of Securities will bear their allocable share of
deficiencies.
If Credit Enhancement is provided with respect to a Series, the
related prospectus supplement will include a description of:
o the amount payable under Credit Enhancement,
o any conditions to payment under the related prospectus supplement
not described in this Prospectus,
o the conditions, if any under which the amount payable under
Credit Enhancement may be reduced and under which Credit
Enhancement may be terminated or replaced; and
o any material provisions of any agreement relating to Credit
Enhancement.
Additionally, the related prospectus supplement may set forth specific
information with respect to the issuer of any third-party Credit Enhancement,
including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business, and
o its total assets and its stockholders' or policyholders' surplus,
if applicable, as of the date specified in the related prospectus
supplement.
If so specified in the related prospectus supplement, the issuer of a
third party Credit Enhancement may have a subordinated interest in the Trust,
the Receivables or cash flows in respect of the Receivables to the extent
described in the related prospectus supplement (the "Enhancement Invested
Amount").
Subordination
If so specified in the related prospectus supplement, one or more
Series of Securities or one or more Classes of Securities of a Series or one or
more classes of other certificated or uncertificated interests in the assets of
the related Trust ("Collateral Indebtedness Interests") may be subordinated to
one or more other Series or one or more Classes of a Series. If so specified in
the related prospectus supplement, the rights of holders of the subordinate
Securities or Collateral Indebtedness Interests to receive distributions of
principal and/or interest on any Payment Date will be subordinated to the rights
of the holders of the Securities which are senior to the subordinate Securities
or Collateral Indebtedness Interests to the extent set forth in the related
prospectus supplement. The related prospectus supplement will also set forth
information concerning the amount of subordination of a Series or Class of
subordinate Securities or Collateral Indebtedness Interests, the circumstances
in which this subordination will be applicable, the manner, if any, in which the
amount of subordination will decrease over time and the conditions under which
amounts available from payments that would otherwise be made to holders of
subordinate Securities or Collateral Indebtedness Interests will be distributed
to holders of Securities which are senior to the subordinate Securities or
Collateral Indebtedness Interests. The amount of subordination will decrease
whenever amounts otherwise payable to the holders of subordinate Securities or
Collateral Indebtedness Interests are paid to the holders of the Securities
which are senior to these subordinated Securities or Collateral Indebtedness
Interests. If so specified in the related prospectus supplement, subordination
may apply only in the event of specific types of losses not covered by another
Credit Enhancement.
Letter of Credit
If so specified in the related prospectus supplement, support for a
Series of Securities or one or more Classes of a Series may be provided by one
or more letters of credit. A letter of credit may provide limited protection
against specific losses in addition to or in lieu of another form of Credit
Enhancement. The issuer of the letter of credit named in the related prospectus
supplement (the "L/C Bank") will be obligated to honor demands with respect to
the letter of credit, to the extent of the amount available under the letter of
credit, to provide funds under the circumstances and subject to conditions
specified in the related prospectus supplement. The liability of the L/C Bank
under its letter of credit may be reduced by the amount of unreimbursed payments
under that same letter of credit.
The maximum liability of a L/C Bank under its letter of credit will
generally be an amount equal to a percentage specified in the related prospectus
supplement of the initial principal amount of a Series of Securities or a Class
of a Series. The maximum amount available at any time to be paid under a letter
of credit will be determined in the manner specified in the letter of credit and
in the related prospectus supplement.
Cash Collateral Guaranty or Cash Collateral Account
If so specified in the related prospectus supplement, support for a
Series of Securities or one or more Classes of a Series may be provided by a
guaranty (a "Cash Collateral Guaranty") secured by the deposit of cash,
government securities or other permitted investments in an account (a "Cash
Collateral Account") reserved for the beneficiaries of the Cash Collateral
Guaranty, or by a Cash Collateral Account alone. A Cash Collateral Account will
generally take the form of a cash collateral trust formed pursuant to a trust
agreement involving a cash collateral depositor and a cash collateral trustee.
The Cash Collateral Guaranty will generally be an obligation of the cash
collateral trust and not of the cash collateral depositor, the cash collateral
trustee, except to the extent of amounts on deposit in the Cash Collateral
Account, or the related Trustee, Indenture Trustee, Seller, Servicer or the
Depositor. The amount available pursuant to a Cash Collateral Guaranty or a Cash
Collateral Account will be the lesser of the amount on deposit in the Cash
Collateral Account and an amount specified in the related prospectus supplement.
The related prospectus supplement will set forth the circumstances under which
payments will be made to beneficiaries of a Cash Collateral Guaranty from the
related Cash Collateral Account or from the Cash Collateral Account directly.
Reserve Account
If so specified in the related prospectus supplement, the Depositor
may deposit cash, a letter or letters of credit, short-term investments,
government securities or other instruments acceptable to the applicable Rating
Agency or Rating Agencies in one or more reserve accounts (each, a "Reserve
Account") to be established in the name of the Trustee, or the Indenture
Trustee. A Reserve Account will be used, as specified in the related prospectus
supplement, by the Trustee, or the Indenture Trustee, to make required payments
of principal of or interest on the Securities of the related Series or one or
more Classes of the Series, to make adequate provision for future payments on
one or more Classes of the Securities or for any other purpose specified in the
applicable Agreement with respect to the Series, to the extent that funds are
not otherwise available for that purpose. In the alternative or in addition to a
deposit, a Reserve Account for a Series may be funded through application of all
or a portion of the excess cash flow from the Base Assets for the Series, to the
extent described in the related prospectus supplement. If applicable, the
initial amount of the Reserve Account and the Reserve Account maintenance
requirements for a Series will be described in the related prospectus
supplement. Amounts deposited in a Reserve Account will be invested by the
Trustee, or the Indenture Trustee, in Eligible Investments meeting specified
maturity criteria.
Surety Bond or Insurance Policy
If so specified in the related prospectus supplement, Credit
Enhancement for a Series or one or more Classes of Securities of a Series may be
provided by the issuance of insurance by one or more insurance companies. The
insurance will guarantee distributions of interest or principal on the affected
Securities in the manner and amount specified in the related prospectus
supplement.
If so specified in the related prospectus supplement, Credit
Enhancement for a Series or one or more Classes of Securities of a Series may
take the form of a surety bond purchased for the benefit of the holders of the
related Securities to assure distributions of interest or principal with respect
to the related Securities in the manner and amount specified in the related
prospectus supplement.
Spread Account
If so specified in the related prospectus supplement, support for a
Series or one or more Classes of Securities of a Series may be provided by the
periodic deposit of available excess cash flow from the Trust assets into an
account (the "Spread Account") intended to assure the subsequent distribution of
interest and principal on the related Securities in the manner specified in the
prospectus supplement.
Ancillary Arrangements
If so specified in the related prospectus supplement, the Trust may
enter into one or more derivative arrangements that are related to or incidental
to one or more of the Base Assets for a Series ("Ancillary Arrangements").
Ancillary Arrangements may take the form of guaranteed rate agreements, maturity
liquidity facilities, tax protection agreements, interest rate caps, floor or
collar agreements, interest rate or currency swap agreements or other similar
arrangements. If so specified in the related prospectus supplement, Ancillary
Arrangements may be entered into with the Depositor or an affiliate of the
Depositor. The related prospectus supplement will to the extent appropriate
contain analogous disclosure with respect to any Ancillary Arrangements as is
set forth in this Prospectus or in the related prospectus supplement with
respect to the Base Assets.
SERVICING OF RECEIVABLES
Customary servicing functions with respect to any Receivables included
in the Base Assets for a Series or underlying any Participations included in the
Base Assets will be provided by the Servicer named in the related prospectus
supplement pursuant to the related Pooling and Servicing Agreement. In general,
comparable servicing functions will be performed by the WALTR Servicer with
respect to the Receivables underlying any WALTR Securities included in the Base
Assets.
Collection Procedures
The Servicer will make reasonable efforts to collect all payments
required to be made under the Accounts and will, consistent with the terms of
the related Pooling and Servicing Agreement for a Series and any applicable
Credit Enhancement, follow the same collection procedures as it follows with
respect to comparable receivables held in its own portfolio.
Deposits to the Collection Account
The Servicer will deposit, subject to some exceptions which, if
applicable, will be specified in the related prospectus supplement, any
collections on the Receivables in a monthly period (the "Monthly Period"), which
period will be defined for each Servicer in the related prospectus supplement,
into the Collection Account within two business days of the Date of Processing,
or, in the case of interchange, on each Distribution Date, to the extent the
collections are allocable among the Certificateholders of the Series (the
"Investor Certificateholders' Interest ") of any Series and are required to be
deposited into an account for the benefit of, or distributed to, the Investor
Certificateholders of any Series or the issuer of any Series Enhancement. In
limited circumstances, the Servicer will not be required to segregate, and will
be permitted to use for its own benefit collections on the Receivables received
by it during each Monthly Period until the related Distribution Date. The
"Distribution Date" for each calendar month will be specified in the prospectus
supplement. To the extent and in the manner specified in the related prospectus
supplement and subject to specific exceptions that will be described in the
applicable prospectus supplement, on the earlier of:
o the second business day following the Date of Processing, and
o the day on which the Servicer deposits any collections into the
Collection Account.
The Servicer will pay to the holder of the Depositor Certificate its allocable
portion of any collections then held by the Servicer. The "Date of Processing"
will generally be the business day on which a record of any transaction is first
recorded on the Servicer's computer file of consumer revolving accounts, without
regard to the effective date of recordation.
To the extent and in the manner specified in the related prospectus
supplement, the Servicer will establish the Collection Account in the name of
the Trustee or, for a Series that includes Notes, the Indenture Trustee. To the
extent and in the manner indicated in the related prospectus supplement, the
Collection Account will be an account maintained:
o at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit in the depository
institution are rated as described in the related prospectus
supplement and as specified by the Rating Agencies rating the
Securities of the Series, or
o 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 the Rating Agencies.
To the extent and in the manner specified in the related prospectus
supplement, the funds held in the Collection Account may be invested, pending
remittance to the Trustee, or the Indenture Trustee, in Eligible Investments. If
so specified in the related prospectus supplement, the Servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the Collection Account. The related prospectus supplement will describe
the obligations of the Servicer, if different from those described above, the
Seller, the Trustee, the Indenture Trustee and/or the Depositor to deposit
payments and/or collections received by them in respect of the Trust assets into
the Collection Account. In addition, to the extent so provided in the related
prospectus supplement, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited in the Collection Account, it
may, at any time, withdraw that amount from the related Collection Account.
Servicing Compensation and Payment of Expenses
The related prospectus supplement may provide that the Servicer will
be entitled to receive a servicing fee in an amount to be determined as
specified in the related prospectus supplement (the "Servicing Fee"). The
Servicing Fee may be fixed or variable, as specified in the related prospectus
supplement.
As specified in the related prospectus supplement, the Servicer may be
required to pay expenses incurred in connection with the servicing of the
Receivables including, without limitation, the payment of the fees and expenses
of the Trustee, and Indenture Trustee, and independent accountants, payment of
the cost of any Series Enhancement and payment of expenses incurred in
preparation of reports to holders of Securities. To the extent specified in the
related prospectus supplement, 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 expenses or otherwise, may be
subordinated to the rights of holders of the Securities of the related Series.
Evidence as to Compliance
The Pooling and Servicing Agreement for a Series may provide that,
each year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that the firm has examined specific documents and
records relating to the servicing of the Receivables by the Servicer and that,
on the basis of this examination, the firm is of the opinion that the servicing
has been conducted in compliance with the Pooling and Servicing Agreement,
except for:
o exceptions the firm believes to be immaterial, and
o other exceptions set forth in a related statement.
The Pooling and Servicing Agreement for a Series will provide for delivery to
the Trustee for the Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its obligations under the
Pooling and Servicing Agreement throughout the preceding calendar year.
Comparable statements and reports may be required to be delivered to the
Indenture Trustee pursuant to any Indenture relating to this Series.
CERTAIN MATTERS REGARDING THE SERVICER
Any Servicer for a Series will be identified in the related prospectus
supplement. The Servicer may be an affiliate of the Seller or the Depositor and
may have other business relationships with the Seller, the Depositor or their
respective affiliates.
If specific events (each a "Servicer Default") occur with respect to
the Servicer under an applicable Agreement, the related Trustee, or a specified
percentage of the holders of Securities or of each Class of Securities as set
forth in the related prospectus supplement may terminate the Servicer, in which
case the Trustee will appoint a successor Servicer. Servicer Defaults and the
rights of the Trustee and the holders of Securities upon the occurrence of a
Servicer Default under the applicable Agreement for a Series will be
substantially similar to those described under "Description of the Trust
Agreements or Pooling and Servicing Agreements-- Servicer Defaults" and "--
Rights upon Servicer Defaults" or will be as described in the related prospectus
supplement.
The Servicer generally may not resign from its obligations and duties
under the applicable Agreement, except:
(a) upon determination that,
(1) the performance of its duties under the Pooling and Servicing
Agreement is no longer permissible under applicable law, and
(2) there is no reasonable action which the Servicer could take
to make the performance of its duties under the applicable
Agreement permissible under applicable law,
(b) in connection with a conveyance, consolidation or merger by the
Servicer with any corporation, or conveyance or transfer of its
properties or assets substantially as an entirety to any other person
permitted under the applicable Agreement, or
(c) upon the satisfaction of the following conditions:
(1) the acceptance and assumption, by agreement supplemental to
the applicable Agreement, executed and delivered to the Trustee,
in form satisfactory to the Trustee, of the obligations and
duties of the Servicer under the related supplemental agreement
by a proposed successor Servicer,
(2) the Servicer having given written notice to each applicable
Rating Agency of a transfer and each Rating Agency having
notified the Servicer in writing to the effect that its then
current rating of the Securities of any Series will not be
reduced or withdrawn as a result of the transfer,
(3) the provider of Credit Enhancement, if any, having consented
in writing to a transfer consent not to be unreasonably withheld,
and
(4) the proposed successor Servicer being an Eligible Servicer.
Notwithstanding anything in the Pooling and Servicing Agreement to the contrary,
any successor Servicer appointed under clause (c) will be deemed to be a
successor Servicer. Any determination permitting the resignation of the Servicer
will be evidenced as to clause (a) above by an opinion of counsel to that effect
delivered to the Trustee. No resignation will become effective until the Trustee
or a successor Servicer shall have assumed the responsibilities and obligations
of the Servicer in accordance with the Pooling and Servicing Agreement.
"Eligible Servicer" means the Trustee, or the Indenture Trustee, or an
entity which, at the time of its appointment as Servicer:
(a) is an established financial institution having capital or a net
worth of not less than $100,000,000,
(b) is servicing a portfolio of, unless otherwise specified in the
related prospectus supplement, Products,
(c) is legally qualified and has the capacity to service the Accounts,
(d) has demonstrated the ability to professionally and completely
service a portfolio of similar accounts in accordance with standards
of skill and care customary in the industry, and
(e) is qualified to use the software that is then currently being used
to service the Accounts or obtains the right to use or has its own
software which is adequate to perform its duties under the Pooling and
Servicing Agreement.
Indemnification
Except to the extent otherwise provided in the Pooling and Servicing
Agreement, each Pooling and Servicing Agreement will provide that the Servicer
will indemnify the Trust, the Trustee and the holders of all Securities of a
Series from and against any loss, liability, expense, damage or injury suffered
or sustained by reason of any acts, omissions or alleged acts or omissions
arising out of activities of the Servicer with respect to the Trust or the
Trustee or any co-trustee pursuant to the Pooling and Servicing Agreement,
including those arising from acts or omissions of the Servicer pursuant to the
Pooling and Servicing Agreement, including but not limited to any judgment,
award, settlement, reasonable attorneys' fees and other costs or expenses
incurred in connection with the defense of any actual or threatened action,
proceeding or claim; provided, however, that the Servicer shall not indemnify:
o the Trust or the Trustee if any acts, omissions or alleged acts
or omissions constitute fraud, gross negligence, breach of
fiduciary duty or misconduct by the Trustee;
o the Trust, the Trustee or the holders of Securities for any
liability, cost or expense of the Trust with respect to any
action taken by the Trust at the request of the holders in
accordance with the Pooling and Servicing Agreement or with
respect to any Federal, state or local income or franchise taxes,
or any interest or penalties with respect to state or local
income or franchise taxes required to be paid by the Trust or by
holders to any taxing authority; or
o the Trust or the holders for any losses incurred by any of them
as a result of defaulted Receivables or Receivables which are
written off as uncollectible unless the write-off is caused by a
breach of the Pooling and Servicing Agreement by the Servicer.
Subject to exceptions in the Pooling and Servicing Agreement, any
indemnification pursuant to the Pooling and Servicing Agreement will be only
from the assets of the Servicer.
DESCRIPTION OF THE NOTES
The following summaries describe the material provisions of the
Indentures which are anticipated to be common to any Notes included in a 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
related Notes and the Indenture. Where particular provisions or terms used in
the Notes or Indentures are referred to in this Prospectus, the actual
provisions, including definitions of terms, are incorporated in this Prospectus
by reference as part of the summaries. The Notes included in any Series will be
issued in one or more Classes. The Notes will only be issued 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 Notes of a Series, as described in the related
prospectus supplement, the transfer of the Notes may be registered, and the
instruments evidencing the Notes may be exchanged, at the office of the
registrar, which may be the Indenture Trustee, appointed from time to time
pursuant to the Indenture (the "Registrar") without the payment of any service
charge other than any tax or governmental charge payable in connection with the
registration of transfer or exchange. If specified in the related prospectus
supplement, one or more Classes of Notes of a Series may be available in
book-entry form only.
Payments of principal of and interest, if any, on the Notes of a
Series will be made on the dates specified in the related prospectus supplement
(the "Payment Dates") by check mailed to holders of these Notes, registered at
the close of business on the record date applicable to the Payment Dates at
their addresses appearing on the register of Notes for the related Series or in
any other manner specified in the related prospectus supplement, except that:
o payments may be made by wire transfer, at the expense of the
Noteholder requesting payment by wire transfer, in specific
circumstances described in the related prospectus supplement, and
o final payments of principal in retirement of any Note will be
made only upon presentation and surrender of the Note at the
office of the Indenture Trustee specified in the related
prospectus supplement.
Notice of the final payment on a Note will be mailed to the holder of the Note
before the Payment Date on which the final principal payment on any Note is
expected to be made to the holder of that Note.
Payments of principal of and interest on the Notes will be made by the
Indenture Trustee, or a paying agent provided for under the Indenture, as
specified in the related prospectus supplement.
Payments of Interest and Principal
Each Class of Notes of a Series will have a stated principal amount,
notional amount or no principal amount and will bear interest at a specified
"Note Interest Rate " or will not bear interest. Each Class of Notes may have a
different Note Interest Rate, which may be fixed, variable or an adjustable Note
Interest Rate, or any combination of the foregoing. The Notes included in any
Series may include one or more Classes of Notes entitled to:
o principal payments with disproportionate, nominal or no interest
payments, or
o interest payments with disproportionate, nominal or no principal
payments.
The related prospectus supplement will specify the Note Interest Rate for each
Class of Notes or the method for determining the Note Interest Rate. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of one or more other Class
or Classes of Notes of the related Series, as described in the related
prospectus supplement. The prospectus supplement may specify that payments of
interest, if any, on Notes will be made prior to payments of principal on the
Notes or any other order or priority as shall be specified in the related
prospectus supplement.
One or more Classes of Notes of a Series may be redeemable in whole or
in part under the circumstances specified in the related prospectus supplement,
including as the result of the exercise by the Servicer, the Seller or the
Depositor of any option that it may have to purchase the Base Assets of the
related Trust. To the extent specified in the related prospectus supplement, one
or more Classes of Notes of a Series may have fixed principal payment schedules
as set forth in the prospectus supplement. Holders of Notes will have the right
to receive payments of principal on any given Payment Date in the applicable
amount set forth in the related schedule with respect to the Notes. Notes may
also be subject to prepayment of principal to the extent set forth in the
related prospectus supplement.
With respect to a Series that includes two or more Classes of Notes,
each Class may differ as to the timing and priority of payments, seniority,
allocations of losses, Note Interest Rates or amount of payments of principal or
interest, and payments of principal or interest in respect of any related Class
or Classes may be subject to the occurrence of specified events or may be made
on the basis of collections from designated portions of the Base Assets. If
specified in the related prospectus supplement, one or more Classes of Notes
("Strip Notes") may be entitled to:
o principal payments with disproportionate, nominal or no interest
payments, or
o interest payments with disproportionate, nominal or no principal
payments.
Provisions of the Indenture
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. "Events of Default"
in respect of a Series of Notes under the related Indenture will consist of
events specified in the related prospectus supplement, which events will
include:
(a) a default for five days or more in the payment of any interest on
any Note;
(b) a default in the payment of the principal of, or any installment
of the principal of, any Note when the same becomes due and payable;
(c) a default by the related Trust in the observance or performance in
any material respect of any covenant or an applicable agreement made in the
related Indenture and the continuation of any default for a period of 30 days
after notice of default is given to the related Trust by the applicable
Indenture Trustee or to the related Trust and the related Indenture Trustee by
the holders of 25% of the aggregate outstanding principal amount of the Notes;
(d) any representation or warranty made by the related Trust in the
related Indenture or in any certificate delivered pursuant to the related
Indenture or in connection with the related Indenture having been incorrect in
any material respect as of the time made, if the breach is not cured within 30
days after notice of the breach is given to the related Trust by the applicable
Indenture Trustee or to the related Trust and the related Indenture Trustee by
the holders of 25% of the aggregate outstanding principal amount of the Notes;
(e) events of bankruptcy, insolvency, receivership or liquidation with
respect to the Trust; or
(f) any other events as shall be specified in the related prospectus
supplement.
The amount of principal required to be paid to Noteholders of each Series under
the related Indenture on any Payment Date generally will be limited to amounts
available to be deposited in the applicable Payment Account; therefore, the
failure to pay principal on a Class of Notes generally will not result in the
occurrence of an Event of Default until the applicable final scheduled Payment
Date for the related Class of Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any Series, the related Indenture Trustee or holders of a majority
in principal amount of the Notes may declare the principal of the Notes to be
immediately due and payable. A declaration may, under some circumstances, be
rescinded by the holders of a majority in principal amount of the Notes then
outstanding. If the Notes of any Series are declared due and payable following
an Event of Default, the related Indenture Trustee may institute proceedings to
collect amounts due on the Notes, foreclose on the property of the Trust,
exercise remedies as a secured party, sell the related Base Assets or elect to
have the applicable Trust maintain possession of the related Base Assets and
continue to apply collections on these Base Assets as if there had been no
declaration of acceleration. The Indenture Trustee, however, will be prohibited
from selling the Base Assets following an Event of Default, other than a default
in the payment of any principal of, or a default for five days or more in the
payment of any interest on, any Note of the related Series, unless one of the
conditions specified in the related prospectus supplement are met, which
conditions generally will include:
(a) the holders of all outstanding Notes consent to the sale,
(b) the proceeds of the sale are sufficient to pay in full the
principal of and the accrued and unpaid interest on related outstanding Notes at
the date of the sale, or
(c) the related Indenture Trustee determines that the proceeds of the
Base Assets would not be sufficient on an ongoing basis to make all payments on
the Notes as payments would become due if the obligations had not been declared
due and payable, and the related Indenture Trustee obtains the consent of the
holders of 66 2/3% of the aggregate outstanding principal amount of the Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default occurs and is
continuing with respect to a Series of Notes, the related Indenture Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the related Notes
if it reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities that might be incurred by it in complying with
the request. Subject to the provisions for indemnification and limitations
contained in the related Indenture, the holders of a majority of the aggregate
outstanding principal amount of the Notes of a Series will have the right to
direct the time, method and place of conducting any proceeding or exercising any
remedy available to the related Indenture Trustee; in addition, the holders of
Notes representing a majority of the aggregate outstanding principal amount of
the related Notes may, in some cases, waive any default with respect to the
related Notes, except a default in the payment of principal of or interest on
any Note or a default in respect of a covenant or provision of the related
Indenture that cannot be modified or amended without the waiver or consent of
the holders of all the outstanding Notes of the Series.
No holder of a Note will have the right to institute any proceeding
with respect to the related Indenture, unless specified conditions in the
Indenture have been satisfied, which conditions generally will include:
(a) the holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default;
(b) the holders of not less than 25% of the outstanding principal
amount of the Notes have made written request to the related Indenture Trustee
to so institute the proceeding in its own name as Indenture Trustee;
(c) the holder or holders have offered the related Indenture Trustee
reasonable indemnity;
(d) the related Indenture Trustee has for 60 days failed to institute
the proceeding; and
(e) no direction inconsistent with the written request has been given
to the related Indenture Trustee during the 60-day period by the holders of a
majority of the outstanding principal amount of the Notes of the Series.
With respect to any Series of Securities that includes Notes, none of
the related Indenture Trustee in its individual capacity, the related Trustee in
its individual capacity, any holder of a Certificate representing an ownership
interest in the related Trust or any other holder of an interest in the related
Trust, or any of their respective beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of a related
express agreement to the contrary, be personally liable for the payment of the
principal of or interest on the related Notes or for the applicable agreements
of Trust contained in the related Indenture.
No Trust may engage in any activity other than as described in this
Prospectus or in the related prospectus supplement. Except as and to the extent
provided in the related prospectus supplement, no Trust will incur, assume or
guarantee any indebtedness other than indebtedness incurred pursuant to the
related Notes and the related Indenture.
COVENANTS. Each Indenture will provide that the related Trust may not
consolidate with or merge into any other entity, unless specific conditions,
which shall be specified in the related Indenture shall be satisfied, which
conditions generally will include:
(a) the entity formed by or surviving consolidation or merger is
organized under the laws of the United States, any state of the United
States or the District of Columbia;
(b) the entity expressly assumes the related Trust's obligation to
make due and punctual payments upon the Notes of the related Series
and to perform or observe every appliable agreement and covenant of
the related Trust under the Indenture;
(c) no Event of Default shall have occurred and be continuing
immediately after merger or consolidation;
(d) the Trust has been advised by each Rating Agency that merger or
consolidation will not result in the qualification, reduction or
withdrawal of its then-current rating of any Class of the Notes or
Certificates of the Series;
(e) the related Trust has received an opinion of counsel to the effect
that consolidation or merger would have no material adverse tax
consequence to the Trust or to any related Noteholder or
Certificateholder;
(f) any action that is necessary to maintain the lien and security
interest created by this Indenture will have been taken; and
(g) the Trust will have delivered to the Indenture Trustee an
officer's certificate and an opinion of counsel each stating that
consolidation or merger and supplemental indenture comply with the
covenants of the Indenture and that all conditions precedent provided
for in the Indenture relating to the transaction have been complied
with.
No Trust relating to a Series of Securities that includes Notes will:
(a) except as expressly permitted by the applicable Indenture, the
applicable Trust Agreement or Pooling and Servicing Agreement or other
documents with respect to the related Trust (the "Related Documents"),
sell, transfer, exchange or otherwise dispose of any of the assets of
the related Trust;
(b) claim any credit on or make any deduction from principal and
interest payments in respect of the related Notes, other than amounts
withheld under the Code or applicable state tax laws or assert any
claim against any present or former holder of the related Notes
because of the payment of taxes levied or assessed upon the related
Trust;
(c) dissolve or liquidate in whole or in part;
(d) permit the validity or effectiveness of the related Indenture to
be impaired or permit any person to be released from any covenants or
obligations with respect to the related Notes under the related
Indenture except as may be expressly permitted by the related
Indenture;
(e) permit any lien, charge, excise, claim, security interest,
mortgage, or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the related Trust or any
part of the related Trust, or any interest in the related Trust or the
proceeds; or
(f) permit the lien of the related Indenture not to constitute a valid
first priority security interest, other than with respect to a tax,
mechanics' or similar lien, in the assets of the related Trust.
Each Indenture Trustee and the related Noteholders, by accepting the
related Notes, will covenant that they will not at any time institute against
the applicable Trust any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law.
MODIFICATION OF INDENTURE. The Trust and the related Indenture Trustee
may, with the consent of the holders of a majority of the aggregate outstanding
principal amount of the Notes of the related Series, execute a supplemental
indenture to add provisions to, change in any manner or eliminate any provisions
of, the related Indenture, or modify, except as provided below, in any manner
the rights of the related Noteholders, provided that, subject to exceptions
which, if applicable, will be specified in the related prospectus supplement,
without the consent of the holder of each outstanding Note affected by the
related Indenture, no supplemental indenture will:
(a) change the due date of any installment of principal of or interest
on any related Note or reduce the principal amount of any related
Note, the interest rate specified on the related Note or the
redemption price with respect to the related Note or change any place
of payment where or the coin or currency in which any related Note or
any interest on the related Note is payable;
(b) impair the right to institute suit for the enforcement of specific
provisions of the related Indenture regarding payment;
(c) reduce the percentage of the aggregate amount of the outstanding
Notes of the related Series, the consent of the holders of which is
required for any supplemental indenture or for any waiver of
compliance with specific provisions of the related Indenture or of
specific defaults under the related Indenture and their consequences
as provided for in the related Indenture;
(d) modify or alter the provisions of the related Indenture regarding
the voting of Notes held by the applicable Trust, any other obligor on
the related Notes, the Seller or an affiliate of any of them;
(e) reduce the percentage of the aggregate outstanding amount of the
related Notes, the consent of the holders of which is required to
direct the related Indenture Trustee to sell or liquidate the Base
Assets in the Trust if the proceeds of the sale would be insufficient
to pay the principal amount and accrued and unpaid interest on the
outstanding Notes of the related Series;
(f) decrease the percentage of the aggregate principal amount of the
related Notes required to amend the sections of the related Indenture
that specify the percentage of the aggregate principal amount of the
Notes of the Series necessary to amend the related Indenture or other
related Agreements; or
(g) permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the related Notes or, except as otherwise permitted or
contemplated in the related Indenture, terminate the lien of the
related Indenture on any related collateral or deprive the holder of
any the related Note of the security afforded by the lien of the
related Indenture.
The Trust and the related Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Noteholders of the
related Series, for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of the related
Indenture or of modifying in any manner the rights of the Noteholders; provided
that this action will not materially and adversely affect the interest of any
related Noteholder.
ANNUAL COMPLIANCE STATEMENT. Each Trust for a Series of Securities
that includes Notes will be required to file annually with the related Indenture
Trustee a written statement as to the fulfillment of its obligations under the
related Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The Indenture Trustee for each
Trust for a Series of Securities that includes Notes will be required to mail
each year to all related Noteholders a brief report relating to its eligibility
and qualification to continue as Indenture Trustee under the related Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of indebtedness owing by the related Trust to the applicable
Indenture Trustee in its individual capacity, the property and funds physically
held by the related Indenture Trustee as such and any action taken by it that
materially affects the related Notes that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. Each Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all related Notes
or, with limitations, upon deposit with the related Indenture Trustee of funds
sufficient for the payment in full of all related Notes.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the related Trust will be obligated to appoint a
successor indenture trustee for the related Series. The Trust may also remove
the related Indenture Trustee if the related Indenture Trustee ceases to be
eligible to continue as Indenture Trustee under the related Indenture or if the
related Indenture Trustee becomes insolvent. In these circumstances, the related
Trust will be obligated to appoint a successor indenture trustee for the
applicable Series of Notes. No resignation or removal of the Indenture Trustee
and appointment of a successor indenture trustee for a Series of Notes will
become effective until the acceptance of the appointment by the successor
indenture trustee for the related Series.
DESCRIPTION OF THE CERTIFICATES
The following summaries describe the material provisions in the
applicable Agreements which generally are anticipated to be common to the Trust
Agreements and to the Pooling and Servicing Agreement. 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 prospectus supplement and Agreement
relating to each Series of Certificates. Where particular provisions or terms
used in the related Certificates or Agreements are referred to in this
Prospectus, the actual provisions, including definitions of terms, are
incorporated in this Prospectus by reference as part of the summaries.
The related prospectus supplement will provide that each Class of
Certificates will have an original principal amount, no principal amount or
notional amount and will accrue interest on the original principal amount or
notional amount at a specified Certificate Interest Rate or will not bear
interest. Each Class of Certificates may have a different Certificate Interest
Rate, which may be a fixed, variable or adjustable Certificate Interest Rate, or
any combination of the foregoing. The related prospectus supplement will specify
the Certificate Interest Rate, or the method for determining the applicable
Certificate Interest Rate, for each Class of Certificates.
A Series of Securities may include two or more Classes of Certificates
that differ as to timing and priority of distributions, seniority, allocations
of losses, Certificate Interest Rate or amount of distributions in respect of
principal or interest. Additionally, distributions in respect of principal or
interest in respect of any Class or Classes may or may not be made upon the
occurrence of specified events or on the basis of collections from designated
portions of the related Base Assets. If specified in the related prospectus
supplement, one or more Classes of Certificates may be Strip Certificates. If a
Series of Securities includes 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.
Certificates will be available for purchase in a minimum denomination
of $100,000 or other minimum denominations as the prospectus supplement shall
provide and in integral multiples of $1,000 in excess of the minimum
denominations and will be available in book-entry form or if provided in the
related prospectus supplement, as Definitive Certificates. If the Certificates
will be available in book-entry form only, the related prospectus supplement
will provide that Certificateholders will be able to receive Definitive
Certificates only in the limited circumstances described in this Prospectus or
in the related prospectus supplement. The Certificates 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
Certificates of a Series, as described in the related prospectus supplement, the
transfer of the Certificates may be registered and the Certificates may be
exchanged at the office of the Trustee specified in the related prospectus
supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange.
Payments of principal of and interest, if any, on the Certificates of
a Series will be made on the dates specified in the related prospectus
supplement by check mailed to Certificateholders of the related Series,
registered as Certificateholders of the Series at the close of business on the
record date applicable to each Payment Date at their addresses appearing on the
register of Certificates for the related Series or in any other manner as shall
be specified in the related prospectus supplement, except that:
o payments may be made by wire transfer, at the expense of the
Certificateholder requesting payment by wire transfer, in
circumstances described in the related prospectus supplement, and
o final payments of principal in retirement of any Certificate will
be made only upon presentation and surrender of the related
Certificate at the office of the Trustee specified in the related
prospectus supplement.
Notice of the final payment on a Certificate will be mailed to the holder of the
Certificate before the Payment Date on which the final principal payment on any
Certificate is expected to be made to the holder of that Certificate.
Payments of principal of and interest, if any, on the Certificates
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
Base Assets for a Series, together with reinvestment income on these payments,
amounts withdrawn from any Reserve Account and amounts available pursuant to any
other Series Enhancement generally will be deposited directly into the
Collection Account net, if and as provided in the related prospectus supplement,
of amounts payable to the Servicer under the related Agreement and specified in
the related prospectus supplement, and will then be deposited into the
applicable Payment Accounts and be available to make payments on Certificates of
the related Series on the next Payment Date, as the case may be. See "The Trust
Assets --Collection and Payment Accounts" .
Payments of Interest
The Certificates of each Class which by their terms are entitled to
receive interest will bear interest, calculated on the basis of a 360-day year
of twelve 30-day months or any other basis as is specified in the related
prospectus supplement, from the date and at the rate per annum specified, or
calculated in the method described, in the related prospectus supplement.
Interest on the Certificates of a Series will be payable on the Payment Dates
specified in the related prospectus supplement. The rate of interest on one or
more Classes of Certificates of a Series may be fixed, floating, variable or
adjustable. A Class of Certificates may by its terms be "Principal Only
Certificates", which may not be entitled to receive any interest distributions
or may be entitled to receive only nominal interest distributions. A Class of
Certificates may by its terms be "Zero Coupon Certificates", the interest on
which is not paid on the related Payment Date, but will accrue and be added to
the principal of the Certificates on the related Payment Date.
Interest payable on the Certificates on a Payment Date will include
all interest accrued during the related period specified in the related
prospectus supplement. In the event interest accrues during the calendar month
preceding a Payment Date, the effective yield to Certificateholders will be
reduced from the yield that would otherwise be obtainable if interest payable on
the Certificates were to accrue through the day immediately preceding the
related Payment Date.
Payments of Principal
On each Payment Date for Certificates of a Series, principal payments
will be made to the holders of the related Certificates on which principal is
then payable, to the extent set forth in the related prospectus supplement. The
payments will be made in an aggregate amount determined as specified in the
related prospectus supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority, which may, in some
cases, include allocation by random lot, set forth in the related prospectus
supplement.
With respect to each Class of Certificates not issued pursuant to a
Pooling and Servicing Agreement, a "Final Scheduled Payment Date" will be
specified in the related prospectus supplement, which will be the date,
calculated on the basis of the assumptions applicable to the Series described in
the related prospectus supplement, on which the entire aggregate principal
balance of the related Class is expected to be reduced to zero. Because payments
received on the Base Assets will generally be used to make distributions in
reduction of the outstanding principal amounts of the Certificates, it is likely
that the final principal payment with respect to a Class of Certificates will
occur earlier, and may occur substantially earlier than its Final Scheduled
Payment Date.
Receivables Pooling Certificates
INVESTOR CERTIFICATEHOLDERS' INTEREST; DEPOSITOR'S INTEREST. In the
case of a Series of Receivables Pooling Certificates, a portion of the assets of
the related Trust will be allocated among the Investor Certificateholders'
Interest and the remainder will be allocated to the depositor's interest (the
"Depositor's Interest") and as provided in the related prospectus supplement.
The Depositor's Interest represents the rights to the assets of the Trust not
allocated to the Investor Certificateholders' Interest of any Series or any
interests in the Trust issued as Series Enhancement. In the case of a Master
Trust, the related Seller may cause the issuance of additional Series of
Certificates from time to time and this issuance will have the effect of
decreasing the Depositor's Interest. The Depositor's Interest may be evidenced
by an exchangeable certificate that is subject to specific transfer
restrictions. The aggregate principal amount of the Investor Certificateholders'
Interest will, except as provided in this Prospectus or in the related
prospectus supplement, remain fixed at the aggregate initial principal amount of
the Certificates of the related Series and the principal amount of the
Depositor's Interest will fluctuate as the amount of the "Principal
Receivables", as defined in the related prospectus supplement, Government
Securities, if any, and Private Label Custody Receipt Securities, if any, held
by the Trust changes from time to time. If so provided in the related prospectus
supplement, in some circumstances, interests in the assets of a Trust may be
allocated to a credit enhancer, and in the case of a Master Trust, interests in
the assets of the Trust may be allocated to the Investor Certificateholders of
more than one Series.
EFFECT OF ISSUANCE OF ADDITIONAL SERIES. In the case of a Master
Trust, the Pooling and Servicing Agreement may provide that, pursuant to any one
or more supplements to the related Pooling and Servicing Agreement (each, a
"Supplement"), the Depositor may direct the Trustee to authenticate from time to
time new Series, subject to the conditions described below (each issuance, a
"New Issuance"). Each New Issuance will have the effect of decreasing the
Depositor's Interest to the extent of the initial Invested Amount of a Series.
Under the Pooling and Servicing Agreement, the Depositor may designate, with
respect to any newly issued Series:
(a) its name or designation;
(b) its initial principal amount or method for calculating its amount,
and its Invested Amount in the Trust which is generally based on the aggregate
amount of Principal Receivables, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, in the Trust allocated to the related
Series, and its Series Invested amount;
(c) its certificate rate, or formula for the determination of the
certificate rate;
(d) the interest payment date or dates and the dates from which
interest shall accrue;
(e) the method for allocating collections to Certificateholders of the
Series;
(f) any bank accounts to be used by the related Series and the terms
governing the operation of these bank accounts;
(g) the percentage used to calculate the Monthly Servicing Fee;
(h) the provider and terms of any form of Series Enhancement with
respect to any newly issued Series;
(i) the terms on which the Certificates of the Series may be
repurchased or remarketed to other investors;
(j) the Series Termination Date;
(k) the number of Classes of Certificates of the Series, and if the
Series consists of more than one Class, the rights and priorities of each
related Class;
(l) the extent to which the Certificates of the Series will be
issuable in temporary or permanent global form, and, in this case, the
depositary for these global certificate or certificates, the terms and
conditions, if any, upon which these global certificate or certificates may be
exchanged, in whole or in part, for definitive certificates, and the manner in
which any interest payable on this global certificate or certificates will be
paid;
(m) whether the Certificates of the Series may be issued in bearer
form and any limitations imposed on the Certificates;
(n) the priority of the Series with respect to any other Series; and
(o) any other relevant terms (all relevant terms, the "Principal
Terms" of the related Series).
None of the Depositor, the Servicer, the Trustee or the Trust is required or
intends to obtain the consent of any Certificateholder of any outstanding Series
to issue any additional Series.
The Pooling and Servicing Agreement may provide that the Depositor may
designate Principal Terms so that each Series has a Controlled Accumulation
Period or a Controlled Amortization Period that may have a different length and
begin on a different date than the Controlled Accumulation Periods or the
Controlled Amortization Periods for any other Series. Further, one or more
Series may be in their Controlled Accumulation Period or Controlled Amortization
Period while other Series are not. Moreover, each Series may have the benefits
of Series Enhancement issued by enhancement providers different from the
providers of Series Enhancement with respect to any other Series. Under the
Pooling and Servicing Agreement, the Trustee shall hold any Series Enhancement
only on behalf of the Certificateholders of the Series to which the Series
Enhancement relates. With respect to each Series Enhancement, the Depositor also
has the option under the Pooling and Servicing Agreement to vary among Series
the terms upon which a Series may be repurchased by the Depositor or remarketed
to other investors. There is no limit to the number of New Issuances the
Depositor may cause under the Pooling and Servicing Agreement. The Trust will
terminate only as provided in the Pooling and Servicing Agreement. There can be
no assurance that the terms of any Series might not have an impact on the timing
and amount of payments received by a Certificateholder of another Series.
Under the Pooling and Servicing Agreement and pursuant to a
Supplement, a New Issuance may only occur upon the satisfaction of conditions
provided in the Pooling and Servicing Agreement. The obligation of the Trustee
to authenticate the Certificates of a new Series and to execute and deliver the
related Series Supplement is subject to the satisfaction of the following
conditions:
(a) on or before the fifth day immediately preceding the date upon
which the New Issuance is to occur, the Depositor shall have given the Trustee,
the Servicer, each Rating Agency and any Series Enhancer so entitled pursuant to
the relevant Supplement, written notice of the New Issuance and the date upon
which the New Issuance is to occur;
(b) the Depositor shall have delivered to the Trustee the related
Supplement, in form satisfactory to the Trustee, executed by each party to the
Pooling and Servicing Agreement other than the Trustee;
(c) the Depositor shall have delivered to the Trustee any related
Series Enhancement agreement executed by each of the parties to the applicable
Agreement;
(d) the Depositor shall have received notice from each Rating Agency
that the New Issuance shall not cause the Rating Agency to reduce or withdraw
the then current rating of the Certificates of any outstanding Series or Class;
(e) the Depositor shall have delivered to the Trustee and providers of
Series Enhancement a certificate of an authorized representative, dated the date
upon which the New Issuance is to occur, to the effect that the Depositor
reasonably believes that the issuance will not, based on the facts known to the
representative at the time of certification, cause a Pay Out Event; and
(f) the Depositor shall have delivered to the Trustee, each Rating
Agency and providers of Series Enhancement an opinion of counsel acceptable to
the Trustee that for federal income tax purposes:
(1) following a New Issuance the Trust will not be deemed to be
an association,or publicly traded partnership taxable as a
corporation,
(2) a New Issuance will not adversely affect the tax
characterization as debt of Certificates of any outstanding
Series or Class that were characterized as debt at the time of
their issuance,
(3) a New Issuance will not cause or constitute an event in which
gain or loss would be recognized by any Certificateholders, and
(4) except as is otherwise provided in a Supplement with respect
to any Series, the Certificates of the related Series will be
properly characterized as debt.
Upon satisfaction of the above conditions, the Trustee shall execute the
Supplement and issue to the Depositor the Certificates of the new Series for
execution and redelivery to the Trustee for authentication.
ALLOCATION PERCENTAGE. Pursuant to the Pooling and Servicing
Agreement, all amounts collected with respect to:
(a) finance charge receivables (as defined in the related prospectus
supplement, the "Finance Charge Receivables") and Principal Receivables and the
Defaulted Amount,
(b) the Government Securities, if any, and
(c) the Private Label Custody Receipt Securities, if any, with respect
to any Monthly Period will be allocated among the Investor Certificateholders'
Interest of each Series, the Depositor's Interest and in some circumstances to
the provider of Series Enhancement, and all Adjustment Payments and Deposit
Amounts deposited in the Collection Account (collectively, "Miscellaneous
Payments") with respect to any Monthly Period will be allocated among the
Investor Certificateholders' Interest of each Series, as follows:
(1) collections of:
(A) Finance Charge Receivables and the Defaulted Amount,
(B) interest on the Government Securities, if any, and
(C) interest on the Private Label Custody Receipt
Securities, if any, will at all times be allocated to the
Investor Certificateholders' Interest of a Series based on
the Floating Allocation Percentage of the related Series;
(2) collections of:
(A) Principal Receivables;
(B) principal of the Government Securities, if any, and
(C) principal of the Private Label Custody Receipt
Securities, if any, will at all times be allocated to the
Investor Certificateholders' Interest of a Series based on
the Principal Allocation Percentage of the related Series;
and
(3) miscellaneous Payments will at all times be allocated among
the Investor Certificateholder's Interest of each Series based on
their respective Invested amounts.
The "Floating Allocation Percentage" and the "Principal Allocation Percentage"
with respect to any Series will be determined as set forth in the related
Supplement and, with respect to each Series offered by this Prospectus, in the
related prospectus supplement. Amounts not allocated to the Investor
Certificateholders' Interest of any Series as described above will be allocated
to the Depositor's Interest.
COLLECTIONS. All collections in respect of Receivables and
Participations with respect to a given Trust will be allocated by the related
Servicer or Trustee as amounts collected on Principal Receivables and on Finance
Charge Receivables. The Servicer will allocate between the Investor
Certificateholders' Interest of each Series, if more than one, of the related
Trust and the Depositor's Interest all amounts collected with respect to:
o Finance Charge Receivables and Principal Receivables and the
Defaulted Amount,
o the Government Securities, if any, and
o Private Label Custody Receipt Securities, if any.
The "Defaulted Amount" for any Monthly Period will be an amount, not less than
zero, equal to:
(a) the amount of Principal Receivables which were charged off as
uncollectible in the Monthly Period in accordance with the Servicer's customary
and usual servicing procedures ("Defaulted Receivables") for the Monthly Period,
minus
(b) the sum of:
(1) the amount of any Defaulted Receivables of which either the
Depositor or the Servicer becomes obligated to accept
reassignment or assignment during the Monthly Period, unless an
Insolvency Event shall have occurred with respect to the
Depositor, the Seller or the Servicer, in which event the amount
of the Defaulted Receivables will not be added to the sum so
subtracted,
(2) the aggregate amount of recoveries, net of collection
expenses, received in the Monthly Period with respect to both
Finance Charge Receivables and Principal Receivables previously
charged off as uncollectible, and
(3) the excess, if any, for the immediately preceding Monthly
Period of the sum computed pursuant to this clause (b) for the
Monthly Period over the amount of Principal Receivables which
became Defaulted Receivables in the Monthly Period.
Collections of:
o Finance Charge Receivables and the Defaulted Amount,
o interest on the Government Securities, if any, and
o interest on the Private Label Custody Receipt Securities, if any,
will be allocated to each Series at all times based upon its Floating
Allocation Percentage.
Collections of:
o Principal Receivables,
o principal of the Government Securities, if any, and
o principal of the Private Label Custody Receipt Securities, if any,
will be allocated to each related Series at all times based upon its
Principal Allocation Percentage.
The Floating Allocation Percentage and the Principal Allocation Percentage with
respect to each related Series will be determined as set forth in the related
Supplement and, with respect to each Series offered by this Prospectus, in the
related prospectus supplement. Collections will be deposited in the related
Collection Account and invested in the manner described under "Servicing of
Receivables -- Deposits in the Collection Account".
INTEREST. Interest will accrue on the Invested amount of the
Receivables Pooling Certificates of a Series or Class (the "Invested Amount" of
the Series or Class) offered by this Prospectus at the per annum rate either
specified, or determined in the manner specified, in the related prospectus
supplement (the "Certificate Interest Rate "). If the prospectus supplement for
a Series of Receivables Pooling Certificates so provides, the interest rate and
interest payment dates applicable to each Class of Certificates of that Series
may be subject to adjustment from time to time. Any interest rate adjustment
would be determined by reference to one or more indices or by a remarketing
firm, in each case as described in the prospectus supplement for the related
Series. To the extent provided in this Prospectus or in the related prospectus
supplement, collections of Finance Charge Receivables and other amounts
allocable to the Investor Certificateholders' Interest of a Series offered by
this Prospectus will be used to make interest payments to Certificateholders of
the related Series on each Interest Payment Date with respect to these
collections, provided that if a rapid amortization period commences with respect
to the related Series, interest will then be distributed to these
Certificateholders monthly on each Special Payment Date. If the Interest Payment
Dates for a Series or Class occur less frequently than monthly, collections or
other amounts, or the portion allocable to the related Class, will be deposited
in one or more trust accounts (in the case of the deposit of interest, an
"Interest Funding Account") and used to make interest payments to
Certificateholders of the related Series or Class on the following Interest
Payment Date with respect to the related Series or Class. If a Series has more
than one Class of Receivables Pooling Certificates, each related Class may have
a separate Interest Funding Account.
PRINCIPAL. The principal of any Receivables Pooling Certificates will
be scheduled to be paid either in full on an expected date specified in the
related prospectus supplement (the "Expected Final Payment Date "), in which
case the related Series will have an accumulation period, as described below
under " -- Accumulation Period", or in installments commencing on a date
specified in the related prospectus supplement (the "Principal Commencement Date
"), in which case the Receivables Pooling Certificates will have a Controlled
Amortization Period as described below under " -- Controlled Amortization
Period". If the related Series has more than one Class of Certificates, a
different method of paying principal, Expected Final Payment Date and/or
Principal Commencement Date may be assigned to each Class. The principal with
respect to the Certificates of the related Series or Class may be made or
commence earlier than the applicable Expected Final Payment Date or Principal
Commencement Date, as the case may be, and the final principal payment with
respect to the Certificates of the related Series or Class may be made earlier
or later than the applicable Expected Final Payment Date or Principal
Commencement Date, if a Pay Out Event occurs with respect to the related Series
or Class or under other circumstances described in this Prospectus or in the
related prospectus supplement.
REVOLVING PERIOD. Receivables Pooling Certificates will have a
"Revolving Period", which will commence on the date specified in the related
prospectus supplement as the Series Cut-Off Date and continue until the earliest
to occur of:
o the commencement of the Rapid Amortization Period with respect to
the Series, and
o the date specified in the related prospectus supplement as the
last day of the Revolving Period with respect to the Series.
During the Revolving Period with respect to the Series, collections of Principal
Receivables, collections of principal of the Government Securities, if any,
collections of principal of the Private Label Custody Receipt Securities, if
any, and other amounts otherwise allocable to the Investor Certificateholders'
Interest of the Series will be distributed to or for the benefit of the
Certificateholders of other Series, if so provided in the related prospectus
supplement or the Seller or the Depositor in respect of the Depositor's
Interest.
CONTROLLED ACCUMULATION PERIOD. If so specified by the related
prospectus supplement in the case of a Series of Receivables Pooling
Certificates, and unless a Rapid Amortization Period commences with respect to
the related Series, one or more Classes of Certificates of the Series will have
a Controlled Accumulation Period. The controlled accumulation period (the
"Controlled Accumulation Period") will commence on the close of business on the
date specified, or determined in the manner specified, in the related prospectus
supplement and will continue until the earliest to occur of:
o the commencement of a Rapid Amortization Period with respect to
the Series,
o payment in full of the Invested Amount of the Certificates of the
Series, or
o the Series Termination Date with respect to the Series.
During the Controlled Accumulation Period with respect to a Series of
Receivables Pooling Certificates, collections of Principal Receivables,
principal of the Government Securities, if any, principal of the Private Label
Custody Receipt Securities, if any, and other amounts allocable to the Investor
Certificateholders' Interest of the Series will be deposited on each
Distribution Date in a trust account established for the benefit of the Investor
Certificateholders of the Series (the "Principal Funding Account") and used to
make principal distributions to the Certificateholders when due. The amount to
be deposited in the Principal Funding Account on the applicable Distribution
Date may, but will not necessarily, be limited to the "Controlled Deposit Amount
" equal to the "Controlled Accumulation Amount" specified in the related
prospectus supplement plus any existing deficit with respect to the Controlled
Accumulation Amount arising from prior Distribution Dates (the "Deficit
Controlled Accumulation Amount "). If a Series of Receivables Pooling
Certificates has more than one Class, each Class may have a separate Principal
Funding Account and Controlled Accumulation Amount. In addition, the related
prospectus supplement may describe priorities among Classes with respect to
deposits of principal into Principal Funding Accounts. In general, unless a Pay
Out Event shall have occurred prior to the Expected Final Payment Date for a
Series, on the Expected Final Payment Date for a particular Series or Class, all
amounts accumulated in the Principal Funding Account with respect to the Series
or Class during the Controlled Accumulation Period will be distributed as a
single repayment of principal with respect to the Series or Class.
RAPID ACCUMULATION PERIOD. If so specified and under the conditions
set forth in the prospectus supplement relating to a Series having a Controlled
Accumulation Period, during the period (the "Rapid Accumulation Period" and
together with the Controlled Accumulation Period, each an "Accumulation Period")
from the day on which a Pay Out Event has occurred until the earliest of:
o the commencement of the Rapid Amortization Period,
o payment in full of the Investor Interest of the Certificates of
the Series and, if so specified in the related prospectus
supplement, of the Collateral Interest, if any, with respect to
the Series, and
o the related Series Termination Date,
collections of Principal Receivables allocable to the Investor Interest of the
Series, and other amounts if so specified in the related prospectus supplement,
will be deposited on each Transfer Date in the Principal Funding Account and
used to make distributions of principal to the Certificateholders of the Series
or Class on the Scheduled Payment Date.
The amount to be deposited in the Principal Funding Account during the Rapid
Accumulation Period will not be limited to the Controlled Deposit Amount.
During the Rapid Accumulation Period, funds on deposit in any
Principal Funding Account may be invested in permitted investments or subject to
a guaranteed rate or investment contract or other arrangement intended to assure
a minimum return on the investment of the funds. Investment earnings on the
funds may be applied to pay interest on the related Series of Certificates or
make other payments as specified in the related prospectus supplement. In order
to enhance the likelihood of payment in full of principal at the end of the
Rapid Accumulation Period with respect to a Series of Certificate, the Series
may be subject to a principal guaranty or other similar agreement.
CONTROLLED AMORTIZATION PERIOD. If the related prospectus supplement
so specifies with respect to a Series of Receivables Pooling Certificates,
unless a Rapid Amortization Period commences with respect to a Series, one or
more Classes of Certificates of the Series will have a Controlled Amortization
Period. The controlled amortization period (the "Controlled Amortization
Period") will commence at the close of business on the date specified or
determined in the manner specified in the related prospectus supplement and will
continue until the earliest to occur of:
o the commencement of the Rapid Amortization Period with respect to
a Series,
o payment in full of the Invested Amount of the Certificates of a
Series, or
o the Series Termination Date with respect to a Series.
During the Controlled Amortization Period with respect to a Series, collections
of Principal Receivables, principal of the Government Securities, if any,
principal of the Private Label Custody Receipt Securities, if any, and other
amounts allocable to the Investor Certificateholders' Interest of a Series will
be used on each Distribution Date to make principal distributions to
Certificateholders of the Series or any Class of the Series then scheduled to
receive the related distributions. The amount to be distributed to
Certificateholders of any Series on any Distribution Date may, but will not
necessarily, be limited to an amount (the "Controlled Distribution Amount")
which will be equal to the "Controlled Amortization Amount" specified in the
related prospectus supplement plus any existing deficit with respect to the
Controlled Amortization Amount arising from prior Distribution Dates (the
"Deficit Controlled Amortization Amount". If a Series of Receivables Pooling
Certificates has more than one Class, each Class may have a separate Controlled
Amortization Amount. In addition, the related prospectus supplement may describe
priorities among the Classes with respect to these distributions.
RAPID AMORTIZATION PERIOD. During the Rapid Amortization Period,
collections of Principal Receivables and other amounts allocable to the Investor
Certificateholders' Interest of the Series will be distributed as principal
payments to the Investor Certificateholders of the Series monthly on each
Distribution Date beginning with the first Special Payment Date with respect to
the Series. The "Rapid Amortization Period" will commence and end on the dates
set forth in the related propsectus supplement. During the Rapid Amortization
Period with respect to a Series, distributions of principal to Investor
Certificateholders will not be subject to any Controlled Deposit Amount or
Controlled Distribution Amount. In addition, upon the commencement of the Rapid
Amortization Period with respect to a Series, any funds on deposit in a
Principal Funding Account with respect to a Series will be paid to the
Certificateholders of the relevant Class or Series on the first Special Payment
Date with respect to the related Series. See "Description of the Certificates --
Pay Out Events" below for a discussion of the events which might lead to the
commencement of the Rapid Amortization Period with respect to a Series.
PAY OUT EVENTS. As described above, the Revolving Period with respect
to a Series of Receivables Pooling Certificates will commence on the Series
Cut-Off Date and continue until the commencement of the Controlled Accumulation
Period or the Controlled Amortization Period, unless a Pay Out Event occurs with
respect to the Series prior to any of these dates. A "Pay Out Event" with
respect to the Series refers to any events specified in the related prospectus
supplement, which events may include:
o the occurrence of an "Insolvency Event", which shall mean the
appointment of the FDIC as receiver of the Depositor or the
Seller or another person specified in the related prospectus
supplement, or other events relating to the bankruptcy,
insolvency or receivership of the Depositor or the Seller, or
another person specified in the related prospectus supplement; or
o the Trust becoming an investment company within the meaning of
the Investment Company Act of 1940 (the "Investment Company
Act").
In the case of any event described above, a Pay Out Event with respect
to the affected Series will be deemed to have occurred without any notice or
other action on the part of the Trustee or the Investor Certificateholders of
the affected Series immediately upon the occurrence of this event. The Rapid
Amortization Period with respect to a Series will commence at the close of
business on the day immediately preceding the day on which a Pay Out Event
occurs with respect to the related Series. Distributions of principal to the
Investor Certificateholders of the related Series will begin on the Distribution
Date next following the month during which the Pay Out Event occurs (the
Distribution Date and each following Distribution Date with respect to the
related Series, a "Special Payment Date"). Any amounts on deposit in a Principal
Funding Account or an Interest Funding Account with respect to the related
Series at that time will be distributed on the first Special Payment Date to the
Investor Certificateholders of the Series. If a Series has more than one Class
of Certificates, each Class may have different Pay Out Events which, in the case
of any Series of Certificates offered by this Prospectus, will be described in
the related prospectus supplement.
In addition to the consequences of a Pay Out Event discussed above, if
any Insolvency Event occurs with respect to the Depositor or the Seller,
pursuant to the Pooling and Servicing Agreement and the Receivables Purchase
Agreement, on the day of the Insolvency Event, the Depositor or the Seller will
immediately cease to transfer Principal Receivables directly or indirectly to
the Trust and promptly give notice to the Trustee of the Insolvency Event. Under
the terms of the Pooling and Servicing Agreement and the Receivables Purchase
Agreement applicable to the Series, within 15 days the Trustee will publish a
notice of the occurrence of the Insolvency Event stating that the Trustee
intends to sell, dispose of or otherwise liquidate the Receivables, Government
Securities, if any, and Private Label Custody Receipt Securities, if any, in a
commercially reasonable manner and on commercially reasonable terms unless
within 90 days from the date notice is published the holders of Certificates of
each Series or, if a Series includes more than one Class, each Class of the
related Series evidencing more than 50% of the aggregate unpaid principal amount
of each related Series or Class and other interested parties specified in the
related prospectus supplement instruct the Trustee not to dispose of or
liquidate the Receivables, Government Securities, if any, and Private Label
Custody Receipt Securities, if any, and to continue transferring Principal
Receivables as before the Insolvency Event. The proceeds from any sale,
disposition or liquidation of the Receivables, Government Securities, if any,
and Private Label Custody Receipt Securities, if any, will be deposited in the
Collection Account and allocated as described in the applicable Pooling and
Servicing Agreement and the related prospectus supplement. If the sum of:
o the portion of the proceeds allocated to the Investor
Certificateholders' Interest of any Series, and
o the proceeds of any collections of the Receivables, Government
Securities, if any, and Private Label Custody Receipt Securities,
if any, in the Collection Account allocated to the Investor
Certificateholders' Interest of the related Series, together with
any related rights under any applicable Series Enhancement,
is not sufficient to pay the Invested Amount of the Certificates of the related
Series in full, the Investor Certificateholders will incur a loss.
PAIRED SERIES. If so provided in the related prospectus supplement,
one or more Series or a portion of one or more Series previously issued by a
Trust (a "Prior Series ") may be paired with one or more other series (a "Paired
Series ") issued by the Trust. As the Invested Amount of the Prior Series is
reduced, the Invested Amount in the Trust of the Paired Series will increase by
an equal amount. Upon payment in full of the Prior Series, the Invested Amount
of the Paired Series will be equal to the Invested Amount paid to
Certificateholders of the Prior Series. If a Pay Out Event occurs with respect
to the Prior Series or with respect to the Paired Series when the Prior Series
is in a Controlled Amortization Period or Controlled Accumulation Period, the
Series Allocation Percentage and the Principal Allocation Percentage for the
Prior Series and the Series Allocation Percentage and the Principal Allocation
Percentage for the Paired Series will be reset as provided in the related
prospectus supplement and the Early Amortization Period or Early Accumulation
Period for the related Series could be lengthened. It shall be a condition to
the issuance of a Paired Series that this issuance shall not result in the
reduction by any Rating Agency of the rating of the Prior Series.
OPTIONAL TERMINATION; FINAL PAYMENT OF PRINCIPAL. If specified in the
prospectus supplement, subject to any conditions described in the prospectus
supplement, on any day occurring on or after the day that the principal amount
of the Certificates of a Series and the Enhancement Invested Amount, if any,
with respect to the Series is reduced to a percentage of the initial outstanding
aggregate principal amount of the Certificates of the related Series set forth
in the related prospectus supplement, the Depositor will have the option to
repurchase the Investor Certificateholders' Interest of the related Series. The
purchase price will be equal to the sum of the principal amount of the Series,
less the amount, if any, on deposit in any Principal Funding Account with
respect to the related Series, plus the Enhancement Invested Amount, if any,
with respect to the related Series, plus accrued and unpaid interest on the
unpaid principal amount of the Certificates, including the Collateral
Indebtedness Interests, if any, and, if applicable, on the Enhancement Invested
Amount, and accrued and unpaid interest with respect to interest amounts that
were due but not paid on a prior Payment Date, through:
o if the day on which the repurchase occurs is a Distribution Date,
the day preceding this Distribution Date, or
o if the day on which the repurchase occurs is not a Distribution
Date, the day preceding the Distribution Date following that day,
at the applicable Certificate Interest Rate.
Following any repurchase and the deposit of the aggregate purchase price into
the Collection Account, the Investor Certificateholders of the related Series
will have no further rights with respect to the Receivables. In the event that
the Depositor shall fail for any reason to deposit the aggregate purchase price
for the Investor Certificateholders' Interest of a Series, payments would
continue to be made to the Investor Certificateholders of the related Series as
described in this Prospectus and in the related prospectus supplement.
In any event, the last payment of principal and interest on the
Securities of a Series will be due and payable not later than the date (the
"Series Termination Date") specified in the related prospectus supplement. In
the event that the principal amount of the Securities of any related Series or
the Enhancement Invested Amount is greater than zero on the Series Termination
Date, the Trustee will sell or cause to be sold interests in the Receivables,
Government Securities, if any, and Private Label Custody Receipt Securities, if
any, of the related Trust, as specified in the Pooling and Servicing Agreement,
in an amount equal to the sum of the principal amount of the outstanding
Securities and the Enhancement Invested Amount, if any, with respect to the
related Series at the close of business on the Series Termination Date. The net
proceeds of the sale will be deposited in the Collection Account and allocated
to the Certificateholders of the related Series or the holder of the Enhancement
Invested Amount after the Certificateholders are paid in full, as provided in
the Pooling and Servicing Agreement with respect to the Series.
The Depositor may, at its option, purchase a Class of Certificates of
any Series, on any Distribution Date under the circumstances, if any, specified
in the prospectus supplement relating to that Series. Alternatively, if so
specified in the related prospectus supplement for a Series of Certificates, the
Depositor, the Servicer, or another entity designated in the related prospectus
supplement may, at its option, cause an early termination of a Trust by
repurchasing all of the Receivables, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, from the Trust on or after a date
specified in the related prospectus supplement, or on or after that time as the
aggregate outstanding principal amount of the Certificates or Receivables,
Government Securities, if any, and Private Label Custody Receipt Securities, if
any, as specified in the related prospectus supplement, is less than the amount
or percentage specified in the related prospectus supplement. Notice of a
purchase or termination must be given by the Depositor, the Servicer or the
Trustee prior to the related date. The purchase or repurchase price will be set
forth in the related prospectus supplement.
In addition, the related prospectus supplement may provide other
circumstances under which holders of Certificates of a Series could be fully
paid significantly earlier than would otherwise be the case as a result of the
occurrence of a Rapid Amortization Event.
CERTAIN INFORMATION REGARDING THE SECURITIES
Book-Entry Registration
If so specified in the related prospectus supplement, holders of
Securities may hold their Securities through the Depository Trust Company ("DTC"
(in the United States) or Clearstream Luxembourg or Euroclear (in Europe) if
they are participants of these systems, or indirectly through organizations
which are participants in these systems.
Cede & Co. ("Cede"), as nominee for DTC, will hold one or more global
Securities. Unless and until definitive securities are issued in fully
registered, certified form ("Definitive Securities ") under the limited
circumstances described in the related prospectus supplement, all references in
this Prospectus or in the related prospectus supplement to actions by holders of
Securities shall refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references in this
Prospectus to distributions, notices, reports and statements to holders of
Securities shall refer to distributions, notices, reports and statements to DTC
or Cede, as the registered holder of the Securities, as the case may be, for
distribution to the beneficial owners of the related Securities in accordance
with DTC procedures.
Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
Depositaries which in turn will hold these positions in customers' securities
accounts in the Depositaries' names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream Luxembourg and Morgan Guaranty Trust Company of
New York will act as depositary for Euroclear (in these capacities, the
"Depositaries").
Transfers between DTC Participants will occur in the ordinary way in
accordance with DTC rules. Transfers among Clearstream Luxembourg Participants
or Euroclear Participants will occur in the ordinary way in accordance with the
applicable rules and operating procedures of Clearstream Luxembourg and
Euroclear.
Cross-market transfers between persons holding directly or indirectly
through DTC on the one hand, and directly or indirectly through Clearstream
Luxembourg or Euroclear, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, these cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in the clearing system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its 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. Clearstream Luxembourg Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a DTC
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear Participant or Clearstream Luxembourg Participant on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream Luxembourg Participant or a
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream Luxembourg
or Euroclear cash account only as of the business day following settlement in
DTC. For additional information regarding clearance and settlement procedures
for the Securities, see Annex I to this Prospectus and for information with
respect to tax documentation procedures relating to the Securities, see Annex I
to this Prospectus "Certain Federal Income Tax Consequences -- Foreign
Investors."
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thus eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations, including the Underwriters. Indirect access to the
DTC System also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (the "Indirect Participants").
Holders of Securities that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Securities may do so only through Participants and Indirect
Participants. In addition, holders of Securities will receive all distributions
of principal of and interest on the Securities from the Trustee, or the
Indenture Trustee, as paying agent, or its successor in this capacity (the
"Paying Agent"), through the Participants who in turn will receive them from
DTC. Under a book-entry format, holders of Securities may experience some delay
in their receipt of payments, since these payments will be forwarded by the
Paying Agent to Cede, as nominee for DTC. DTC will forward these payments to its
Participants which will then forward them to Indirect Participants or holders of
Securities. It is anticipated that the only holder of the Certificates (the
"Certificateholder"), holder of the Note (the "Noteholder" and together with the
Certificateholder, the "Securityholder") for a Series will be Cede, as nominee
of DTC. Holders of Securities would not then be recognized by the Trustee as
"Certificateholders", "Noteholders" or "Securityholders", as these terms are
used in the related Agreement, and holders of Securities would only be permitted
to exercise the rights of a "Certificateholder", "Noteholder" or
"Securityholder" indirectly through the Participant who in turn will exercise
those rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of and interest on
the Securities. Participants and Indirect Participants with which holders of
Securities have accounts with respect to the Securities similarly are required
to make book-entry transfers and receive and transmit payments on behalf of
their respective holders of Securities. Accordingly, although holders of
Securities will not possess Securities, holders of Securities will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, the ability of a holder of Securities to pledge
Securities to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of the Securities, may be limited due to the
lack of a physical certificate or instrument for the Securities.
DTC will take any action permitted to be taken by a
"Certificateholder", "Noteholder" or "Securityholder" under the applicable
Agreement or Indenture only at the direction of one or more Participants to
whose account with DTC the relevant Securities are credited. Additionally, DTC
will take these actions with respect to specified percentages of the
Certificateholders', Noteholders' or Securityholders' interests only at the
direction of and on behalf of Participants whose holdings include undivided
interests that satisfy the specified percentages. DTC may take conflicting
actions with respect to other undivided interests to the extent that these
actions are taken on behalf of Participants whose holdings include these
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
The Euroclear System ("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, thus eliminating both the need
for physical movement of certificates and the risk resulting from transfers of
securities and cash that are not simultaneous.
The Euroclear System has subsequently been extended to clear and
settle transactions between Euroclear Participants counterparties both in
Clearstream Luxembourg and in many domestic securities markets. Transactions may
be settled in any of 32 settlement currencies, including United States dollars.
In addition to safekeeping (custody) and securities clearance and settlement,
the Euroclear System includes securities lending and borrowing and money
transfer services. The Euroclear System is operated by the Brussels, Belgium
office of Morgan Guaranty Trust Company of New York (the "Euroclear Operator"),
under contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation that establishes policy on behalf of Euroclear Participants. The
Euroclear Operator is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. Accordingly, 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.
All operations are conducted by the Euroclear Operator and all
Euroclear securities clearance accounts and cash accounts are accounts with the
Euroclear Operator. They 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 all transfers of securities and cash, both within the
Euroclear System and receipts and withdrawals of securities and cash. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
Euroclear Participants include banks, including central banks,
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System 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 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 with respect to Securities held through Clearstream
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream
Luxembourg Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by its
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Certain Federal
Income Tax Consequences". Clearstream Luxembourg or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Certificateholder, Noteholder or Securityholder under the applicable Agreement
or Indenture on behalf of a Clearstream Luxembourg Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect these actions on its behalf
through DTC.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Securities among
participants of DTC, Clearstream Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform the procedures and these procedures
may be discontinued at any time.
Definitive Securities
If the Securities of any Series will be available in book entry form,
the related Securities will be issued as Definitive Securities, rather than to
DTC or its nominee, only under circumstances specified in the related prospectus
supplement, which circumstances may include that,
o the Depositor advises the Trustee, and any Indenture Trustee, in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the
Securities, and the Trustee, or the Indenture Trustee, or the
Depositor are unable to locate a qualified successor,
o the Depositor, at its option, elects to terminate the book-entry
system through DTC, or
o after the occurrence of a Servicer Default, holders of Securities
of the related Series evidencing not less than 50% of the
aggregate unpaid principal amount of the Securities advise the
Trustee and DTC through Participants in writing that the
continuation of a book-entry system through DTC, or a successor
to DTC, is no longer in the best interests of the holders of the
Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities. Upon surrender by DTC of the
physical certificates or notes held by Cede that represent the Securities, and
instructions for registration, the Trustee, or the Indenture Trustee, will issue
the related Securities in the form of Definitive Securities, and the Trustee, or
the Indenture Trustee, will then recognize the holders of these Definitive
Securities as holders of Securities, under the applicable Agreement or Indenture
and the related prospectus supplement ("Holders").
If Definitive Securities are issued, distribution of principal and
interest on the Definitive Securities will be made by the Paying Agent or the
Trustee, or the Indenture Trustee, directly to the Holders in whose names the
Definitive Securities were registered on the related Record Date in accordance
with the procedures set forth in this Prospectus and in the related Agreement,
Indenture and prospectus supplement. Distributions will be made by check mailed
to the address of each Holder as it appears on the register maintained by the
Trustee, or the Indenture Trustee, except that the final payment on any
Definitive Security will be made only upon presentation and surrender of the
Definitive Security on the date for final payment at the office or agency as is
specified in the notice of final distribution to Holders. The Trustee, or the
Indenture Trustee, will provide notice to Holders not later than the date
specified in the related prospectus supplement.
Definitive Securities will be transferable and exchangeable at the
offices of the Transfer Agent specified pursuant to the applicable Agreement or
Indenture (the "Transfer Agent") and the Registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Transfer Agent and
Registrar may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection with the registration of transfer or
exchange.
DESCRIPTION OF THE TRUST AGREEMENTS
OR POOLING AND SERVICING AGREEMENTS
The following summaries describe the material provisions of the Trust
Agreements and Pooling and Servicing Agreements which are anticipated to be
common to any 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 related Agreement. Where particular provisions or terms used
in a related Agreement are referred to in this Prospectus, the actual
provisions, including definitions of terms, are incorporated in this Prospectus
by reference as part of the summaries.
Assignment of Base Assets to the Trust
ASSIGNMENT OF RECEIVABLES; PRE-FUNDING ACCOUNT. For any Series of
Receivables Pooling Certificates, pursuant to the related Pooling and Servicing
Agreement and Receivables Purchase Agreement, the Seller will sell and assign to
the related Trust on the Closing Date specified in the related prospectus
supplement (the "Closing Date"), either directly or by assignment to the
Depositor and reassignment by the Depositor to the Trust, without recourse to
the Seller, or the Depositor, all Receivables in the Initial Accounts
outstanding as of the Series Cut-Off Date, and will similarly sell and assign to
the Trust all Receivables in the Additional Accounts as of the applicable
additional cut-off dates and all Receivables later created under the Initial
Accounts or the Additional Accounts, other than the Removed Accounts, any
Participations added to the Trust and the proceeds of all of the foregoing. To
the extent specified in the related prospectus supplement, a portion of the
proceeds from the sale of the Securities of a Series may be applied by the
Depositor to the deposit of an amount on deposit in a Pre-Funding Account (the
"Pre-Funded Amount"). If a Pre-Funding Account is provided for, the related
prospectus supplement will specify the terms, conditions and manner under which
additional Receivables will be purchased by the Trust from time to time during
the funding period provided for in the related prospectus supplement.
In connection with any transfer of any Receivables, the Seller will
annotate and indicate in its computer files that these Receivables have been
conveyed to the Trust. In addition, the Seller will provide to the Trustee a
computer file or a microfiche list containing a true and complete list showing
each Account, the Receivables of which have been designated for inclusion in the
Trust, identified by account number, collection status, the amount of
Receivables outstanding and the amount of Principal Receivables as of the
initial Series Cut-Off Date, or additional Cut-Off Date. The Seller will not
deliver to the Trustee any other records or agreements relating to these
Accounts or the Receivables. The records and agreements relating to these
Accounts and the Receivables maintained by the Seller or the Servicer will not
be segregated by the Seller or the Servicer from other documents and agreements
relating to other accounts and receivables and will not be stamped or marked to
reflect the transfer of the Receivables to the Trust. Each Seller will file the
UCC financing statements meeting the requirements of applicable state law with
respect to the Receivables. See "Risk Factors - Certain Legal Aspects --
Transfer of Receivables" and "Risk Factors-- Risk of Commingling" and "Certain
Legal Aspects of the Receivables".
ASSIGNMENT OF WALTR SECURITIES; PRE-FUNDING ACCOUNT. All or a portion
of the net proceeds received from the sale of the Securities of a Series, the
Base Assets of which consist entirely or in part of WALTR Securities, will be
applied to the purchase of the related WALTR Securities from the Depositor or
other Seller on the Closing Date and, to the deposit of a Pre-Funded Amount into
a Pre-Funding Account, if and to the extent specified in the related prospectus
supplement. If a Pre-Funding Account is provided for, the related prospectus
supplement will specify the terms, conditions and manner under which additional
WALTR Securities will be purchased by the Trust from time to time during the
funding period provided for in the related prospectus supplement. The Trustee
will cause any WALTR Securities purchased by the Trust to be registered in the
name of the Trustee, or its nominee or correspondent, or, where applicable, the
Indenture Trustee, and the Trustee, or its agent or correspondent, or the
Indenture Trustee will have possession of any certificated WALTR Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a WALTR Security. See "The Trust Assets -- WALTR Securities".
Each WALTR Security to be transferred to the Trust will be identified
in a schedule appearing as an exhibit to the related Trust Agreement (the "WALTR
Schedule"), which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, or subsequent cut-off date, annual
Certificate Interest Rate or interest rate and maturity date for each WALTR
Security. In the Trust Agreement, to the extent that any WALTR Securities are
purchased from the Depositor, the Depositor will represent and warrant to the
Trustee regarding the WALTR Securities:
(a) that the information contained in the WALTR Schedule is true and
correct in all material respects;
(b) that, immediately prior to the conveyance of the WALTR Securities,
the Depositor had good title to, and was the sole owner of the WALTR Securities;
(c) that there has been no other sale by it of the WALTR Securities;
and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the WALTR Securities.
ASSIGNMENT OF GOVERNMENT SECURITIES; PRE-FUNDING ACCOUNT. A portion of
the net proceeds received from the sale of the Securities of a Series, the Base
Assets of which consist in part of Government Securities, will be applied to the
purchase of the related Government Securities from the Depositor or other Seller
on the Closing Date and, to the deposit of a Pre-Funded Amount into a Pre-
Funding Account, if and to the extent specified in the related prospectus
supplement. If a Pre-Funding Account is provided for, the related prospectus
supplement will specify the terms, conditions and manner under which additional
Government Securities will be purchased by the Trust from time to time during
the funding period provided for in the related prospectus supplement. The
Trustee will cause any Government Securities purchased by the Trust to be
registered in the name of the Trustee, or its nominee or correspondent, or,
where applicable, the Indenture Trustee, and the Trustee, or its agent or
correspondent, or the related Indenture Trustee will have possession of any
certificated Government Securities. The Trustee will not be in possession of or
be assignee of record of any underlying assets for a Government Security. See
"The Trust Assets -- Government Securities".
Each Government Security to be transferred to the Trust will be
identified in a schedule appearing as an exhibit to the related Trust Agreement
(the "Government Security Schedule"), which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, or subsequent
cut-off date, annual interest rate and maturity date for each Government
Security. In the Trust Agreement, to the extent that any Government Securities
are purchased from the Depositor, the Depositor will represent and warrant to
the Trustee regarding the Government Securities:
(a) that the information contained in the Government Schedule is true
and correct in all material respects;
(b) that immediately prior to the conveyance of the Government
Securities, the Depositor had good title to and was the sole owner of the
Government Securities;
(c) that there has been no other sale by it of Government Securities;
and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the Government Securities.
ASSIGNMENT OF PRIVATE LABEL CUSTODY RECEIPT SECURITIES; PRE-FUNDING
ACCOUNT. A portion of the net proceeds received from the sale of the Securities
of a Series, the Base Assets of which consist in part of Private Label Custody
Receipt Securities, will be applied to the purchase of the related Private Label
Custody Receipt Securities from the Depositor or other Seller on the Closing
Date and, to the deposit of a Pre-Funded Amount into a Pre-Funding Account, if
and to the extent specified in the related prospectus supplement. If a
Pre-Funding Account is provided for, the related prospectus supplement will
specify the terms, conditions and manner under which additional Private Label
Custody Receipt Securities will be purchased by the Trust from time to time
during the funding period provided for in the related prospectus supplement. The
Trustee will cause any Private Label Custody Receipt Securities purchased by the
Trust to be registered in the name of the Trustee, or its nominee or
correspondent, or, where applicable, the Indenture Trustee, and the Trustee, or
its agent or correspondent, or the Indenture Trustee will have possession of any
certificated Private Label Custody Receipt Securities. The Trustee will not be
in possession of or be assignee of record of any underlying assets for a Private
Label Custody Receipt Security. See "The Trust Assets -- Government Securities".
Each Private Label Custody Receipt Security to be transferred to the
Trust will be identified in a schedule appearing as an exhibit to the related
Trust Agreement (the "Private Label Custody Receipt Security Schedule"), which
will specify the original principal amount, outstanding principal balance as of
the Cut-off Date, or subsequent cut-off date, annual interest rate and maturity
date for each Private Label Custody Receipt Security. In the Trust Agreement, to
the extent that any Private Label Custody Receipt Securities are purchased from
the Depositor, the Depositor will represent and warrant to the Trustee regarding
the Private Label Custody Receipt Securities:
(a) that the information contained in the Private Label Custody
Receipt Schedule is true and correct in all material respects;
(b) that immediately prior to the conveyance of the Private Label
Custody Receipt Securities, the Depositor had good title to and was the sole
owner of the Private Label Custody Receipt Securities;
(c) that there has been no other sale by it of the related Private
Label Custody Receipt Securities; and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the related Private Label Custody Receipt Securities.
Repurchase and Substitution of Non-Conforming Base Assets
In general, the Depositor and/or the Seller or another entity will
make specific representations and warranties to the Trust regarding the Base
Assets to be purchased by the Trust. To the extent described in the related
prospectus supplement, the applicable Agreement will provide that if the
Depositor, the Seller or another entity cannot cure a breach of representations
and warranties in all material respects within the time period specified in the
related prospectus supplement after notification by the Trustee of the breach,
and if the breach is of a nature that materially and adversely affects the value
of a Base Asset, then the Depositor, the Seller or another entity will be
required to repurchase the affected Base Assets on the terms and conditions and
in the manner described in the related prospectus supplement. If provided in the
related prospectus supplement, the Depositor, the Seller or another entity may,
rather than repurchase a Base Asset as described above, remove the affected Base
Asset from the Trust (the "Removed Base Asset") and substitute in its place one
or more other Base Assets meeting the qualifications described in the related
prospectus supplement each, a "Qualifying Substitute Base Asset". The
above-described cure, repurchase or substitution obligations, subject to
specific exceptions which, if applicable, will be specified in the related
prospectus supplement, shall constitute the sole remedies available to holders
of Securities or the Trustee, or Indenture Trustee, for a breach of a
representation or warranty in respect of a Base Asset. Where Base Assets are
purchased by a Depositor from a Seller and reconveyed to the Trustee, the
Depositor's only source of funds to effect any cure, repurchase or substitution
generally will be through the enforcement of the corresponding obligations of
the Seller to the Depositor.
Trust Accounts
With respect to any Series of Securities that includes Notes, the
Owner Trustee will establish and maintain with the related Indenture Trustee:
o one or more accounts, in the name of the Indenture Trustee on
behalf of the related Securityholders, into which all payments
made on or in respect of the related Base Assets will be
deposited (the "Collection Account"), and
o one or more accounts, in the name of the Indenture Trustee on
behalf of the Noteholders, into which amounts released from the
Collection Account and any Reserve Account or other form of
Series Enhancement for payment to the Noteholders will be
deposited and from which all payments to these Noteholders will
be made (the "Note Payment Account").
With respect to each Trust, the Trustee will establish and maintain one or more
accounts with the related Trustee, in the name of that Trustee on behalf of the
Certificateholders, into which amounts released from the Collection Account and
any Reserve Account or other form of Series Enhancement for distribution to the
Certificateholders will be deposited and from which all distributions to the
Certificateholders will be made (the "Certificate Payment Account "). With
respect to any Series that does not include Notes, the Trustee will also
establish and maintain the Collection Account and any other account in the name
of the related Trustee on behalf of the related Certificateholders.
For each Series of Securities, funds in the Collection Account, Note
Payment Account and Certificate Payment Account and any Reserve Account or other
accounts, identified in the related prospectus supplement (collectively, the
"Trust Accounts") will be invested as provided in the related Agreement or
Indenture in Eligible Investments. "Eligible Investments" will generally be
limited to investments acceptable to the Rating Agencies as being consistent
with the rating of the related Securities. Except as described in this
Prospectus or in the related prospectus supplement, Eligible Investments will be
limited to obligations or securities that mature on or before the date of the
next scheduled distribution to Securityholders of the related Series. However,
to the extent permitted by the Rating Agencies, funds in any Reserve Account may
be invested in securities that will not mature prior to the date of the next
scheduled distribution with respect to the Notes or Certificates and will not be
sold prior to maturity to meet any shortfalls. Thus, the amount of available
funds on deposit in a Reserve Account at any time may be less than the balance
of the Reserve Account. If the amount required to be withdrawn from a Reserve
Account to cover shortfalls in collections with respect to the related Base
Assets, as provided in the related prospectus supplement, exceeds the amount of
available funds on deposit in the Reserve Account, a temporary shortfall in the
amounts distributed to the related Noteholders or Certificateholders could
result, which could, in turn, increase the average life of the related Notes or
Certificates. The related prospectus supplement may provide that investment
earnings on funds deposited in the Trust Accounts, net of losses and investment
expenses (collectively, "Investment Earnings"), will be treated as collections
of interest on the related Base Assets.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either:
o a segregated account with an Eligible Institution, or
o a segregated trust account with the corporate trust department of
a depository institution organized under the laws of the United
States of America or any one of the states of the United States
of America or the District of Columbia, or any domestic branch of
a foreign bank, having corporate trust powers and acting as
trustee for funds deposited in the segregated trust account, so
long as any of the securities of the depository institution have
a credit rating from each Rating Agency in one of its generic
rating categories that signifies investment grade.
"Eligible Institution" means, with respect to a Trust:
(a) the corporate trust department of the related Indenture Trustee or
Trustee, as applicable, or
(b) a depository institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank,
(1) that has either,
(A) a long-term unsecured debt rating acceptable to the Rating
Agencies, or
(B) a short-term unsecured debt rating or certificate of
deposit rating acceptable to the Rating Agencies, and
(2) whose deposits are insured by the FDIC.
Reports to Certificateholders
The Trustee will prepare and forward to each Certificateholder on each
Distribution Date, or as soon after each Distribution Date as is practicable, a
statement setting forth, to the extent applicable to any Series, the information
specified in the related prospectus supplement for the related Series. In
addition, within a reasonable period of time after the end of each calendar
year, the Trustee will be required to furnish to each holder of record at any
time during the calendar year a statement setting forth the information
specified in the related prospectus supplement, which will include information
intended to enable holders of Certificates to prepare their tax returns.
Information in the Distribution Date reports and the annual reports provided to
the holders will not have been examined and reported upon by an independent
public accountant. However, any Servicer will provide to the Trustee an annual
report by independent public accountants with respect to the Servicer's
servicing of the Receivables. See "Servicing of Receivables -- Evidence as to
Compliance".
Servicer Defaults
With respect to a Series of Receivables Pooling Certificates,
"Servicer Defaults" under the Pooling and Servicing Agreement for a Series
generally include:
(a) any failure by the Servicer to deposit amounts in the Collection
Account and any Payment Account to enable the Trustee to distribute to
Certificateholders of the Series any required payment, which failure continues
unremedied for five days after the giving of written notice of failure to the
Servicer by the Trustee for the Series, or to the Servicer and the Trustee by
the holders of the required percentage of any Class of Securities of the related
Series specified in the related prospectus supplement,
(b) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which continues unremedied for 30 days after the giving of
written notice of the failure to the Servicer by the Trustee, or to the Servicer
and the Trustee by the holders of the required percentage of any Class of
Securities of the related Series,
(c) events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and specific actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations,
and
(d) other events that shall be specified in the related prospectus
supplement.
Rights Upon Servicer Defaults
With respect to a Series of Receivables Pooling Certificates, so long
as a Servicer Default remains unremedied under the Pooling and Servicing
Agreement for a Series, and subject to any right of any Indenture Trustee, the
Trustee for the Series or holders of the required percentage of any Class of
Securities specified in the related prospectus supplement may terminate all of
the rights and obligations of the Servicer as servicer under the Pooling and
Servicing Agreement in and to the Receivables, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Pooling and Servicing Agreement and will be entitled to reasonable
servicing compensation not to exceed the applicable Servicing Fee, together with
other servicing compensation in the form of assumption fees, late payment
charges or as otherwise provided in the Pooling and Servicing Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a financial
institution, bank or loan servicing institution with a net worth of at least
$15,000,000 to act as successor Servicer under the provisions of the Pooling and
Servicing Agreement relating to the servicing of the Receivables. The successor
Servicer would be entitled to reasonable servicing compensation in an amount not
to exceed the Servicing Fee as set forth in the related prospectus supplement,
together with the other servicing compensation in the form of assumption fees,
late payment charges or otherwise, as provided in the Pooling and Servicing
Agreement.
During the continuance of any Servicer Default under the Pooling and
Servicing Agreement for a Series, the Trustee for the Series will have the right
to take action to enforce its rights and remedies and to protect and enforce the
rights and remedies of the Certificateholders of the Series, and holders of the
required percentages of the Certificates specified in the related prospectus
supplement may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred upon the Trustee. The Trustee, however, will not be under any
obligation to pursue any remedy or to exercise any trusts or powers unless the
Certificateholders have offered the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred by the Trustee
in or by pursuit of remedy or exercise of trusts or powers. Also, the Trustee
may decline to follow any direction if the Trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the nonassenting Certificateholders.
No Certificateholder of a Series, solely by virtue of the holder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement for the related Series to institute any proceeding with
respect to the Pooling and Servicing Agreement, unless the holder previously has
given to the Trustee for the Series written notice of default and unless the
holders of the required percentages of the outstanding Securities specified in
the related prospectus supplement have made written request upon the Trustee to
institute a proceeding in its own name as Trustee under the Pooling and
Servicing Agreement and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any proceeding.
The Trustee
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Certificates will be set
forth in the related prospectus supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor, the Seller or the
Servicer. In addition, for the purpose of meeting the legal requirements of some
local jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust relating to a Series of
Securities. In the event of an appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the applicable Agreement
relating to the Series will be conferred or imposed upon the Trustee and each
separate trustee or co-trustee jointly, or in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform specific acts, singly
upon the separate trustee or co-trustee who shall exercise and perform these
rights, powers, duties and obligations solely at the direction of the Trustee.
The Trustee may also appoint agents to perform any of the responsibilities of
the Trustee, which agents shall have any or all of the rights, powers, duties
and obligations of the Trustee conferred on them by the appointment; provided
that the Trustee shall continue to be responsible for its duties and obligations
under the applicable Agreement.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of the applicable Agreement, the Securities or of any Base Asset,
Series Enhancement or related documents. If no Servicer Default, as defined in
the related Pooling and Servicing Agreement, if applicable, has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of the documents furnished by it or the Securityholders to
the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the
Securityholders upon a Servicer Default. See "-- Rights Upon Servicer Defaults"
above. The Trustee is not required to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties under an
Agreement, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of funds or adequate indemnity
against risk or liability is not reasonably assured to it.
Replacement of the Trustee
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time:
o by the Depositor, if the Trustee ceases to be eligible to
continue as under the related Agreement,
o if the Trustee becomes insolvent, or
o by the holders of the required percentages of the outstanding
Securities specified in the related prospectus supplement upon 30
days' advance written notice to the Trustee and to the Depositor.
Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
Amendment of the Agreement
The Agreement for each Series of Securities may be amended by the
Depositor and the related Trustee, and where applicable the Seller and the
Servicer, without notice to or consent of the Securityholders:
(a) to cure any ambiguity,
(b) to correct any defective provisions or to correct or supplement
any provision in the Agreement which may be inconsistent with any other
provision in the Agreement,
(c) to add to the duties of the Depositor, Seller or Servicer,
(d) to add any other provisions with respect to matters or questions
arising under the related Agreement or related Series Enhancement,
(e) to add or amend any provisions of the Agreement as required by a
Rating Agency in order to maintain or improve the rating of any Class of the
Securities,
(f) to comply with any requirements imposed by the Code, or
(g) to make other amendments as are specified in the related
prospectus supplement;
provided that any amendment pursuant to clause (d) or (g) above will not
adversely affect in any material respect the interests of any Securityholders of
the related Series, as evidenced by an opinion of counsel.
Any amendment except pursuant to clause (f) of the preceding sentence shall be
deemed not to adversely affect in any material respect the interests of any
Securityholder if the Trustee receives written confirmation from each Rating
Agency rating the Securities that the amendment will not cause the Rating Agency
to reduce the then current rating of the Securities. The Agreement for each
Series may also be amended by the Depositor and the Trustee, and where
applicable the Seller and the Servicer, with the consent of the holders of the
required percentages of the outstanding Securities of each Series affected by
the amendment of the Agreement specified in the related prospectus supplement,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or modifying in any manner
the rights of Securityholders of the related Series; provided, however, that no
amendment may:
o reduce the amount or delay the timing of payments on any Security
without the consent of the holder of that Security; or
o reduce the aforesaid percentage of aggregate outstanding
principal amount of Securities of each Class, the holders of
which are required to consent to any amendment.
List of Certificateholders
Upon written request of three or more Certificateholders of record of
a Series for purposes of communicating with other Certificateholders with
respect to their rights under the Agreement or under the Certificates for the
Series, which request is accompanied by a copy of the communication which the
Certificateholders propose to transmit, the Trustee will afford these
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Certificateholders.
Termination
The obligations created by the Agreement for a Series will terminate
upon the distribution to Certificateholders of all amounts distributable to them
pursuant to that Agreement after the earliest to occur of:
o the final payment or other liquidation of the last Base Asset
remaining in the Trust for the related Series, or
o the repurchase, as described below, by the Servicer from the
Trustee for the related Series of all Base Assets and other
property at that time subject to the Agreement.
The Agreement for each Series will permit, but will not require, the Servicer,
the Seller and/or the Depositor to repurchase from the Trust for the Series all
remaining Base Assets at a price equal to 100% of the aggregate principal amount
of the Base Assets plus, with respect to any property acquired in respect of a
Base Asset, if any, the outstanding principal amount of the related Base Asset,
and unreimbursed expenses, that are reimbursable pursuant to the terms of the
Agreement, plus accrued interest on the unreimbursed expenses at the weighted
average rate on the related Base Assets through the last day of the Monthly
Period in which the repurchase occurs. The exercise of this right will effect
early retirement of the Certificates of the Series, but the Servicer's right to
so purchase is subject to the aggregate principal balance of the Base Assets at
the time of repurchase being less than a fixed percentage, to be set forth in
the related prospectus supplement, of the Cut-off Date aggregate principal
balance. In no event, however, will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the last survivor of persons
identified in the related prospectus supplement. For each Series, the Servicer
or the Trustee, as applicable, will give written notice of termination of the
Agreement to each Certificateholder, and the final distribution will be made
only upon surrender and cancellation of the Certificates at an office or agency
specified in the notice of termination. If so provided in the related prospectus
supplement for a Series, the Depositor or another entity may effect an optional
termination of the Trust under the circumstances described in the related
prospectus supplement. See "Description of the Certificates-- Receivables
Pooling Certificates -- Optional Termination; Final Payment of Principal".
Payment in Full of the Notes
With respect to any Series of Securities that includes Notes, the
Trust Agreement will provide that upon the payment in full of all outstanding
Notes of a given Series and the satisfaction and discharge of the related
Indenture, the related Trustee will succeed to all the rights of the Indenture
Trustee, and the Certificateholders of the Series will succeed to all the rights
of the Noteholders of the Series under the related Trust Agreement, to the
extent and in the matter provided in the Trust Agreement.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
The following discussion contains summaries of some legal aspects of
Products which are general in nature. As a consequence, investors should
consider the issues raised by the following discussion as relevant in connection
with both the Receivables and the Receivables underlying the WALTR Securities.
Because some legal aspects are governed by applicable state law, which laws may
differ substantially, the summaries do not purport to be complete nor purport to
reflect the laws of any particular state, nor purport to encompass the laws of
all states in which Receivables, or the Receivables underlying the WALTR
Securities, originate. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Receivables,
and the Receivables underlying the WALTR Securities.
Transfer of Receivables
With respect to each transfer of Receivables to a Trust, the Seller
and/or the Depositor will warrant in the applicable Agreement that the transfer
constitutes either a valid transfer and assignment to the Trust of all right,
title and interest of the Seller, and/or the Depositor, in and to the
Receivables free and clear from liens arising from or through the Seller, or the
Depositor, except, to the extent specified in the related prospectus supplement,
for potential tax liens, any interest of the Seller or the Depositor as holder
of the Depositor's Interest and the Servicer's right to receive interest and
investment earnings ,net of losses and investment expenses, in respect of the
Collection Account, or a valid grant to the Trust of a security interest in the
Receivables. The Seller and/or the Depositor will also warrant in the Agreement
that, in the event that the transfer of the Receivables to the Trust is deemed
to create a security interest under the Uniform Commercial Code (the "UCC") as
in effect in the state in which its principal office is located, there will
exist a valid, subsisting and enforceable first priority perfected security
interest in the Receivables in favor of the Trust and a valid, subsisting and
enforceable first priority perfected security interest in the Receivables later
created in the relevant Accounts in favor of the Trust upon their creation
except for specific liens as described in the Agreement.
The Receivables are generally considered to be "chattel paper",
"general intangibles" or "accounts" for purposes of the UCC. Both the transfer
of accounts and the transfer of accounts as security for an obligation are
treated under Article 9 of the UCC as creating a security interest in the
Receivables and are subject to its provisions, and the filing of appropriate
financing statements is required to perfect the security interest of the Trust.
Financing statements covering the Receivables will be filed with the appropriate
governmental authority to protect the interest of the Depositor and the Trust.
There are limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the date on
which the Receivables are transferred to the Trust could have an interest in
these Receivables with priority over the Trust's interest. Under the Pooling and
Servicing Agreement, however, the Seller and/or the Depositor will warrant that
the Receivables have been transferred to the Trust free and clear of the lien of
any third party, except for some tax and other governmental liens. In addition,
the Seller and the Depositor will each covenant that, except as permitted by the
Pooling and Servicing Agreement, it will not sell, pledge, assign, transfer or
grant any lien on any Receivables, or any interest in the Receivables, other
than to the Trust. A tax or other government lien on property of the Seller or
the Depositor arising prior to the time a Receivable comes into existence may
also have priority over the interest of the Trust in the Receivables. In
addition, if a Seller is a Bank, if the FDIC were appointed as receiver of the
Bank, some administrative expenses of the receiver may also have priority over
the interest of the Trust in these Receivables.
A case decided by the United States Court of Appeals for the Tenth
Circuit contains language to the effect that accounts sold by an entity which
subsequently became bankrupt remained property of the debtor's bankruptcy
estate. If a Seller were to become a debtor under the federal bankruptcy code
and a court were to follow the reasoning of the Tenth Circuit, Securityholders
could experience a delay or reduction in distributions.
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans and
related assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
USE OF PROCEEDS
The Depositor will use the net proceeds from the sale of each Series
of Securities for one or more of the following purposes:
(a) to purchase the related Base Assets and/or Series Enhancement,
(b) to repay indebtedness which has been incurred to obtain funds to
acquire the related Base Assets and/or Series Enhancement,
(c) to fund the purchase of the related Base Assets and/or Series
Enhancement by the related Trust on the Closing Date or to establish a
Pre-Funding Account for the Series,
(d) to establish any Reserve Account or Cash Collateral Accounts
described in the related prospectus supplement, or
(e) to pay costs of structuring and issuing the Securities.
If so specified in the related prospectus supplement, the purchase of the Base
Assets for a Series may be effected in whole or in part by an exchange of
Securities with the Seller of the related Base Assets.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of Securities. Stroock & Stroock & Lavan LLP, New York, New York or
any other counsel specified in the related prospectus supplement ("Federal Tax
Counsel"), will deliver its opinion regarding some related federal income tax
matters discussed below, a copy of which will be filed with the SEC in a Current
Report on Form 8-K or in a post-effective amendment to the Registration
Statement. The opinion of Federal Tax Counsel specifically addresses only those
issues specifically identified below as being covered by the opinion; however,
the opinion also states that the additional discussion set forth below
accurately sets forth Federal Tax Counsel's advice with respect to material
federal income tax issues. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of Notes ("Note Owners") or Certificates
("Certificate Owners", together with Note Owners, "Security Owners") that are
insurance companies, regulated investment companies or dealers in securities.
Moreover, there are no cases or Internal Revenue Service ("IRS") rulings on
similar transactions involving both debt and equity interests issued by a trust
with terms similar to those of the Notes and the Certificates. As a result, the
IRS might disagree with all or part of the discussion below. Prospective
investors are urged to consult their own tax advisors in determining the
federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated under the Code and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Federal Tax Counsel regarding some related federal income tax
matters. An opinion of Federal Tax Counsel, however, is not binding on the IRS
or the courts. No ruling on any of the issues discussed below will be sought
from the IRS. For purposes of the following summary, references to the Trust,
the Notes, the Certificates and related terms, parties and documents shall be
deemed to refer, unless otherwise specified in this Prospectus, to each Trust
and the Notes, Certificates and related terms, parties and documents applicable
to each Trust.
OWNER TRUSTS
TAX CHARACTERIZATIONS OF THE OWNER TRUSTS
In the case of an Owner Trust, Federal Tax Counsel will deliver its
opinion that the Trust will not be an association, or publicly traded
partnership, taxable as a corporation for federal income tax purposes. The
opinion of Federal Tax Counsel will be based on the assumption that the terms of
the Trust Agreement and related documents will be complied with, and on the
Federal Tax Counsel's conclusions that the nature of the income of the Trust, or
the restrictions, if any, on transfers of the Certificates, will exempt the
Trust from the rule that some publicly traded partnerships are taxable as
corporations.
If an Owner Trust were taxable as a corporation for federal income tax
purposes, the Owner Trust would be subject to corporate income tax on its
taxable income. The Trust's taxable income would include all of its income on
the related Base Assets, which might be reduced by its interest expense on the
Notes. Any corporate income tax could materially reduce cash available to make
payments on the Notes and distributions on the Certificates, and Certificate
Owners, and possibly Note Owners could be liable for any tax that is unpaid by
the Trust.
TAX CONSEQUENCES TO NOTE OWNERS
Treatment of the Notes as Indebtedness. The Trust will agree, and the
Note Owners will agree by their purchase of Notes, to treat the Notes as debt
for federal tax purposes. Federal Tax Counsel will advise the Owner Trust that
the Notes will be classified as debt for federal income tax purposes, or
classified in another manner as shall be provided in the related prospectus
supplement. As noted above, there are no cases or IRS rulings on similar
transactions involving both debt and equity interests issued by a trust with
terms similar to those of the Notes and the Certificates and, as a result, the
IRS might disagree with a conclusion. 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. If so treated, the Trust might be treated as a
publicly traded partnership that would be taxable as a corporation unless it met
specified qualifying income tests, and the resulting taxable corporation would
not be able to reduce its taxable income by deductions for interest expense on
Notes recharacterized as equity. Treatment of the Notes as equity interests in a
partnership could have adverse tax consequences to some holders, even if the
Trust were not treated as a publicly traded partnership taxable as a
corporation. For example, income allocable to foreign holders might be subject
to U.S. federal income tax and U.S. federal tax return filing and withholding
requirements, and individual holders might be subject to limitations on their
ability to deduct their share of Trust expenses. The discussion below assumes
that the Notes will be characterized as debt for federal income tax purposes.
Interest Income on the Notes. The taxation of interest on a Note will
depend on whether the interest constitutes "qualified stated interest". Interest
on a Note that constitutes qualified stated interest is includible in a Note
Owner's income as ordinary interest income when actually or constructively
received, if the Note Owner uses the cash method of accounting for federal
income tax purposes, or when accrued, if the Note Owner uses an accrual method
of accounting for federal income tax purposes. Interest that does not constitute
qualified stated interest is included in a Note Owner's income under the rules
described below under "--Original Issue Discount", regardless of the Note
Owner's method of accounting, or, in some circumstances, under rules governing
contingent payments which are set out in regulations issued in final form on
June 11, 1996 (the "1996 Contingent Debt Regulations"). Notwithstanding the
foregoing, interest that is payable on a Note with a fixed maturity of one year
or less from its issue date is included in a Note Owner's income under the rules
described below under "--Short Term Notes".
In general, "qualified stated interest " is stated interest that,
during the entire term of the Note, is unconditionally payable at least annually
at a single fixed rate of interest or, subject to exceptions summarized below,
at a variable rate that is a single "qualified floating rate" or a single
"objective rate". If stated interest is unconditionally payable at two or more
qualified floating rates, a single fixed rate and one or more qualified floating
rates, or a single fixed rate and a single objective rate that is a "qualified
inverse floating rate", all or a portion of the stated interest might be treated
as "qualified stated interest". See "--Original Issue Discount", below. Under
Treasury Regulations under Sections 1271-1275 of the Code (the "OID
Regulations"), interest is considered unconditionally payable only if late
payment or nonpayment is remote or reasonable remedies exist to compel payment.
If stated interest is payable at a variable rate other than in accordance with
the foregoing, the interest will not be treated as "qualified stated interest",
and it is unclear whether these payments must be treated as part of a Note's
"stated redemption price at maturity" and governed by the rules described below
under "--Original Issue Discount" or, alternatively, must be taxed as contingent
interest under, or under rules similar to, the 1996 Contingent Debt Regulations,
or in some other manner.
Stated interest generally qualifies as being payable at a "qualified
floating rate" if variations in the value of the rate can reasonably be expected
to measure contemporaneous fluctuations in the cost of newly borrowed funds in
the currency in which the Note is denominated. A variable rate will be
considered a qualified floating rate if the variable rate equals:
a) the product of an otherwise qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, or
b) an otherwise qualified floating rate, or the product described in
clause (a), plus or minus a fixed rate.
If the variable rate equals the product of an otherwise qualified floating rate
and a single multiplier greater than 1.35 or less than or equal to 0.65,
however, the rate will generally constitute an objective rate, described more
fully below.
Stated interest qualifies as payable at an "objective rate" if the
rate is determined using a single fixed formula and is based on objective
financial information or economic information. However, an objective rate does
not include a rate based on information that is within the control of the issuer
or that is unique to the circumstances of the issuer, or a related party. The
IRS may designate other objective rates. An objective rate is a "qualified
inverse floating rate " if:
o the rate is equal to a fixed rate minus a qualified floating
rate, and
o the variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the cost of newly
borrowed funds, disregarding some related caps, floors, governors
or similar restrictions.
All or a portion of interest that otherwise is treated as qualified
stated interest under the rules summarized above will not be treated as
qualified stated interest if, among other circumstances:
(a) the variable rate of interest is subject to one or more minimum or
maximum rate floors or ceilings or one or more governors limiting the amount of
increase or decrease in each case which are not fixed throughout the term of the
Note and which are reasonably expected as of the issue date to cause the rate in
some accrual periods to be significantly higher or lower than the overall
expected return on the Note determined without a floor or ceiling;
(b) it is reasonably expected that the average value of the variable
rate during the first half of the term of the Note will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the term of the Note;
(c) the "issue price" of the Note, as described below, exceeds the
total noncontingent principal payments by more than an amount equal to the
lesser of .015 multiplied by the product of the total noncontingent principal
payments and the number of complete years to maturity from the issue date, or,
in some cases, its weighted average maturity, and 15 percent of the total
noncontingent principal;
(d) the Note does not provide that a qualified floating rate or
objective rate in effect at any time during the term of the Note is set at the
value of the rate on any day that is no earlier than three months prior to the
first day on which the value is in effect and no later than one year following
that first day, or
(e) if interest is not unconditionally payable.
In these situations, as well as others, it is unclear whether interest payments
must be treated either as part of a Note's "stated redemption price at
maturity," as described below, resulting in original issue discount, or
represent contingent payments subject to taxation under, or under rules similar
to, the 1996 Contingent Debt Regulations, or some other manner.
Original Issue Discount. Notes may be issued with "original issue
discount "). Rules governing original issue discount are set forth in Sections
1271-1275 of the Code and the OID Regulations. The discussion in this Prospectus
is based in part on the OID Regulations. Note Owners also should be aware that
the OID Regulations do not address all issues relevant to prepayable securities
such as the Notes.
In general, a Note's original issue discount, if any, is the
difference between the "stated redemption price at maturity" of the Note and its
"issue price".
The original issue discount with respect to a Note will be considered
to be zero if it is less than a specified de minimis amount of 0.25% of the
Note's stated redemption price at maturity multiplied by the number of complete
years from the date of issue of the Note to its maturity date or, in the case of
Notes that have more than one principal payment or that have interest payments
that are not qualified stated interest, the weighted average maturity of the
Note, as specially defined for tax purposes. Because of the possibility of
prepayments, it is not clear how the de minimis rules will apply to the Notes.
It is likely that the anticipated rate of prepayments assumed in pricing the
debt instrument (the "Prepayment Assumption") will be required to be used in
determining the weighted average maturity of the Notes. In the absence of
authority to the contrary, the Depositor presently expects to apply the de
minimis rule by using the Prepayment Assumption. Generally, a Note Owner
includes de minimis original issue discount in income as principal payments are
made. The amount includable in income with respect to each principal payment
equals a pro rata portion of the entire amount of de minimis original issue
discount with respect to that Note. Any de minimis amount of original issue
discount includable in income by a Note Owner is generally treated as a capital
gain if the Note is a capital asset in the hands of the Note Owner.
The "stated redemption price at maturity" of a Note generally will be
equal to the sum of all payments, whether denominated as principal or interest,
to be made with respect to the Note other than "qualified stated interest".
In general, the "issue price" of a Note is the first price at which a
substantial amount of the Notes of a class are sold for money to the public,
excluding bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers.
If a Note is determined to be issued with original issue discount, the
Note Owner must generally include the original issue discount in ordinary gross
income for federal income tax purposes as it accrues in advance of the receipt
of any cash attributable to income. The amount of original issue discount, if
any, required to be included in a Note Owner's ordinary gross income for federal
income tax purposes in any taxable year will be computed in accordance with
Section 1272(a) of the Code and the OID Regulations. Under this section and the
OID Regulations, original issue discount accrues on a daily basis under a
constant yield method that takes into account the compounding of interest.
The amount of original issue discount includable in income by a Note
Owner is the sum of the "daily portions" of the original issue discount for each
day during the taxable year on which the holder held the Note. The daily
portions of original issue discount are determined by allocating to each day in
any "accrual period" a pro rata portion of the excess, if any, of:
(a) the sum of,
(1) the present value of all remaining payments to be made on the
Note as of the close of the "accrual period", and
(2) the payments during the accrual period of amounts included in
the stated redemption price of the Note over,
(b) the "adjusted issue price" of the Note at the beginning of the
accrual period.
Generally, the "accrual period" for the Notes corresponds to the intervals at
which amounts are paid or compounded with respect to the Note, beginning with
their date of issuance and ending with the maturity date. The "adjusted issue
price" of a Note at the beginning of any accrual period is the sum of the issue
price and accrued original issue discount for each prior accrual period reduced
by the amount of payments other than payments of qualified stated interest made
during each prior accrual period. The Code and related legislative history
require, pending the issuance of Treasury Regulations, the present value of the
remaining payments to be determined on the bases of:
o the original yield to maturity, determined on the basis of
compounding at the close of each accrual period and properly
adjusted for the length of the accrual period,
o events, including actual prepayments, which have occurred before
the close of the accrual period, and
o the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption.
Although original issue discount, if any, will be reported to Note Owners based
on the Prepayment Assumption, no representation is made to Note Owners that the
Notes will be prepaid at that rate or at any other rate.
In general, a subsequent purchaser of a Note will also be required to
include in the purchaser's ordinary gross income for federal income tax purposes
the original issue discount, if any, accruing with respect to the Note, unless
the price paid equals or exceeds the Note's stated redemption price at maturity.
If the price paid exceeds the Note's "adjusted issue price", but does not equal
or exceed the stated redemption price at maturity, the amount of original issue
discount to be accrued will be reduced in accordance with a formula set forth in
Section 1272(a)(7)(B) of the Code. If the price paid is less than the Note's
adjusted issue price, the purchaser will be required to include in income any
original issue discount on the Note and, to the extent the price paid is less
than the adjusted issue price, the Note will be treated as having been purchased
with "market discount". See "--Market Discount", below.
If a variable rate Note is deemed to have been issued with original
issue discount, as described above, the amount of original issue discount
accrues on a daily basis under a constant yield method that takes into account
the compounding of interest; provided, however, that the interest associated
with this Note generally is assumed to remain constant throughout the term of
the Note at a rate that, in the case of a qualified floating rate or qualified
inverse floating rate, equals the value of the qualified floating rate as or
qualified inverse floating rate as of the issue date of the Note, or, in the
case of an objective rate other than a qualified floating rate, at a fixed rate
that reflects the yield that is reasonably expected for the Note. A holder of
this type of Note would then recognize original issue discount during each
accrual period which is calculated based upon the Note's assumed yield to
maturity. If the interest actually accrued or paid during an accrual period
exceeds, or is less than, the constant interest assumed to be accrued or paid
during the accrual period under the foregoing rules, qualified stated interest
or original issue discount allocable to an accrual period is increased, or
decreased, under rules set forth in the OID Regulations.
The Depositor believes that the owner of a Note determined to be
issued with original issue discount will be required to include the original
issue discount in ordinary gross income for federal income tax purposes computed
in the manner described above. However, the OID Regulations either do not
address or are subject to varying interpretations with respect to several issues
concerning the computation of original issue discount for like the Notes.
Market Discount. Notes, whether or not issued with original issue
discount, will be subject to the market discount rules of the Code. A purchaser
of a Note who purchases the Note at a price that is less than the Note's "stated
redemption price at maturity" or, in the case of a Note issued with original
issue discount, at a price that is less than the Note's "adjusted issue price"
(as these terms are described above under "--Original Issue Discount") will be
required to recognize accrued market discount as ordinary income as payments of
principal are received on the Note or upon the sale or exchange of the Note. In
general, the holder of a Note may elect to treat market discount as accruing
either:
o under a constant yield method that is similar to the method for
the accrual of original issue discount, or
o in proportion to accruals of original issue discount, or, if
there is no original issue discount, in proportion to accruals of
stated interest, in each case computed taking into account the
Prepayment Assumption.
The amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on the Note
is to be reduced by the amount previously treated as ordinary income under the
market discount rule.
The Code provides that the market discount in respect of a Note will
be considered to be zero if the market discount is less than a specified de
minimis amount of 0.25% of the Note's stated redemption price at maturity
multiplied by its weighted average remaining life as computed for tax purposes.
If market discount is treated as de minimis under this rule, the de minimis
market discount would be allocated among the scheduled payments included in the
stated redemption price at maturity of the Note, and the portion of the discount
allocable to each payment would be reported as income when the payment is made.
The Code grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, like the Notes, that are subject to repayment. Until the time
regulations are issued, rules described in the legislative history for these
provisions of the Code will apply. Note Owners who acquire a Note at a market
discount should consult their tax advisors concerning various methods which are
available for accruing that market discount.
In general, the Code requires a holder of a Note having market
discount to defer a portion of the interest deductions attributable to any
indebtedness incurred or continued to purchase or carry the Note. Alternatively,
a holder of a Note may elect to include market discount in gross income as it
accrues and, if the holder makes the election, the holder will be exempt from
this rule. The adjusted basis of a Note subject to the election will be
increased to reflect market discount included in gross income, thus reducing any
gain or increasing any loss on a sale or other taxable disposition.
Amortizable Premium. A Note Owner who holds the Note as a capital
asset and who purchased the Note at a price greater than its stated redemption
price at maturity will be considered to have purchased the Note at a premium. In
general, the Note Owner may elect under Code Section 171 to deduct the
amortizable bond premium as it accrues under a constant yield method. A Note
Owner's tax basis in the Note will be reduced by the amount of the amortizable
bond premium deducted. In addition, it appears that the same methods which apply
to the accrual of market discount on obligations providing for principal
payments prior to maturity are intended to apply in computing the amortizable
bond premium deduction with respect to a Note. Although there are Treasury
regulations dealing with amortizable bond premiums, they specifically do not
apply to prepayable debt instruments subject to Section 1272(a)(6), like the
Notes. However, by analogy to the regulations, any premium in excess of interest
income may be deductible to the extent of prior accruals of interest. Note
Owners who pay a premium for a Note should consult their tax advisors concerning
an election and rules for determining the method for amortizing bond premium.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit an election to accrue all interest, discount, including de
minimis market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to a Note, the Note Owner 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 the Note Owner acquires during the year
of the election or after the year of election. See "--Market Discount" above.
Similarly, a Note Owner that makes this election for a Note 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 the Note
Owner owns at the beginning of the first taxable year to which the election
applies or later acquires. See "-- Amortizable Premium", above. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Note is irrevocable.
Gain or Loss on Disposition. If a Note is sold, the selling Note Owner
will recognize gain or loss equal to the difference between the amount realized
from the sale and the selling Note Owner's adjusted basis in the Note. The
adjusted basis generally will equal the cost of the Note to the seller,
increased by any original issue discount and market discount on the Note
included in the seller's income, and reduced, but not below zero, by any
payments on the Note other than qualified stated interest and reduced further by
any amortizable premium. Except as discussed above with respect to market
discount, any gain or loss recognized upon a sale, exchange, retirement, or
other disposition of a Note will be capital gain or loss if the Note is held as
a capital asset and as long-term capital gain or loss if the Note Owner's
holding period exceeded one year. Special character rules apply to debt
instruments characterized as contingent debt instruments under the 1996
Contingent Debt Regulations. In general, under those rules gain is treated as
ordinary, and loss is treated as ordinary to the extent of prior ordinary income
inclusions.
Short-Term Notes. In the case of a Note with a maturity of one year or
less from its issue date (a "Short-Term Note"), no interest is treated as
qualified stated interest, and therefore all interest is included in original
issue discount. Note Owners that report income for federal income tax purposes
on an accrual method and other Note Owners, including banks and dealers in
securities, are required to include original issue discount in income on these
Short-Term Notes on a straight-line basis, unless an election is made to accrue
the original issue discount according to a constant yield method based on daily
compounding.
Any other Note Owner of a Short-Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount on a
Short- Term Note in income currently are required to defer deductions for any
interest paid on indebtedness incurred or continued to purchase or carry the
Short-Term Note in an amount not exceeding the deferred interest income with
respect to the Short-Term Note, which includes both the accrued original issue
discount and accrued interest that are payable but that have not been included
in gross income, until deferred interest income is realized. The Note Owner may
elect to apply the foregoing rules, except for the rule characterizing gain on
sale, exchange or retirement as ordinary, with respect to "acquisition discount"
rather than original issue discount. Acquisition discount (the "Acquisition
Discount") is the excess of the stated redemption price at maturity of the
Short-Term Note over the Note Owner's basis in the Short-Term Note. This
election applies to all obligations acquired by the taxpayer on or after the
first day of the first taxable year to which an election applies, unless revoked
with the consent of the IRS. A Note Owner's tax basis in a Short-Term Note is
increased by the amount included in the Owner's income on the Note.
Taxation of Certain Foreign Note Owners. As used in this Prospectus,
the term "Non- United States Person" means any Person other than a "United
States Person". A "United States Person" is an individual who is a citizen or
resident of the United States, a corporation, partnership or other entity
treated as such, created or organized in or under the laws of the United States
or any political subdivision of the United States, an estate the income of which
is subject to United States federal income taxation regardless of its source and
any trust with respect to which:
o a court of the United States is able to exercise primary
supervision over the administration of the trust, and
o one or more United States persons have the authority to control
all substantial decisions of the trust.
A "Non-United States Holder" means a Non-United States Person that is a Note
Owner.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Holders. The 1997 Withholding Regulations are generally effective for
payments after December 31, 1999, regardless of the issue date of the Note with
respect to which these payments are made, subject to specific transition rules.
The discussion under this heading and under "-- Backup Withholding and
Information Reporting", below, is not intended to include a complete discussion
of the provisions of the 1997 Withholding Regulations, and prospective investors
are urged to consult their tax advisors with respect to the effect of the 1997
Withholding Regulations.
In general, Non-United States Holders will not be subject to United
States federal withholding tax with respect to payments of principal and
interest on Notes, including original issue discount, provided that specific
conditions are met. Under United States federal income tax law now in effect,
and subject to the discussion of backup withholding in the following section,
payments of principal and interest, including original issue discount, with
respect to a Note to any Non-United States Holder will not be subject to United
States federal withholding tax, provided, in the case of interest, including
original issue discount, that:
(a) the Holder does not actually or constructively own 10% or more of
the equity of the Trust,
(b) the Holder is not for federal income tax purposes a controlled
foreign corporation related, directly or indirectly, to the Trust through equity
ownership,
(c) the Holder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code, and
(d) either:
(1) the Non-United States Holder certifies, under penalties of
perjury, to the Trust or paying agent, as the case may be, that
the Holder is a Non- United States Holder and provides the
Holder's name and address, or
(2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and
holds the Note, certifies, under penalties of perjury, to the
Trust or paying agent, as the case may be, that the certificate
has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and
furnishes the payor with a copy of the certificate.
A certificate described in this paragraph is effective only with respect to
payments of interest, including original issue discount, made by the certifying
Non-United States Holder after the issuance of the certificate in the calendar
year of its issuance and the two immediately succeeding calendar years. The
forgoing certification may be provided by the beneficial owner of a Note on IRS
Form W-8.
The 1997 Withholding Regulations provide optional documentation
procedures designed to simplify compliance by withholding agents. The 1997
Withholding Regulations will add "intermediary certification" options for some
qualifying withholding agents. Under one option, a withholding agent will be
allowed to rely on an IRS Form W-8 furnished by a financial institution or other
intermediary on behalf of one or more beneficial owners, or other
intermediaries, without having to obtain the beneficial owner certificate
described in the preceding paragraph, provided that the financial institution or
intermediary has entered into a withholding agreement with the IRS and is thus a
"qualified intermediary". Under another option, an authorized foreign agent of a
United States withholding agent will be permitted to act on behalf of the United
States withholding agent, provided specific conditions are met.
The 1997 Withholding Regulations will also provide presumptions with
respect to withholding for holders not providing the required certifications to
qualify for the withholding exemption described above. In addition, the 1997
Withholding Regulations will replace a number of current tax certification
forms, including IRS Form W-8 IRS, Form 1001, and IRS Form 4224, discussed
below, with restated forms and standardize the period of time for which
withholding agents can rely on these certifications.
Notwithstanding the foregoing, interest described in Section 871(h)(4)
of the Code will be subject to United States withholding tax at a 30% rate, or a
lower rate as may be provided by an applicable treaty. In general, interest
described in Section 871(h)(4) of the Code includes, subject to exceptions, any
interest the amount of which is determined by reference to receipts, sales or
other cash flow of the issuer or a related person, any income or profits of the
issuer or a related person, any change in the value of any property of the
issuer or a related person or any dividends, partnership distributions or
similar payments made by the issuer or a related person. Interest described in
Section 871(h)(4) of the Code may include other types of contingent interest
identified by the IRS in future Treasury Regulations. If the Trust issues Notes
the interest on which the Trust believes is described in Section 871(h)(4) of
the Code, the United States withholding tax consequences of any Notes will be
described in the applicable prospectus supplement.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest, including original issue discount, on the Note is
effectively connected with the conduct of that trade or business, the Non-United
States Holder, although exempt from the withholding tax discussed in the
preceding paragraphs, will be subject to United States federal income tax on the
interest, including original issue discount, in the same manner as if it were a
United States person. In lieu of the certificate described above, the Holder
will be required to provide a properly executed IRS Form 4224 annually in order
to claim an exemption from withholding tax. In addition, the Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30%, or any
lower rate as may be specified by an applicable treaty, of its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, interest, including original issue discount, on a Note will be
included in the earnings and profits of the Holder if the interest, including
original issue discount, is effectively connected with the conduct by the Holder
of a trade or business in the United States.
Generally, any gain or income, other than that attributable to accrued
interest, market discount or original issue discount in specific circumstances,
realized upon the sale, exchange, retirement or other disposition of a Note by a
Non-United States Holder will not be subject to United States federal income tax
unless:
o the gain or income is effectively connected with a trade or
business in the United States of the Non-United States Holder, or
o in the case of a Non-United States Holder who is a nonresident
alien individual, the Non-United States Holder is present in the
United States for 183 days or more in the taxable year of the
sale, exchange, retirement or other disposition and the
individual has a "tax home" as defined in Section 911(d)(3) of
the Code, in the United States.
Backup Withholding and Information Reporting. Under current United
States federal income tax law, information reporting requirements apply to
interest, including original issue discount, and principal payments made to, and
to the proceeds of sales before maturity by, particular Note Owners that are
United States Persons.
In addition, a 31% backup withholding tax will apply if the Note
Owner:
(a) fails to furnish its Taxpayer Identification Number ("TIN"),
which, for an individual, would be his or her Social Security Number, to the
payor in the manner required,
(b) furnishes an incorrect TIN and the payor is so notified by the
IRS,
(c) is notified by the IRS that it has failed properly to report
payments of interest and dividends, or
(d) in particular circumstances, fails to certify, under penalties of
perjury, that it has not been notified by the IRS that it is subject to backup
withholding for failure properly to report interest and dividend payments.
Backup withholding will not apply with respect to payments made to some exempt
recipients, like corporations, within the meaning of Section 7701(a) of the
Code, and tax-exempt organizations.
In the case of a Non-United States Holder, under Treasury Regulations,
backup withholding and information reporting will not apply to payments of
principal and interest made by the Trust or any paying agent of the Trust on a
Note with respect to which the holder has provided the required certification
under penalties of perjury that it is a Non-United States Holder or has
otherwise established an exemption, provided that:
o the Trust or paying agent, as the case may be, does not have
actual knowledge that the payee is a United States person, and
o other conditions are satisfied.
Subject to the discussion below, payments to or through the United
States office of a broker will be subject to backup withholding and information
reporting unless the holder certifies under penalties of perjury as to its
status as a Non-United States Holder and other qualifications, and no agent of
the broker who is responsible for receiving or reviewing the statement has
actual knowledge that it is incorrect, and provides his or her name and address
or the holder otherwise establishes an exemption.
In general, if principal or interest payments on a Note are collected
outside the United States by a foreign office of a custodian, nominee or other
agent acting on behalf of a Note Owner, the custodian, nominee or other agent
will not be required to apply backup withholding to payments made to the owner
and will not be subject to information reporting. However, if the custodian,
nominee or other agent is a United States Person for United States federal
income tax purposes, a controlled foreign corporation for United States tax
purposes, or a foreign person 50% or more of whose gross income is effectively
connected with its conduct of a United States trade or business for a specified
three-year period, the custodian, nominee or other agent may be subject to
information reporting, but not backup withholding, requirements with respect to
payment unless the custodian, nominee or other agent has in its records
documentary evidence that the Note Owner is not a United States person and
specific conditions are met or the Note Owner otherwise establishes an
exemption.
Under Treasury Regulations, payments on the sale, exchange or
retirement of a Note effected by or through a foreign office of a broker will
not be subject to backup withholding. However, if the broker is a United States
person, a controlled foreign corporation for United States tax purposes, or a
foreign person 50% or more of whose gross income is effectively connected with
its conduct of a United States trade or business for a specified three-year
period, information reporting, but not backup withholding, will be required
unless the broker has in its records documentary evidence that the Note Owner is
not a United States person and other conditions are met or the Note Owner
otherwise establishes an exemption.
The 1997 Withholding Regulations alter the forgoing rules in some
respects. In particular, the 1997 Withholding Regulations will provide specific
presumptions under which Non-United States Holders may be subject to backup
withholding in the absence of required certifications.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a Note Owner under the backup withholding rules will
be allowed as a refund or a credit against the owner's United States federal
income tax, provided that the required information is furnished to the IRS.
Note Owners should consult their tax advisors regarding the
application of information reporting and backup withholding to their particular
situations, the availability of an exemption from reporting and backup
withholding, and the procedure for obtaining an exemption, if available.
TAX CONSEQUENCE TO CERTIFICATE OWNERS
Treatment of the Trust as a Partnership. The Trust will agree, and the
related Certificate Owners will agree by their purchase of Certificates, to
treat the Trust 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, the partners of
the partnership being the Certificate Owners, including, to the extent relevant,
the Seller or the Depositor in its capacity as recipient of distributions from
any reserve fund, and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, the Seller, the Depositor and the Servicer is not
definite because there is no authority on transactions closely comparable to
that contemplated in this Prospectus. A variety of alternative characterizations
are possible. For example, to the extent the Certificates have particular
features characteristic of debt, the Certificates might be considered debt of
the Seller, the Depositor or the Trust. As long as the characterization did not
result in the Trust being subject to tax as a corporation, the characterization
is not expected to result in materially adverse tax consequences to Certificate
Owners as compared to the consequences from treatment of the Certificates as
equity in a partnership, described below.
On December 17, 1996, final Treasury Regulations (the "Check-the-Box
Regulations") were issued which generally permit non-corporate entities, like
the Trust, to elect whether to be taxed as corporations or partnerships. Under
the Check- the-Box Regulations, the Trust will be classified as a partnership
unless it elects to be classified as an association taxable as a corporation.
Except as expressly provided in the applicable prospectus supplement, the Trust
will not elect to be classified as an association taxable as a corporation.
However, the Check-the-Box-Regulations would have no effect on whether a
partnership should be classified as a publicly traded partnership taxable as a
corporation.
The following discussion assumes that the Certificates represent
equity interests in a partnership, none of the Certificates represents Stripped
Certificates 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 the
Certificates will be disclosed in the related prospectus supplement.
Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificate Owner will be required to take
into account separately the Owner's allocable share of income, gains, losses,
deductions and credits of the Trust, whether or not there is a corresponding
cash distribution. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificate Owners may
become liable for taxes on Trust income even if they have not received cash from
the Trust to pay the taxes. The Trust's income will consist primarily of
interest and finance charges earned on the related Base Assets, including
appropriate adjustments for market discount, original issue discount and bond
premium, and any gain upon collection or disposition of the related Base Assets.
The Trust's deductions will consist primarily of interest accruing with respect
to the Notes to the extent the Notes are properly characterized as debt, as
discussed above under "--Tax Consequences to Note Owners", servicing and other
fees, and losses or deductions upon collection or disposition of Base Assets.
Any collateral certificates held by the Owner Trustee will be subject
to the federal income tax treatment described in this Prospectus depending on
the terms of the collateral certificates and their characterization (for
example, as indebtedness) for federal income tax purposes.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Trust Agreement and related documents). The Trust Agreement is
expected to provide, in general, that the Certificate Owners will be allocated
taxable income of the Trust for each month equal to the sum of:
(a) the interest or other income that accrues on the Certificates in
accordance with their terms for the month including, as applicable, interest
accruing at the related Certificate Interest Rate for the month and interest on
amounts previously due on the Certificates but not yet distributed;
(b) any Trust income attributable to discount on the related Base
Assets that corresponds to any excess of the principal amount of the
Certificates over their initial issue price;
(c) any prepayment premium payable to the Certificate Owners for the
month; and
(d) any other amounts of income payable to the Certificate Owners for
the month.
This allocation will be reduced by any amortization by the Trust of premium on
Base Assets that corresponds to any excess of the issue price of Certificates
over their principal amount. Losses will generally be allocated in the manner in
which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating Trust 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 Certificate Owners.
Moreover, even under the foregoing method of allocation, Certificate Owners may
be allocated income equal to the entire Certificate Interest Rate plus the other
items described above, even though the Trust might not have sufficient cash to
make current cash distributions of that amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificate Owners, but Certificate Owners may be purchasing Certificates at
different times and at different prices, Certificate Owners 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.
All of the taxable income allocated to a Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will generally constitute "unrelated
business taxable income" taxable to the holder under the Code.
A non-corporate Certificate Owner's share of expenses of the Trust,
including fees to the Servicer, but not interest expense, would generally be
"miscellaneous itemized deductions" and thus deductible only to the extent the
expenses plus all other miscellaneous itemized deductions exceed two percent of
the Certificate Owner's adjusted gross income. A non-corporate Certificate Owner
will be allowed no deduction for its share of the expenses of the Trust in
determining its liability for alternative minimum tax. In addition, Section 68
of the Code provides that the amount of all "itemized deductions" otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code ($100,000 (or $50,000 in the
case of a separate return by a married individual), adjusted for changes in the
cost of living subsequent to 1990) will be reduced by the lesser of:
o 3% of the excess of adjusted gross income over the specified
threshold amount, or
o 80% of the amount of itemized deductions otherwise allowable for
the relevant taxable year.
Accordingly, deductions might be disallowed to an individual in whole or in part
and might result in the Certificate Owner being taxed on an amount of income
that exceeds the amount of cash actually distributed to the holder over the life
of the Trust. 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 the partnership 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 Trust intends to make all tax calculations relating to income and
allocations to Certificate Owners on an aggregate basis. If the IRS were to
require that the calculations be made separately for each Base Asset, the
calculations may result in timing and character differences under some
circumstances.
Discount and Premium. The purchase price paid by the Trust for the
related Base Assets may be greater or less than the remaining principal balance
of the Base Assets at the time of purchase. If so, the Base Assets will have
been acquired at a premium or market discount, as the case may be. See "Tax
Consequences to Note Owners--Market Discount" and "--Amortizable Premium" above.
As indicated above, the Trust will make this calculation on an aggregate basis,
but it is possible that the IRS might require that it be recomputed on a Base
Asset-by-Base Asset basis.
If the Trust acquires the Base Assets at a market discount or premium,
the Trust will elect to include any discount in income currently as it accrues
over the life of the Base Assets or to offset any premium against interest
income on the Base Assets. As indicated above, a portion of market discount
income or premium deduction may be allocated to Certificate Owners.
Section 708 Termination. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If termination occurs, the Trust will be considered to
contribute its assets to a new Trust, which will be treated as a new partnership
for tax purposes, in exchange for Certificates in the new Trust. The original
Trust will then be deemed to distribute the Certificates in the new Trust to
each of the Owners of Certificates in the original Trust in liquidation of the
original Trust. The Trust will not comply with technical requirements that might
apply when this constructive termination occurs. As a result, the Trust may be
subject to tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply with those requirements 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.
Any gain or loss would be long-term capital gain or loss if the Certificate
Owner's holding period exceeded one year. A Certificate Owner's tax basis in a
Certificate will generally equal the Certificate's cost, increased by the share
of Trust income allocable to the Certificate Owner with respect to the
Certificates and decreased by any distributions received or losses allocated
with respect to the Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the Certificate Owner's share, determined under Treasury Regulations, of the
Notes and other liabilities of the Trust. A Certificate Owner acquiring
Certificates at different prices will generally be required to maintain a single
aggregate adjusted tax basis in the related Certificates and, upon a sale or
other disposition of some of the Certificates, allocate a portion of the
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.
If a Certificate Owner 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 to these Certificates, this excess will
generally give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificate Owners
based on the principal amount of Certificates owned by them as of the close of
the last day of that month. As a result, a Certificate Owner purchasing
Certificates may be allocated tax items, which will affect the purchaser's tax
liability and tax basis, attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
Treasury 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 might be reallocated among the Certificate Owners. The Seller will
be authorized to revise the Trust's method of allocation between transferors and
transferees.
Section 754 Election. In the event that a Certificate Owner sells its
Certificates at a profit (loss), the purchasing Certificate Owner will have a
higher (lower) basis in the Certificates than the selling Certificate Owner had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust 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 will not make the election. As a
result, Certificate Owners might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep complete and
accurate books of the Trust. These books will be maintained for financial
reporting and tax purposes on an accrual basis, and the fiscal year of the Trust
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 and will
report each Certificate Owner's allocable share of items of Trust income and
expense to Certificate Owners and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and the nominees will be required
to forward information to the beneficial owners of the Certificates. Generally,
Certificate Owners must timely file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
holder timely notifies the IRS of all 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
with a statement containing specific information on the nominee, the beneficial
owners and the Certificates so held. This information includes:
(a) the name, address and taxpayer identification number of the
nominee, and
(b) as to each beneficial owner:
(1) the name, address and identification number of the person,
(2) whether the 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
(3) information on Certificates that were held, bought or sold on
behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust 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 information
statement to the Trust. The information referred to above for any calendar year
must be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
Except as provided otherwise in the relevant prospectus supplement,
the Depositor will be designated as the tax matters partner for each Trust in
the related Trust Agreement and, accordingly, will be responsible for
representing the Certificate Owners in some disputes 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 the later of three years after the date
on which the partnership information return is filed or the last day for filing
a return for the year, determined without regard to extension. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificate Owners, and, under some circumstances, a Certificate Owner may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificate Owner's
returns and adjustments of items not related to the income and losses of the
Trust.
The Taxpayer Relief Act of 1997 created a special audit system for
qualifying large partnerships that have elected to apply a simplified
flow-through reporting system under new sections 771 through 777. Unless
otherwise specified in the applicable prospectus supplement, a Trust will not
elect to apply the simplified flow-through reporting system.
Taxation of Certain Foreign Certificate Owners. As used in this
Prospectus, the term "Non-United States Owner" means a Certificate Owner that is
not a United States Person, as defined under "Owner Trusts -- Tax Consequences
to Note Owners -- Backup Withholding and Information Reporting", above.
It is not clear whether the Trust would be considered to be engaged in
a trade or business in the United States for purposes of federal withholding
taxes with respect to Non-United States Owners because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this Prospectus. Although it is not expected that the Trust would
be engaged in a trade or business in the United States for these purposes, the
Trust will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to Non-United
States Owners pursuant to Section 1446 of the Code, as if the income were
effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners. Subsequent adoption of Treasury regulations or
the issuance of other administrative pronouncements may require the Trust to
change its withholding procedures. In determining a Certificate Owner's
withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9 or the
Certificate Owner's certification of nonforeign status signed under penalties of
perjury.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the Trust's income,
including, in the case of a corporation, a return in respect of the branch
profits tax. Each Non-United States Owner must obtain a taxpayer identification
number from the IRS and submit that number to the Trust in order to assure
appropriate crediting of the taxes withheld. Assuming that the Trust is
determined not to be engaged in a U.S. trade or business, a Non-United States
Owner might be entitled to a refund with respect to all or a portion of taxes
withheld by the Trust if, in particular, the Owner's allocable share of interest
from the Trust constituted "portfolio interest" under the Code.
This interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Trust, in the
later case, the interest being properly characterized as a guaranteed payment
under Section 707(c) of the Code. If this were the case, Non-United States
Owners would be subject to a United States federal income and withholding tax at
a rate of 30 percent on the Trust's gross income, without any deductions or
other allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
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 Certificate Owner fails to comply
with particular identification procedures, unless the certificate owner is an
exempt recipient under applicable provisions of the Code.
GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE GRANTOR TRUSTS
Characterization. In the case of a "Grantor Trust ", Federal Tax
Counsel will deliver its opinion that the Trust will not be classified as an
association taxable as a corporation and that the Grantor Trust will be
classified as a grantor trust under subpart E, Part I of subchapter J of the
Code. In this case, beneficial owners of Certificates (referred to in this
Prospectus as "Grantor Trust Certificateholders") will be treated for federal
income tax purposes as owners of a portion of the Trust's assets as described
below. The Certificates issued by a Trust that is treated as a grantor trust are
referred to in this Prospectus as "Grantor Trust Certificates".
Taxation of Grantor Trust Certificateholders. Subject to the
discussion below under "--Stripped Certificates" and "--Subordinated
Certificates", each Grantor Trust Certificateholder will be treated as the owner
of a pro rata undivided interest in the Base Assets and other assets of the
Trust. Accordingly, and subject to the discussion below of the
recharacterization of the Servicing Fee, each Grantor Trust Certificateholder
must include in income its pro rata share of the interest and other income from
the Base Assets, including any interest, original issue discount, market
discount, prepayment fees, assumption fees, and late payment charges with
respect to the Base Assets, and, subject to limitations discussed below, may
deduct its pro rata share of the fees and other deductible expenses paid by the
Trust, at the same time and to the same extent as these items would be included
or deducted by the Grantor Trust Certificateholder if the Grantor Trust
Certificateholder held directly a pro rata interest in the assets of the Trust
and received and paid directly the amounts received and paid by the Trust. Any
amounts received by a Grantor Trust Certificateholder in lieu of amounts due
with respect to Base Assets because of a default or delinquency in payment will
be treated for federal income tax purposes as having the same character as the
payments they replace.
Under Sections 162 and 212 each Grantor Trust Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Servicer, provided that the amounts are reasonable compensation
for services rendered to the Trust. A non-corporate Grantor Trust
Certificateholder's share of expenses of the Trust would generally be
"miscellaneous itemized deductions" and thus deductible only to the extent the
expenses plus all other miscellaneous itemized deductions exceed two percent of
the Grantor Trust Certificateholder's adjusted gross income. A non-corporate
Grantor Trust Certificateholder will be allowed no deduction for its share of
the expenses of the Trust, other than interest, in determining its liability for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of "itemized deductions" otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($100,000 (or $50,000 in the case of a separate return by a married
individual), adjusted for changes in the cost of living subsequent to 1990 will
be reduced by the lesser of:
o 3% of the excess of adjusted gross income over the specified
threshold amount, or
o 80% of the amount of itemized deductions otherwise allowable for
that 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 these partnership 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 servicing compensation to be received by the Servicer might be
questioned by the IRS with respect to specific Certificates or Base Assets as
exceeding a reasonable fee for the services being performed in exchange for the
fee, and a portion of the servicing compensation could be recharacterized as an
ownership interest retained by the Servicer or other party in a portion of the
interest payments to be made pursuant to the Base Assets. In this event, a
Certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code and therefore be subject to the original
issue discount rules. See the discussion below under "--Stripped Certificates".
Except as discussed below under "--Stripped Certificates" or "--Subordinated
Certificates", this discussion assumes that the servicing fees paid to the
Servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Certificate will be treated as
purchasing an interest in each Base Asset in the Trust at a price determined by
allocating the purchase price paid for the Certificate among all Base Assets in
proportion to their fair market values at the time of the purchase of the
Certificate. To the extent that the portion of the purchase price of a Grantor
Trust Certificate allocated to Base Assets is less than or greater than the
portion of the stated redemption price at maturity of the Base Assets, the
interest in the Base Assets will have been acquired at a discount or premium.
See "--Market Discount" and "--Premium", below.
The treatment of any discount on a Base Asset will depend on whether
the discount represents original issue discount or market discount. It is not
expected that any Base Assets will have original issue discount, except as
discussed below under "--Stripped Certificates" or "--Subordinated
Certificates". For the rules governing original issue discount, see "Owner
Trusts -- Tax Consequences to Note Owners -- Short-Term Notes" above. However,
in the case of Base Assets that constitute short-term Government Securities or
short-term Private Label Custody Receipt Securities the rules set out above
dealing with short-term obligations (see "Owner Trusts -- Tax Consequences to
Note Owners -- Short-Term Notes" above) are applied with reference to
acquisition discount rather than original issue discount, if the obligations
constitute "short-term Government obligations" within the meaning of Section
1271(a)(3)(B) of the Code.
The information provided to Grantor Trust Certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Base Asset is acquired.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Base Assets may be subject to the market discount rules of
Sections 1276 through 1278 of the Code to the extent an undivided interest in a
Base Asset is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "Owner Trust -- Tax
Consequences to Note Owners -- Market Discount" above.
Premium. To the extent a Grantor Trust Certificateholder is considered
to have purchased an undivided interest in a Base Asset for an amount that is
greater than the stated redemption price at maturity of the interest, the
Grantor Trust Certificateholder will be considered to have purchased the
interest in the Base Asset at a "premium" equal in amount to the excess. For a
discussion of the rules applicable to premium, see "Owner Trusts -- Tax
Consequences to Note Owners -- Amortizable Premium" above.
Stripped Certificates. Some classes of Certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates". In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Base Asset from ownership of the right to receive some
or all of the related interest payments. In general, where separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the Base Asset is
required to accrue into income, on a constant yield basis under rules governing
original issue discount (see "Owner Trust--Tax Consequences to Note
Owners--Original Issue Discount"), the difference between the holder's initial
purchase price for the right and the principal or interest payment to be
received with respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
(a) if any servicing compensation is deemed to exceed a reasonable
amount (see "--Taxation of Grantor Trust Certificateholders", above);
(b) if the Company or any other party retains a retained yield with
respect to the Base Assets held by the Trust;
(c) if two or more classes of Certificates are issued representing the
right to non-pro rata percentages of the interest or principal payments on the
Base Assets; or
(d) if Certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the Trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and the accrual of income
may be in advance of the receipt of any cash attributable to the income. See
"Owner Trust--Tax Consequences to Note Owners--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code, the
issue price of a Stripped Certificate will be the purchase price paid by each
holder of the Stripped Certificate and the stated redemption price at maturity
may include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated as
zero under the original issue discount de minimis rules described above.
Subordinated Certificates. In the event the Trust issues two classes
of Grantor Trust Certificates that are identical except that one class is a
subordinated class, with a relatively higher Certificate Interest Rate, and the
other is a senior class, with a relatively lower Certificate Interest Rate,
(referred to in this Prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the Grantor Trust Certificateholders would be
deemed to have acquired the following assets:
o the principal portion of each Base Asset plus a portion of the
interest due on each Base Asset (the "Trust Stripped Bond"), and
o a portion of the interest due on each Base Asset equal to the
difference between the Certificate Interest Rate on the
Subordinate Certificates and the Certificate Interest Rate on the
Senior Certificates, if any, which difference is then multiplied
by the Subordinate Class Percentage (the "Trust Stripped
Coupon").
The "Subordinate Class Percentage" equals the initial aggregate principal amount
of the Subordinate Certificates divided by the sum of the initial aggregate
principal amount of the Subordinate Certificates and the Senior Certificates.
The "Senior Class Percentage" equals the initial aggregate principal amount of
the Senior Certificates divided by the sum of the initial aggregate principal
amount of the Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of the related
asset. The Senior Certificateholders will not own any portion of the Trust
Stripped Coupon. The Subordinate Certificateholders in the aggregate own both
the Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the
Trust Stripped Coupon, if any, and accordingly each Subordinate
Certificateholder will be treated as owning its pro rata share in both assets.
The Trust Stripped Bond will be treated as a "stripped bond" and the Trust
Stripped Coupon will be treated as "stripped coupons" within the meaning of
Section 1286 of the Code. Because the purchase price paid by each Subordinate
Certificateholder will be allocated between that Certificateholder's interest in
the Trust Stripped Bond and the Trust Stripped Coupon based on the relative fair
market value of each asset on the date Subordinate Certificate is purchased, the
Trust Stripped Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped
Bond represented by a Certificate will be reported in the same manner as
described generally above for holders of Certificates. The interest income on
the Subordinate Certificates at the Senior Certificate Certificate Interest Rate
and the portion of the Servicing Fee that does not constitute excess servicing
may be treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the related Trust Stripped Coupon over the portion of the purchase price
allocated to the Trust Strip Coupon. The sum of the daily portions of original
issue discount on the Trust Stripped Coupon for each day during a year in which
the Subordinate Certificateholder holds the Trust Stripped Coupon will be
included in the Subordinate Certificateholder's income. It is unclear whether a
Subordinated Certificateholder's interest in Trust Stripped Bonds and Trust
Stripped Coupons should be treated separately, or aggregated and treated as a
single debt instrument for purposes of applying the original issue discount
rules. However, the Trustee intends to treat each Subordinate
Certificateholder's interest in Trust Stripped Bonds and Trust Stripped Coupons
as a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount.
If the Subordinate Certificateholders receive distribution of less
than their share of the Trust's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had:
o received as distributions their full share of the receipts,
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount, and
o retained the right to reimbursement of these amounts to the
extent these amounts are otherwise available as a result of
collections on the Base Assets or amounts available from a
Reserve Account or other form of credit enhancement, if any.
Under this analysis:
o Subordinate Certificateholders would be required to accrue as
current income any interest income or original issue discount on
the Base Assets that was a component of the Shortfall Amount,
even though that amount was in fact paid to the Senior
Certificateholders,
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that the amount will not be available from any source to
reimburse the loss), and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Grantor Trust Certificateholder to elect to accrue all
interest, discount, including de minimis market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield method.
If an election were to be made with respect to an interest in a Base Asset with
market discount, the Certificate Owner 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 the Grantor Trust Certificateholder
acquires during the year of the election or later acquires. See "--Market
Discount" above. Similarly, a Grantor Trust Certificateholder that makes this
election for an interest in a Base Asset 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, including other Base Assets,
that the Grantor Trust Certificateholder owns at the beginning of the first
taxable year to which the election applies or later acquires. See "-- Premium",
above. The election to accrue interest, discount and premium on a constant yield
method with respect to a Grantor Trust Certificate is irrevocable.
Prepayments. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments,
the yield on which may be affected by reason of prepayments to be calculated
taking into account the Prepayment Assumption and requiring the discount to be
taken into income on the basis of a constant yield to maturity taking account of
actual prepayments. The legislative history of the 1986 Act states that similar
rules apply with respect to market discount and amortizable bond premium on
these debt instruments.
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will be treated as a sale or
exchange of the Grantor Trust Certificateholder's interest in the assets of the
Grantor Trust and will result in gain or loss equal to the difference, if any,
between the amount realized, exclusive of amounts attributable to accrued and
unpaid interest, which will be treated as ordinary income, and the owner's
adjusted basis in those assets. The adjusted basis generally will equal the
Seller's cost for the Grantor Trust Certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the Grantor Trust Certificate, and reduced, but not below zero, by
any premium amortized by the Seller and by principal payments on the Grantor
Trust Certificate previously received by the seller. Gain or loss will be
capital gain or loss to an owner for which the interests in the assets of the
Grantor Trust represented by the Grantor Trust Certificate are "capital assets"
within the meaning of Section 1221, except that gain will be treated in whole or
in part as ordinary interest income to the extent of the Depositor's Interest in
accrued market discount not previously taken into income on underlying Base
Assets having a fixed maturity date of more than one year from the date of
origination. A capital gain or loss will be long-term or short-term depending on
whether or not the Grantor Trust Certificate has been owned for the long-term
capital gain holding period, currently more than one year.
Non-United States Grantor Trust Certificate Owners. Amounts paid to
Non-United States Persons (as defined above under "Owner Trusts--Tax
Consequences to Certificate Owners--Taxation of Certain Foreign Certificate
Owners) who are owners of Grantor Trust Certificates will be treated as interest
for purposes of United States withholding tax. The interest attributable to the
underlying Receivables will not be subject to the normal 30%, or a lower rate
provided for by an applicable tax treaty, withholding tax imposed on the amounts
provided that the Owner:
o does not own, directly or indirectly, 10% or more of, and is not
a controlled foreign corporation, within the meaning of Section
957 of the Code, related to, any of the issuers of the Base
Assets, and
o fulfills particular certification and other requirements.
Under these requirements, the Owner must certify, under penalty of perjury, that
it is not a "United States Person" (as defined above under "Owner Trusts-- Tax
Consequences to Note Owners--Backup Withholding and Information Reporting") and
must provide its name and address. If interest or gain is effectively connected
to the conduct of a trade or business within the United States by the Owner, the
owner will be subject to United States federal income tax on the interest or
gain at graduated rates and, in the case of a corporation, to a possible branch
profits tax, and will not be subject to withholding tax provided that the owner
meets applicable documentation requirements. Potential investors who are not
United States persons should consult their own tax advisors regarding the
specific tax consequences of owning a Certificate.
On October 6, 1997, the1997 Withholding Regulations were issued which
affect the United States taxation of Non-United States Owners of Grantor Trust
Certificates. The 1997 Withholding Regulations are generally effective for
payments after December 31, 1999, regardless of the issue date of the Base
Assets with respect to which payments are made, subject to some related
transition rules. For further discussion, see "Owner Trusts - Tax Consequences
to Note Owners - Taxation of Certain Foreign Note Owners" above.
Backup Withholding. Distributions made on the Grantor Trust
Certificates and proceeds from the sale of the related Certificates will be
subject to a "backup" withholding tax of 31% if, in general, the Grantor Trust
Certificateholder fails to comply with particular identification procedures,
unless the Owner is an exempt recipient under applicable provisions of the Code.
See "Owner Trusts -- Tax Consequences to Note Owners -- Backup Withholding and
Information Reporting," above.
MASTER TRUST
TREATMENT OF THE CERTIFICATES AS INDEBTEDNESS
In the case of a Master Trust, Federal Tax Counsel will deliver its
opinion that, although no transaction closely comparable to that contemplated in
this Prospectus has been the subject of any Treasury regulation, revenue ruling
or judicial decision, based upon its analysis of the factors discussed below,
the Depositor, or the Seller, will be properly treated as the owner of the Base
Assets for federal income tax purposes and, accordingly, the Certificates, when
issued, will be properly characterized for federal income tax purposes as
indebtedness of the Depositor, or the Seller, that is secured by the Base
Assets.
The Depositor, or the Seller, and Certificate Owners will express in
the Agreement the intent that, for federal, state and local income and franchise
tax purposes, and for the purposes of any other tax imposed on or measured by
income, the Certificates will be indebtedness of the Depositor, or the Seller,
secured by the Base Assets. The Depositor, or the Seller, by entering into the
Agreement, each Certificate holder, by the acceptance of a Certificate, and each
Certificate Owner, by virtue of accepting a beneficial interest in a
Certificate, will agree to treat the Certificates, or the beneficial interests
in the Certificates, as indebtedness of the Depositor, or the Seller, secured by
the Base Assets for federal, state and local income and franchise tax purposes
and for the purposes of any other tax imposed on or measured by income. However,
because different criteria are used in determining the non-tax accounting
treatment of a transaction, the Seller is expected to treat the Agreement for
financial accounting purposes as a transfer of an ownership interest in the Base
Assets and not as creating a debt obligation of the Depositor, or the Seller.
The economic substance of a transaction generally determines its
federal income tax consequences and the form of a transaction, while a relevant
factor, is generally not conclusive evidence of its economic substance. In
appropriate circumstances the courts have allowed taxpayers, as well as the IRS,
to treat a transaction in accordance with its economic substance,
notwithstanding that participants characterized the transaction differently for
nontax purposes. In some instances, however, courts have held that a taxpayer is
bound by the particular form it has chosen for a transaction, even if the
substance of the transaction does not accord with its form. Based on the advice
of Federal Tax Counsel, the Depositor and the Seller believe that the rationale
of those cases will not apply to this transaction.
The determination of whether the economic substance of a transfer of
an interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished, and the transferee has obtained, substantial incidents of
ownership in the property. Among the primary factors considered are whether the
transferee has obtained the opportunity for gain if the property increases in
value, has assumed the risk of loss if the property decreases in value and, in
the case of accounts receivable such as the Base Assets, whether the transferee,
at the time of transfer, has a fixed interest in the proceeds of the receivable
when collected. Federal Tax Counsel will consider these factors in rendering its
opinion that the Certificates will be properly characterized for federal income
tax purposes as indebtedness of the Depositor, or the Seller, secured by the
Base Assets. Contrary characterizations that could be asserted by the IRS are
described under "Possible Characterization of the Arrangement as a Partnership
or Association Taxable as a Corporation" below. Except as otherwise expressly
indicated, the following discussion assumes that the Certificates are properly
treated as debt obligations of the Depositor, or the Seller, for federal income
tax purposes.
Interest Income to Certificate Owners. It is anticipated that the
Certificates will be issued at par value, or at an insubstantial discount from
par value, and therefore, except as discussed below or in the applicable
prospectus supplement, will not be issued with original issue discount.
As discussed above under "Owner Trusts--Tax Consequences to Note
Owners--Interest Income on the Notes" and "--Original Issue Discount", interest
that constitutes "qualified stated interest" is includible in a Certificate
Owner's income as ordinary interest income when it is received or accrued in
accordance with the Certificate Owner's method of tax accounting. Interest that
does not constitute "qualified stated interest" may be treated either as part of
a Certificate's stated redemption price at maturity (as described above under
"Owner Trusts - Tax Consequences to Note Owners - Original Issue Discount")
resulting in original issue discount, or be treated as contingent interest under
the 1996 Contingent Debt Regulations.
One requirement for treatment as "qualified stated interest" is that
the interest be "unconditionally payable". Interest is considered
unconditionally payable only if reasonable legal remedies exist to compel timely
payment or the debt instrument otherwise contains terms and conditions that make
the likelihood of late payment a remote contingency. See "Owner Trusts - Tax
Consequences to Note Owners - Original Issue Discount" above.
Market Discount and Premium. A Certificate Owner who purchases a
Certificate at a market discount may be subject to the "market discount" rules
of the Code. These rules provide, in part, for the treatment of gain
attributable to accrued market discount as ordinary income upon the receipt of
partial principal payments or on the sale or other disposition of the
Certificate, and for the deferral of interest deductions with respect to debt
incurred to acquire or carry the market discount Certificate. See "Owner
Trusts--Tax Consequences to Note Owners--Market Discount".
If a Certificate is purchased by a Certificate Owner at a premium, the
premium will be amortized as an offset to interest income, with a corresponding
reduction in the Certificate Owner's basis, under a constant yield method over
the term of the Certificate if an election under Section 171 of the Code is made
or is previously in effect. See "Owner Trusts--Tax Consequences to Note Owners--
Amortizable Premium".
Disposition of Certificates. If a Certificate is sold, exchanged or
otherwise disposed of, a Certificate Owner generally will recognize gain or loss
in an amount equal to the difference between the amount realized on the sale,
exchange or disposition and the Certificate Owner's adjusted tax basis in the
Certificate. The adjusted tax basis of a Certificate generally will equal the
cost of the Certificate to the Certificate Owner, increased by any original
issue discount or market discount previously includible in the Certificate
Owner's gross income, and reduced by the portion of the basis of the Certificate
allocable to payments on the Certificate previously received by the Certificate
Owner and any amortized premium. Subject to the market discount rules, gain or
loss on the sale or other disposition of a Certificate will generally be capital
gain or loss if the Certificate is held by the Certificate Owner as a capital
asset. Capital gain or loss will be long-term if the Certificate is held by the
Certificate Owner for more than one year and otherwise will be short-term.
POSSIBLE CHARACTERIZATION OF THE ARRANGEMENT AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
Although, as described above, Federal Tax Counsel will deliver an
opinion that the Certificates are properly characterized as debt of the
Depositor, or the Seller, for federal income tax purposes, this opinion is not
binding on the IRS or the courts and no assurance can be given that this
characterization would prevail. If the IRS were to contend successfully that the
Certificates were not debt obligations of the Seller for federal income tax
purposes, the arrangement among the Seller and the Certificate Owners might be
classified for federal income tax purposes as either a partnership or as a
publicly traded partnership taxable as a corporation.
If the Certificates were treated as interests in a partnership, the
partnership would probably be treated as a "publicly traded partnership." A
publicly traded partnership is taxed in the same manner as a corporation unless
at least 90% of its gross income consists of specified types of "qualifying
income." Qualifying income includes, among other things, "interest" that is not
"derived in the conduct of a financial or insurance business." If a deemed
partnership between the Depositor, or the Seller, and the Certificate Owners
were to qualify for the foregoing exception from taxation as a corporation, the
deemed partnership would not be subject to federal income tax but each item of
income, gain, loss, and deduction generated as a result of the ownership of the
Base Assets by the partnership would be passed through to the Depositor, or the
Seller, and the Certificate Owners as partners in a partnership according to
their respective interests in the partnership.
The income reportable by the Certificate Owners as partners could
differ from the income reportable by the Certificate Owners as holders of debt
obligations of the Depositor, or the Seller. For example, a cash basis
Certificate Owner might be required to report income when it accrued to the
partnership rather than when it is received by the Certificate Owner. Moreover,
an individual's share of expenses of the partnership would be miscellaneous
itemized deductions that, in the aggregate, are allowed as deductions only to
the extent they, together with other miscellaneous itemized deductions, exceed
two percent of the individual's adjusted gross income, and an individual
Certificate Owner's deduction for a holder's share of expenses of the
partnership would be subject to reduction under Section 68 of the Code if the
individual's adjusted gross income exceeded specified limits. As a result, the
individual might be taxed on a greater amount of income than the stated rate on
the Certificates.
If, alternatively, the arrangement created by the Agreement were
treated as a "publicly traded partnership" taxable as a corporation, the
resulting entity would be subject to federal income taxes at corporate tax rates
on its taxable income from the Base Assets. Because neither the Seller nor the
Depositor will provide any indemnity for income taxes, this tax might result in
reduced distributions to Certificate Owners and Certificate Owners might be
liable for a share of this tax. Moreover, distributions by the entity would
probably not be deductible in computing the entity's taxable income and all or
part of the distributions to Certificate Owners would generally be treated as
dividend income to the Certificate Owners.
Since the Seller will treat the Certificates as indebtedness for
federal income tax purposes, the Seller will not comply with the tax reporting
requirements that would apply under these alternative characterizations of the
Certificates.
FOREIGN INVESTORS
Taxation of Certain Foreign Note Owners. As used in this Prospectus,
the term "Non- United States Person" means any Person other than a "United
States Person." A "United States Person" is an individual who is a citizen or
resident of the United States, a corporation, partnership or other entity
treated as such, created or organized in or under the laws of the United States
or any political subdivision of the United States, an estate of income which is
subject to United States federal income taxation regardless of its source and
any trust with respect to which:
o a court within the United States is able to exercise primary
supervision over the administration of the trust, and
o one or more United States persons have the authority to control
all substantial decisions of the trust.
A "Non-United States Holder" means a Non-United States Person that is a Note
Owner.
On October 6, 1997, the 1997 Withholding Regulations were issued which
affect the United States taxation of Non-United States Holders. The 1997
Withholding Regulations are generally proposed to be effective for payments
after December 31, 1999, regardless of the issue date of the Note with respect
to which payments are made, subject to some related transition rules. The
discussion under this heading and under "-- Backup Withholding and Information
Reporting", below, is not intended to be a complete discussion of the provisions
of the 1997 Withholding Regulations, and prospective investors are urged to
consult their tax advisors with respect to the effect of the 1997 Withholding
Regulations.
Subject to the discussion of backup withholding below, and assuming
the Certificates represent debt obligations of the Depositor, or the Seller, for
federal income tax purposes, foreign investors ("Foreign Investors ") generally
will not be subject to United States federal withholding tax with respect to
payments of principal and interest on Certificates, provided that some specified
conditions are met. Under United States federal income tax law now in effect,
payments of principal and interest, including original issue discount, with
respect to a Certificate to any Foreign Investor will not be subject to United
States federal withholding tax, provided, in the case of interest, including
original issue discount, that:
(a) the Investor does not actually or constructively own 10% or more
of the total combined voting power of all classes of equity of the Depositor, or
the Seller,
(b) the Investor is not for federal income tax purposes a controlled
foreign corporation related, directly or indirectly, to the Depositor, or the
Seller, through equity ownership,
(c) the Investor is not a bank receiving interest described in Section
881(c)(3)(A) of the Code and
(d) either,
o the Foreign Investor certifies, under penalties of perjury, to
the Depositor, or the Seller, or paying agent, as the case may
be, that the Investor is a Foreign Investor and provides the
Investor's name and address, or
o a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business and holds the Certificate,
certifies, under penalties of perjury, to the Trust or paying
agent, as the case may be, that the related Certificate has been
received from the beneficial owner by it or by a financial
institution between it and the beneficial owner and furnishes the
payor with a copy of the Certificate.
A certificate described in this paragraph is effective only with respect to
payments of interest, including original issue discount, made to the certifying
Foreign Investor after the issuance of the certificate in the calendar year of
its issuance and the two immediately succeeding calendar years. Under temporary
Treasury Regulations, the forgoing certification may be provided by the
beneficial owner of a Note on IRS Form W-8.
The 1997 Withholding Regulations provide optional documentation
procedures designed to simplify compliance by withholding agents. The 1997
Withholding Regulations add "intermediary certification" options for qualifying
withholding agents. Under one option, a withholding agent will be allowed to
rely on IRS Form W-8 furnished by a financial institution or other intermediary
on behalf of one or more beneficial owners, or other intermediaries, without
having to obtain the beneficial owner certificate described in the preceding
paragraph, provided that the financial institution or intermediary has entered
into a withholding agreement with the IRS and is thus a "qualified
intermediary". Under another option, an authorized foreign agent of a United
States withholding agent will be permitted to act on behalf of the United States
withholding agent, provided some specified conditions are met.
The 1997 Withholding Regulations also provide specific presumptions
with respect to withholding for holders not providing the required
certifications to qualify for the withholding exemption described above. In
addition, the 1997 Withholding Regulations will replace a number of current tax
certification forms, including IRS Form W-8, IRS Form 1001 and IRS Form 4224,
with restated forms and standardize the period of time for which withholding
agents can rely on these certifications.
Notwithstanding the foregoing, interest described in Section 871(h)(4)
of the Code will be subject to United States withholding tax at a 30% rate, or a
lower rate as may be provided by an applicable treaty. In general, interest
described in Section 871(h)(4) of the Code includes, subject to some exceptions,
any interest the amount of which is determined by reference to receipts, sales
or other cash flow of the issuer or a related person, any income or profits of
the issuer or a related person, any change in the value of any property of the
issuer or a related person or any dividends, partnership distribution or similar
payments made by the issuer or a related person. Interest described in Section
871(h)(4) of the Code may include other types of contingent interest identified
by the IRS in future Treasury Regulations. If the Trust issues Certificates the
interest on which is described in Section 871(h)(4) of the Code, the United
States withholding tax consequences of any related Certificates will be
described in the applicable prospectus supplement.
If a Foreign Investor is engaged in a trade or business in the United
States and interest, including original issue discount, on the Certificate is
effectively connected with the conduct of the trade or business, the Foreign
Investor, although exempt from the withholding tax discussed above, will be
subject to United States federal income tax on the interest, including original
issue discount, in the same manner as if it were a United States person. In lieu
of the certificate described above, the Investor will be required to provide a
properly executed IRS Form 4224 annually in order to claim an exemption from
withholding tax. In addition, if the Investor is a foreign corporation, it may
be subject to a branch profits tax equal to 30%, or a lower rate as may be
specified by an applicable treaty, of its effectively connected earnings and
profits for the taxable year, subject to adjustments. For this purpose,
interest, including original issue discount, on a Certificate will be included
in the earnings and profits of the Investor if the interest, including original
issue discount, is effectively connected with the conduct by the Investor of a
trade or business in the United States.
Generally, any gain or income, other than that attributable to accrued
interest or original issue discount, realized upon the sale, exchange,
retirement or other disposition of a Certificate will not be subject to United
States federal income tax unless:
o the gain or income is effectively connected with a trade or
business in the United States of the Foreign Investor, or
o in the case of a Foreign Investor who is a nonresident alien
individual, the Foreign Investor is present in the United States
for 183 days or more in the taxable year of the sale, exchange,
retirement or other disposition the individual has a "tax home"
(as defined in Section 911(d)(3) of the Code) in the United
States.
If the IRS were to contend successfully that the Certificates
represent interests in a partnership, not taxable as a corporation, a
Certificate Owner that is a nonresident alien, foreign corporation or foreign
estate or trust might be required to file a U.S. individual or corporate income
tax return and pay tax on its share of partnership income at regular U.S. rates,
including the branch profits tax in the case of a corporation, and would be
subject to withholding tax on its share of partnership income. If the
Certificates were recharacterized as interests in a "publicly traded
partnership" taxable as a corporation, to the extent distributions under the
Agreement were treated as dividends, a nonresident alien individual or foreign
corporation would generally be subject to withholding tax on the gross amount of
the dividends at the rate of 30%, or lower rate as provided by an applicable
treaty, unless dividends are effectively connected with the holder's United
States trade or business, in which case the dividends would be taxed at
graduated rates applicable to U.S. persons. In either case, and assuming the
Certificates are recharacterized as partnership interests, a Certificate Owner
that is a nonresident alien, foreign corporation, foreign partnership or foreign
estate or trust might be subject to federal income tax on any gain from the sale
of the Certificates.
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 Certificate Owners fail to comply with particular identification
procedures, unless the Owner is an exempt recipient under applicable provisions
of the Code.
The 1997 Withholding Regulations alter the forgoing rules in some
respects. In particular, the 1997 Withholding Regulations provide specific
presumptions under which Non-United States Holders may be subject to backup
withholding in the absence of required certifications.
CERTAIN STATE AND LOCAL TAX CONSIDERATIONS
An investment in the Securities may have state or local income,
franchise, personal property or other tax consequences. These consequences may
depend upon, among other things, the tax laws of the jurisdiction where the
Security Owners reside or are doing business, the characterization of the Trust
(e.g., as a trust, partnership or other entity) for state or local tax purposes,
whether the Trust is considered to be doing business in a particular
jurisdiction, and the classification of the Securities as equity or debt or as
an undivided interest in the underlying Base Assets under the laws of a
jurisdiction.
Generally the tax treatment of the Securities for federal income tax
purposes should apply for state and local tax purposes. Thus, if the
Certificates or Notes are treated as indebtedness for federal income tax
purposes, they should likewise be treated as indebtedness for state and local
tax purposes. In this case, Certificate Owners and Note Owners not otherwise
subject to state or local tax would not become subject to the tax solely because
of their ownership of the Securities. However, except as described in the
following paragraph, a Security Owner already subject to tax in a state or
locality could be required to pay additional tax as a result of the holder's
ownership or disposition of Securities.
Interest income, including original issue discount, earned on
obligations of the United States Treasury Department and of other government
sponsored enterprises is generally exempt from state and local income taxation.
Therefore, where a Grantor Trust holds Government Securities or Private Label
Custody Receipt Securities as part of the Trust Property, interest income
attributable to Government Security or Private Label Custody Receipt Security
earned on Certificates may be exempt from state and local taxation, depending on
the form of the Government Security. However, some states or localities may take
a contrary position. Investors should consult their own tax advisors concerning
exemptions from state and local income taxes.
If some or all of the Securities are treated as equity interests in a
partnership, not treated as a publicly traded partnership taxable as a
corporation, for federal income tax purposes, the related Securities generally
should be treated as partnership interests for state and local income tax
purposes. In this case, the partnership should be viewed as a passive holder of
investments and, as a result, should not be subject to state or local taxation
and the Security Owners should not be subject to taxation on income received
through the partnership unless they are already subject to tax in the
jurisdiction. However, if the state or local jurisdiction viewed the partnership
as doing business in the jurisdiction, Security Owners would normally be subject
to taxation in the jurisdiction on their allocable share of the partnership's
income even though they otherwise had no contact with the jurisdiction.
Furthermore, depending on the allocation and apportionment formula, if any, used
by the jurisdiction, it is possible that Security Owners in this case may be
subject to tax in the jurisdiction on their income from other sources.
Additionally, notwithstanding the flow-through treatment that generally applies
to partnerships, some states and localities impose an entity level tax on
partnerships and trusts doing business within their jurisdiction.
The foregoing discussion presents some of the state and local tax
consequences that might apply to Security Owners. However, because of the
variation in each state's and locality's tax laws based in whole or in part upon
income, it is impossible to predict the tax consequences to Note Owners and
Certificate Owners in all of the taxing jurisdictions in which they are already
subject to tax. Accordingly, Security Owners are strongly urged to consult their
own tax advisors with respect to state and local tax consequences arising out of
the purchase, ownership and disposition of Securities.
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTE OWNER'S OR
CERTIFICATE OWNER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF NOTES OR
CERTIFICATES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND
CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Set forth below are some consequences under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and the Code that a fiduciary
(a "Plan Fiduciary") of an "employee benefit plan" (as defined in and subject to
ERISA) or of a "plan" (as defined in Section 4975 of the Code) who has
investment discretion should consider before deciding to invest the plan's
assets in Securities. The following summary is intended to be a summary of
relevant ERISA issues and does not purport to address all ERISA considerations
that may be applicable to a particular plan.
In general, the terms "employee benefit plan" as defined in ERISA and
"plan" as defined in Section 4975 of the Code (a "Plan") refer to any plan or
account of various types which provide retirement benefits or welfare benefits
to an individual or to an employer's employees and their beneficiaries. Plans
include corporate pension and profit-sharing plans, "simplified employee pension
plans", Keogh plans for self-employed individuals, including partners in a
partnership, individual retirement accounts described in Section 408 of the Code
and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts
and circumstances that are relevant to an investment in the Securities,
including the role that an investment in the Securities plays in the Plan's
investment portfolio. Each Plan Fiduciary, before deciding to invest in the
Securities, must be satisfied that investment in the Securities is a prudent
investment for the Plan, that the investments of the Plan, including the
investment in the Securities, are diversified so as to minimize the risks of
large losses and that an investment in the Securities complies with the Plan and
related trust documents.
Each Plan considering acquiring a Security should consult its own
legal and tax advisors before doing so.
Exempt Plans
ERISA and Section 4975 of the Code do not apply to governmental plans
and some church plans, each as defined in Section 3 of ERISA and Section 4975(g)
of the Code. However, fiduciaries with respect to these plans may be subject to
federal, state or other laws similar in effect to ERISA and Section 4975 of the
Code. The discussion below does not purport to address considerations under
federal, state or other laws.
Ineligible Purchasers
Securities may not be purchased with the assets of a Plan that is
sponsored by or maintained by the Depositor, the Trustee, the Issuer, the
Servicer or any of their respective affiliates. Securities may not be purchased
with the assets of a Plan if the Depositor, the Trustee, the Issuer, the
Servicer or any of their respective affiliates or any of their employees:
(a) has investment discretion with respect to the investment of the
Plan assets; or
(b) has authority or responsibility to give or regularly gives
investment advice with respect to the Plan assets for a fee, pursuant
to an appropriate agreement or understanding that the investment
advice will serve as a primary basis for investment decisions with
respect to the Plan assets and that the investment advice will be
based on the particular investment needs of the Plan.
A party that is described in clause (a) or (b) of the preceding sentence is a
fiduciary under ERISA and the Code with respect to the Plan, and any purchase
might result in a "prohibited transaction" under ERISA and the Code.
Plan Assets
It is possible that the purchase of a Security by a Plan will cause,
for purposes of Title I of ERISA and Section 4975 of the Code, the related Base
Assets to be treated as assets of that Plan. A regulation (the "DOL Regulation")
issued under ERISA by the United States Department of Labor (the "DOL") contains
rules for determining when an investment by a Plan in an entity will result in
the underlying assets of the entity being plan assets. Those rules provide that
the assets of an entity will not be "plan assets" of a Plan that purchases an
interest in those plan assets if the interest is not an "equity interest". The
DOL Regulation defines an equity interest as an interest other than an
instrument that is treated as indebtedness under applicable local law and that
has no substantial equity features. The DOL Regulation provides, with respect to
the purchase of an equity interest by a Plan, that the assets of an entity will
not be plan assets of a Plan that purchases an interest in those plan assets if
specific exceptions apply including the following:
a) the investment by all "benefit plan investors" is not
"significant"; or
b) the security issued by the entity is a "publicly offered security".
The prospectus supplement will specify whether any of the exceptions set forth
in the regulation under ERISA may apply with respect to a Series of Securities.
With respect to clause (a) of the preceding paragraph, the term
"benefit plan investors" includes all plans and accounts of the types described
above as employee benefit plans and accounts, whether or not subject to ERISA,
as well as entities that hold "plan assets" due to investments made in these
entities by any plans or accounts. Investments by benefit plan investors will be
deemed not significant if benefit plan investors own, in the aggregate, less
than a 25% interest in the entity, determined without regard to the investments
of persons with discretionary authority or control over the assets of the
entity, of any person who provides investment advice for a fee with respect to
the assets and of "affiliates" of the persons, within the meaning of the DOL
Regulation. Because the availability of this exception to any Trust depends upon
the identity of the Certificateholders of the applicable Series at any time,
there can be no assurance that any Series or Class of Certificates will qualify
for this exception.
With respect to clause (b) of the second preceding paragraph, a
publicly offered security is one which is:
(a) "freely transferable",
(b) part of a class of securities that is "widely held", and
(c) either,
(1) part of a class of securities registered under Section 12(b)
or 12(g) of the Exchange Act, or
(2) sold to the Plan as part of a public offering pursuant to an
effective registration statement under the Securities Act and
registered under the Exchange Act within 120 days, or any later
time as may be allowed by the Securities and Exchange Commission,
after the end of the fiscal year of the issuer in which the
offering of the security occurred.
Whether a security is "freely transferable" is based on all relevant facts and
circumstances. A class of securities is "widely held" only if it is of a class
of securities owned by 100 or more investors independent of the issuer and of
each other.
The prospectus supplement will indicate if either of the exceptions
set forth in the DOL Regulation apply. If neither exception is applicable,
Securities which are Certificates will not be eligible to be purchased directly
or indirectly for, or on behalf of, or with the assets of a Plan.
Some transactions involving the purchase of Securities which are Notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the Base Assets were deemed to be assets of a Plan. Under the DOL Regulation,
the Base Assets 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 DOL Regulation is applicable.
The prospectus supplement will indicate whether the Notes will be treated as
indebtedness without substantial equity features for purposes of the DOL
Regulation.
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 Trustee, the Indentive Trustee or any of their respective affiliates
is or becomes a party in interest or a disqualified person with respect to the
Plan or in the event that a Note is purchased in the secondary market and the
purchase constitutes a sale or exchange between a Plan and a party in interest
or disqualified person with respect to the Plan. Some 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 Note.
Included among these exemptions are:
(a) Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts;
(b) PTCE 91-38 regarding investments by bank collective investment
funds;
(c) PTCE 95-60, regarding investments by insurance company general
accounts;
(d) PTCE 96-23, regarding transactions affected by in-house asset
managers; and
(e) PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
Before purchasing any Securities, a Plan Fiduciary should consult with
its counsel and determine whether there exists any prohibition to the
acquisition and holding of the Securities. In particular, a Plan Fiduciary
should determine whether a plan asset exception or prohibited transaction class
exemption is applicable in the Plan's particular circumstances and whether the
exception or exemption covers all potential prohibited transactions.
Except as otherwise set forth, the foregoing statements regarding the
consequences under ERISA of an investment in Securities are based on the
provisions of the Code and ERISA as currently in effect, and the existing
administrative and judicial interpretations under the Code and ERISA. No
assurance can be given that administrative, judicial or legislative changes will
not occur that would not make the foregoing statements incorrect or incomplete.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY THE DEPOSITOR THE ISSUER, THE TRUSTEE, THE SERVICER OR ANY
OTHER PARTY THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL REQUIREMENTS WITH
RESPECT TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THE INVESTMENT IS
APPROPRIATE FOR ANY PARTICULAR PLAN. EACH PLAN FIDUCIARY SHOULD CONSULT WITH
ATTORNEYS AND FINANCIAL ADVISORS AS TO THE PROPRIETY OF THIS TYPE OF INVESTMENT
IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND THE RESTRICTIONS OF
ERISA AND SECTION 4975 OF THE CODE.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the Notes, if any, of a given Series and an underwriting
agreement with respect to the Certificates of the Series (collectively, the
"Underwriting Agreements"), the Depositor will agree to cause the related Trust
to sell to the underwriters named in the Underwriting Agreements and in the
related prospectus supplement, and each underwriter will severally agree to
purchase, the principal amount of each Class of Notes and Certificates, as the
case may be, of the related Series set forth in the Underwriting Agreements and
in the related prospectus supplement.
In the Underwriting Agreements with respect to any given Series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth in the Underwriting Agreements, to purchase all of the
Notes and Certificates, as the case may be, described in the Underwriting
Agreements that are offered by this Prospectus and by the related prospectus
supplement if any Notes and Certificates, as the case may be, are purchased.
Each prospectus supplement will either:
o set forth the price at which each Class of Notes and
Certificates, as the case may be, being offered by the prospectus
supplement will be offered to the public and any concessions that
may be offered to dealers participating in the offering of the
Notes and Certificates, as the case may be, or
o specify that the related Notes and Certificates, as the case may
be, are to be resold by the underwriters in negotiated
transactions at varying prices to be determined at the time of
the sale.
After the initial public offering of any Notes and Certificates, as the case may
be, public offering prices and concessions may be changed.
Each Underwriting Agreement will provide that the related Seller will
indemnify the related underwriters against specified civil liabilities,
including liabilities under the Securities Act, or contribute to payments the
several underwriters may be required to make in respect of these liabilities.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a
given Series of Securities, the closing of the sale of any Class of Securities
will be conditioned on the closing of the sale of all other Classes under the
related Underwriting Agreement.
The place and time of delivery for the Notes and Certificates, as the
case may be, in respect of which this Prospectus is delivered will be set forth
in the related prospectus supplement.
If and to the extent required by applicable law or regulation, this
Prospectus and the applicable prospectus supplements will also be used by the
Underwriter after the completion of the offering in connection with offers and
sales related to market-making transactions in the offered Securities in which
the Underwriter acts as principal. Sales will be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Some related legal matters relating to the Securities of any Series
will be passed upon by Stroock & Stroock & Lavan LLP, New York, New York or any
other counsel set forth in the prospectus supplement. Some related federal
income tax and other matters will be passed upon for each Trust by Stroock &
Stroock & Lavan LLP, New York, New York or any other counsel set forth in the
prospectus supplement.
<PAGE>
Index of Defined Terms
1996 Contingent Debt Regulations.........................64
1997 Act.................................................84
1997 Withholding Regulations.............................70
Account Balance..........................................67
Accounts..................................................7
Accumulation Period......................................43
Acquisition Discount.....................................70
Additional Accounts.......................................7
adjusted issue price.....................................67
Agreements................................................6
Ancillary Arrangements...................................23
Base Assets...............................................6
benefit plan investors...................................94
Callable Treasury Strips.................................12
Cash Collateral Account..................................22
Cash Collateral Guaranty.................................22
Cede.....................................................47
Clearstream Luxembourg...................................49
Clearstream Luxembourg Participants......................49
Certificate Interest Rate................................41
Certificate Owners.......................................63
Certificate Payment Account..............................55
Certificateholder........................................48
Certificates..............................................6
Check-the-Box Regulations................................74
Class.....................................................6
Closing Date.............................................51
Code.....................................................63
Collateral Indebtedness Interests........................21
Collection Account.......................................55
Commission................................................6
Controlled Accumulation Amount...........................42
Controlled Accumulation Period...........................42
Controlled Amortization Amount...........................44
Controlled Amortization Period...........................43
Controlled Deposit Amount................................42
Controlled Distribution Amount...........................44
Credit Enhancement.......................................20
Date of Processing.......................................24
Dealers...................................................7
Defaulted Amount.........................................40
Defaulted Receivables....................................40
Deficit Controlled Accumulation Amount...................43
Deficit Controlled Amortization Amount...................44
Definitive Certificates..................................18
Definitive Securities....................................47
Depositaries.............................................47
Depositor.................................................6
Depositor's Interest.....................................36
Distribution Date........................................24
DOL......................................................93
DOL Regulation...........................................93
DTC......................................................47
Eligible Deposit Account.................................55
Eligible Institution.....................................56
Eligible Investments.....................................55
Eligible Servicer........................................26
Enhancement Invested Amount..............................21
ERISA....................................................92
Euroclear................................................49
Euroclear Operator.......................................49
Euroclear Participants...................................49
Events of Default........................................29
Exchange Act.............................................10
Expected Final Payment Date..............................41
Fannie Mae...............................................13
Farm Credit Act..........................................16
FCA......................................................16
FCBs.....................................................16
FDIC.....................................................24
Federal Tax Counsel......................................62
FFCB.....................................................13
FFEL.....................................................14
FHLB.....................................................13
FHLMC Act................................................14
Final Scheduled Payment Date.............................36
Finance Charge Receivables...............................39
financial institution....................................71
FIRREA...................................................15
Fiscal Agent.............................................13
Floating Allocation Percentage...........................40
Foreign Investors........................................89
Freddie Mac..............................................13
freely transferable......................................94
Funding Corporation......................................17
Global Securities........................................04
Government Securities....................................10
Government Security Schedule.............................53
Grantor Trust............................................79
Grantor Trust Certificateholders.........................79
Grantor Trust Certificates...............................79
GSE Bonds................................................10
GSE Issuer...............................................13
GSEs.....................................................10
Holders..................................................51
Indenture.................................................6
Indenture Trustee.........................................6
Indirect Participants....................................48
Initial Accounts..........................................7
Insolvency Event.........................................44
Interest Component.......................................19
Interest Funding Account.................................41
intermediary certification...............................71
Invested Amount..........................................41
Investment Company Act...................................44
Investment Earnings......................................55
Investor Certificateholders' Interest....................24
IRS......................................................63
issue price..............................................66
L/C Bank.................................................22
market discount..........................................67
MBS......................................................14
miscellaneous itemized deductions........................75
Miscellaneous Payments...................................39
Monthly Period...........................................24
New Issuance.............................................37
Non-United States Holder.................................70
Non-United States Owner..................................78
Non-United States Person.................................70
Note Interest Rate.......................................28
Note Owners..............................................63
Note Payment Account.....................................55
Noteholder...............................................48
Notes.....................................................6
objective rate...........................................65
OID Regulations..........................................64
original issue discount..................................66
Paired Series............................................45
Participants.............................................47
Participations............................................6
Pay Out Event............................................44
Paying Agent.............................................48
Payment Accounts.........................................20
Payment Dates............................................28
Plan.....................................................92
Plan Fiduciary...........................................92
Pooling and Servicing Agreement...........................6
Pre-funded Amount........................................52
Pre-Funding Account.......................................7
premium..................................................81
Prepayment Assumption....................................66
Principal Allocation Percentage..........................40
Principal Commencement Date..............................41
Principal Component......................................19
Principal Funding Account................................42
Principal Only Certificates..............................36
Principal Receivables....................................36
Principal Terms..........................................38
Prior Series.............................................45
Private Label Custody Receipt Securities.................11
Private Label Custody Receipt Security Schedule..........54
Private Label Custody Strips.............................11
Products..................................................7
PTCE.....................................................95
publicly traded partnership..............................87
qualified floating rate..................................64
qualified inverse floating rate..........................65
qualified stated interest................................64
Qualifiying Substitute Base Asset........................54
qualifying income........................................87
Rapid Accumulation Period................................43
Rapid Amortization Period................................44
Rating Agency............................................12
Receivables...............................................6
Receivables Pooling Certificates.........................11
REFCO....................................................11
REFCO Strip..............................................19
REFCO Strips.............................................11
Registrar................................................28
Related Documents........................................32
Removed Accounts..........................................7
Removed Base Asset.......................................54
Reserve Account..........................................22
Revolving Period.........................................42
RTC......................................................15
Sallie Mae...............................................13
Securities................................................6
Securities Act............................................8
Security Owners..........................................63
Securityholder...........................................48
Seller....................................................7
Senior Class Percentage..................................82
Serieal Treasury Strip...................................12
Series....................................................6
Series Cut-Off Date.......................................7
Series Enhancement.......................................20
Series Termination Date..................................46
Servicer Defaults........................................56
Servicing Fee............................................25
Shortfall Amount.........................................83
Short-Term Note..........................................69
Special Payment Date.....................................45
Spread Account...........................................23
stated redemption price at maturity......................66
Strip Notes..............................................29
Stripped Certificates....................................81
stripping................................................12
STRIPS...................................................12
Subordinate Certificates.................................82
Subordinate Class Percentage.............................82
Supplement...............................................37
System...................................................16
Systemwide Debt Securities...............................16
TEFRA....................................................18
Terms and Conditions.....................................50
TIN......................................................72
Transfer Agent...........................................51
Treasury Bonds...........................................10
Treasury Strips..........................................10
Trust.....................................................6
Trust Accounts...........................................55
Trust Agreement...........................................6
Trust Stripped Bond......................................82
Trust Stripped Coupon....................................82
Trustee...................................................6
TVA......................................................13
TVA Act..................................................16
UCC......................................................61
unconditionally payable..................................87
Underwriting Agreements..................................96
United States Person.....................................70
unrelated business taxable income........................75
WALTR Agreement...........................................8
WALTR Issuer..............................................8
WALTR Schedule...........................................52
WALTR Securities..........................................6
WALTR Servicer............................................8
WALTR Trust...............................................8
WALTR Trustee.............................................8
widely held..............................................94
Zero Coupon Certificates.................................36
<PAGE>
ANNEX I
Global Clearance, Settlement and Tax Documentation Procedures
Except in limited circumstances, the globally offered Certificates
(the "Global Securities") will be available only in book entry form. Unless
otherwise specified in a prospectus supplement for a Series, investors in the
Global Securities may hold Global Securities through any of DTC, Clearstream
Luxembourg or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC participants holding Global Securities will be effected on a
delivery-against-payment basis through Citibank and Morgan as the respective
depositaries of Clearstream Luxembourg and Euroclear and as participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S.
withholding taxes, provided that the holders meet particular requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will he held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, Citibank and Morgan, which in turn will
hold these positions in accounts as participants of DTC.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional asset-backed
securities. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desire value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to conventional
asset-backed securities.
Trading between Clearstream Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a participant at least one business day prior to
settlement. Clearstream Luxembourg or Euroclear will instruct Citibank or
Morgan, respectively, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. Payment will then be made by Citibank or Morgan to the DTC participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Luxembourg Participant's or Euroclear Participant's account. The
Global Securities credit will appear the next day (European time) and the cash
debit will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Clearstream Luxembourg or Euroclear cash debit will
be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended
a line of credit to them, participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Clearstream Luxembourg Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases, the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of overdraft charges, although this result will depend on each participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global Securities
to Citibank or Morgan for the benefit of Clearstream Luxembourg Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading between Clearstream Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
and Euroclear Participants may employ their customary procedures for
transactions in which Global Securities are to be transferred by the respective
clearing system, through Citibank or Morgan, to a DTC participant. The seller
will send instructions to Clearstream Luxembourg or Euroclear through a
participant at least one business day prior to settlement. In these cases,
Clearstream Luxembourg or Euroclear will instruct Citibank or Morgan, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. The payment will then be reflected in the account of the Clearstream
Luxembourg Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Luxembourg or Euroclear Participant's
account would be back-valued to the value date, which would be the preceding
day, when settlement occurred in New York. Should the Clearstream Luxembourg or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Luxembourg or Euroclear Participant's account would instead be valued as of the
actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(1) borrowing through Clearstream Luxembourg or Euroclear for one day,
until the purchase side of the day trade is reflected in their Clearstream
Luxembourg or Euroclear accounts in accordance with the clearing system's
customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream Luxembourg or
Euroclear account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Clearstream Luxembourg
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear, or through DTC if the holder has an address
outside the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest, including original issue discount, on
registered debt issued by U.S. persons, unless the holder takes one of the
following steps to obtain an exemption or reduced tax rate:
(1) Exemption for non-U.S. persons (Form W-8). Non U.S. persons that
are beneficial owners can obtain a complete exemption from the withholding tax
by filing a signed Form W-8 (Certificate of Foreign Status) in the calendar year
in which the payment is made or collected or in either of the preceding two
calendar years.
(2) Exemption for non-U.S. persons with effectively connected income
(Form4224). A non-U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of a Trade or Business in the
United States) annually.
(3) Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate, depending on the treaty terms, by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate) every three years. If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the beneficial
owner or his agent.
(4) Exemption for U.S. persons (Form W-9). U.S. persons should file a
FormW-9 (Request for Taxpayer Identification Number and Certification) in order
to avoid backup withholding (see "Material Federal Income Tax Consequences --
Owner Trusts -- Tax Consequences to Note Owners -- Backup Withholding and
Information Reporting", above).
U.S. Federal Income Tax Reporting Procedure. The Global Security
holder, or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he holds, the
clearing agency, in the case of persons holding directly on the books of the
clearing agency. Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one taxable year.
On October 6, 1997, the 1997 Withholding Regulations were issued which
affect the documentation required from non-U.S. persons holding Global
Securities. The 1997 Withholding Regulations are generally proposed to be
effective for payments after December 31, 1998, regardless of the issue date of
the Global Security with respect to which the payments are made, subject to some
related transition rules. The 1997 Withholding Regulations will replace a number
of current tax certification forms, including IRS Form W-8, IRS Form 1001 and
IRS Form 4224, discussed above, with a single, restated form and standardize the
period of time for which withholding agents could rely on these certifications.
Prospective investors are urged to consult their tax advisors with respect to
the effect of the 1997 Withholding Regulations.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of these Global Securities.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, THIS INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR DEUTSCHE BANC ALEX. BROWN. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE THIS TYPE OF OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
UNDER THIS PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THEIR RESPECTIVE DATES.
Until 90 days after the date of this prospectus supplement, all dealers
effecting transactions in the securities described in this prospectus
supplement, whether or not participating in this distribution, may be required
to deliver this prospectus supplement and the Prospectus. This is in addition to
the obligation of dealers to deliver this prospectus supplement and the
Prospectus when acting as underwriters and with respect to their to their unsold
allotments of subscriptions.
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS SUPPLEMENT (to prospectus date [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
SPONSOR
[ ] EQUIPMENT TRUST SECURITIES [ ]-[ ]
OWNER TRUST
RECEIVABLE-BACKED NOTES
[ ]
DEPOSITOR
[ ]
SERVICER
-------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The certificates will represent interests in the trust fund only and
will not represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the
certificates only if accompanied by the prospectus.
The owner trust will issue the following classes of notes:
-------------------------------------------------------------------------------
Initial Interest
Class of Aggregate Rate First Stated Price to Underwriting
Notes Principal (per Payment Maturity Public Discount
Amount annum) Date Date Per Note Per Note
---------- ----------- ---------- ----------- ---------- ---------- -----------
A-1 $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- -----------
A-2 $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- -----------
A-3 $ [ ] Floating [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- -----------
A-4 $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- -----------
A-5 $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- -----------
B $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- -----------
C $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- ------------
D $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
---------- ----------- ---------- ----------- ---------- ---------- ------------
The total price to the public is $[ ].
The total underwriting discount is $[ ].
The total proceeds to the owner trust are $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
-----------------
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
-------------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Background Information....................................14
Risk Factors..............................................15
Some Note Classes Will be Entitled to Interest or
Principal Payments Before Other Note Classes and the
Swap Counterparty Will be Entitled to Payment Before
Some Note Classes................................ 15
The Owner Trust...........................................24
The Owner Trust......................................24
The Indenture........................................24
Capitalization of the Owner Trust....................24
The Owner Trustee....................................24
The Originators, the Servicer, the Seller
and the Depositor.........................................25
Origination Of The Contracts..............................25
The Contracts.............................................25
Description of the Contracts.........................25
Statistics Relating to the Initial Cut-Off
Date Contract Pool.................................25
Statistics Relating to Delinquencies and Defaults....29
Weighted Average Life Of The Notes........................31
Description Of The Notes And Indenture....................40
Distributions........................................41
Interest.............................................43
Principal............................................44
Class A-3 Swap Agreement.............................54
Optional Purchase of Class A-5 Notes.................56
Cash Collateral Account..............................56
Optional Purchase of Contracts and
Redemption of Notes................................58
Reports to Noteholders...............................59
Servicing............................................59
The Indenture Trustee................................60
Representation and Warranties........................60
Indemnification......................................61
Amendments...........................................62
Ratings Of The Notes......................................62
Use Of Proceeds...........................................64
Legal Proceedings.........................................64
Plan Of Distribution......................................64
Legal Matters.............................................67
Index Of Defined Terms....................................68
PROSPECTUS:
Prospectus Summary................................
Risk Factors......................................
The Sponsor.......................................
The Depositor.....................................
The Owner Trusts..................................
The Originators, The Seller
And The Servicer................................
The Contracts.....................................
Description Of The
Notes And Indenture.............................
Description Of The Pooling
And Servicing Agreements........................
Material Federal Income
Tax Consequences................................
Erisa Considerations..............................
Ratings Of The Notes..............................
Use Of Proceeds...................................
Plan Of Distribution..............................
Legal Matters.....................................
Where You Can Find
More Information................................
Index Of Terms....................................
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED
TO CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU
SHOULD READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH
FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
Owner Trustee...........................The owner trustee is [ ], acting not in
its individual capacity but solely as
owner trustee under the trust agreement
with the sponsor and the depositor, and
its telephone number is [ ]. See "THE
OWNER TRUST" in this prospectus
supplement.
Originators.............................[ ] and [ ].
The address of each originator is [ ].
Sponsor.................................ACE Securities Corp., an affiliate of
Deutsche Banc Alex. Brown. Neither
Deutsche Banc Alex. Brown nor any of its
affiliates has guaranteed, will
guarantee or is or will be otherwise
obligated with respect to any notes.
Indenture and Indenture
Trustee..............................The notes will be issued under an
indenture. [ ] will serve as indenture
trustee. See "DESCRIPTION OF THE NOTES
AND INDENTURE-- THE INDENTURE TRUSTEE,"
in this prospectus supplement.
Terms of the Notes:
o Payment Dates......................The [20]th day of each month, beginning
[ ], or if that day is not a business
day, the next business day.
o Interest...........................See the cover page for the rates as to
all classes other than Class A-3. The
Class A-3 interest rate will be the
one-month London interbank offered rate,
plus [ ]%. See "DESCRIPTION OF THE NOTES
AND INDENTURE-- INTEREST." The owner
trust will calculate interest on the
Class A-1 and Class A-3 Notes on the
basis of the actual number of days
elapsed and a 360-day year. The owner
trust will calculate interest on the
Class A-2, Class A-4, Class A-5, Class
B, Class C and Class D Notes on the
basis of a 360-day year comprised of
twelve 30-day months.
On each payment date and after the owner
trust repays any outstanding servicer
advances and pays the servicer's monthly
servicing fee, the owner trust will pay
interest on the notes in the following
order:
CLASS OF RECEIVES INTEREST
NOTES BEFORE CLASS
A-1, A-2, A-3, B C and D
A-4 and A-5
B C and D
C D
D None
If the available funds are insufficient
to pay interest on all classes of Class
A Notes, the owner trust will apply the
available funds pro rata to the classes
of Class A Notes based on their
respective principal balances.
See "DESCRIPTION OF THE NOTES AND
INDENTURE -- DISTRIBUTIONS" in this
prospectus supplement.
o Principal..........................After paying interest on the notes, the
owner trust will pay principal on the
notes on each payment date. The owner
trust will pay principal in the
following order:
BEFORE AN EVENT OF DEFAULT:
1.(A) Until the Class A-1 Note
principal amount becomes zero, [ ]%
of the total principal payment
amount to the Class A-1 Notes and
[ ]% of the total principal payment
amount to the Class A-5 Notes;
(B)on the payment date when the Class
A-1 Note principal amount becomes
zero, first, the remaining Class
A-1 principal amount to the Class
A-1 noteholders, second, [ ]% of
the total principal payment amount,
but not greater than the Class A
principal payment amount, to the
Class A-5 noteholders and third,
the remaining Class A principal
payment amount to the Class A-2,
A-3, A-4 and A-5 Notes in that
order, with each successive class
not being entitled to principal
until the prior class' principal
amount is reduced to zero;
(C)after the Class A-1 Note principal
amount is reduced to zero, [ ]% of
the total principal payment amount,
but not greater than the Class A
principal payment amount to the
Class A-5 Notes and then the
remaining Class A principal payment
amount to the Class A-2, A-3, A-4
and A-5 Notes in that order, with
each successive class not being
entitled to principal until the
prior class' principal amount is
reduced to zero.
If the available amount is insufficient
for the full payment of the amounts
called for in (A), (B), or (C) above,
the allocation of the available amount
will be as provided in "DESCRIPTION OF
THE NOTES AND INDENTURE -- PRINCIPAL" in
this prospectus supplement;
2. after the Class A-1 Note principal
amount is reduced to zero, the
Class B principal payment amount to
the Class B Notes;
3. after the Class A-1 Note principal
amount is reduced to zero, the
Class C principal payment amount to
the Class C Notes; and
4. after the Class A-1 Note principal
amount is reduced to zero, the
Class D principal payment amount to
the Class D Notes.
The principal payment amount on each
class of the notes on each payment date
will be based on the difference between
the aggregate principal balance of that
class of notes on that payment date and
the target amount set for the class or
in the case of Class B, C and D a floor
amount set for the class, if greater
than the target amount.
AFTER AN EVENT OF DEFAULT:
Following an event of default with
respect to the notes, the owner trust
will pay principal in the following
order:
CLASS OF RECEIVES PRINCIPAL
NOTES BEFORE CLASSES
----- ------------------
A-1 A-2, A-3, A-4, A-5, B, C and D
A-2 A-3, A-4, A-5, B, C and D
A-3 A-4, A-5, B, C and D
A-4 A-5, B, C and D
A-5 B, C and D
B C and D
C D
D None
See "DESCRIPTION OF THE NOTES AND
INDENTURE -- DISTRIBUTIONS" in this
prospectus supplement.
o Class A-3 Swap
Agreement...........................The owner trust will enter into a swap
agreement with a swap counterparty
solely for the benefit of the Class A-3
noteholders. Under the swap agreement,
the swap counterparty's payments will be
calculated at the Class A-3 Note
interest rate and the owner trust's
payments will be calculated at the
assumed fixed rate of [ ]%.
To the extent that interest on any
payment date at the Class A-3 Note
interest rate exceeds interest
calculated at the assumed fixed rate:
o the swap counterparty will be
obligated to pay an amount equal to
the excess to the owner trust,
o that payment will constitute a
portion of the amount available but
only in respect of the Class A-3
Notes and
o the Class A-3 Notes will be
dependent upon that payment for
receipt of interest to the extent
of the excess.
Likewise under the swap agreement, to
the extent that interest calculated at
the assumed fixed rate exceeds interest
calculated at the Class A-3 Note
interest rate
o the owner trust will be obligated
to pay an amount equal to the
excess to the swap counterparty,
and
o the payment will have the same
priority, in terms of application
of the amount available, as payment
of interest on the Class A-3 Notes.
Any shortfall in the payment of interest
on the Class A-3 Notes due entirely to
the failure of the swap counterparty to
make a required payment under the swap
agreement will not constitute an event
of default under the indenture. Except
to the extent the amount available on
any payment date exceeds the amount
needed to pay:
o the servicing fee and servicer
advances,
o all interest and principal payable
on the notes, with Class A-3 Note
interest being calculated at the
assumed fixed rate for this
purpose, and
o all amounts payable in connection
with the cash collateral account,
no amounts in addition to those
available under the swap agreement will
be available under the indenture to make
up the shortfall. The only remedies in
these circumstances will be those
available to the owner trust under the
swap agreement. See "DESCRIPTION OF THE
NOTES AND INDENTURE -- THE CLASS A-3
SWAP AGREEMENT" in this prospectus
supplement.
o Class A-3 Swap
Counterparty.........................[ ] will be the counterparty to the
owner trust under the swap agreement.
The swap counterparty currently has an
"[ ]" long-term unsecured senior debt
credit rating from [ ] and an "[ ]"
long-term unsecured senior debt credit
rating from [ ]. See "DESCRIPTION OF THE
NOTES AND INDENTURE-- THE CLASS A-3 SWAP
COUNTERPARTY" in this prospectus
supplement.
o Stated Maturity Dates.................The notes will mature on the respective
dates shown on the cover of this
prospectus supplement. However, if the
stated maturity date is not a business
day, then the stated maturity date will
be the next business day.
o Optional Purchase of
Class A-5 Notes....................The owner trust will have the right to
purchase all of the Class A-5 Notes, on
any payment date, at a purchase price
equal to the principal balance of the
Class A-5 Notes plus a premium.
Following any purchase, the Class A-5
Notes will not be retired, but will
continue to be entitled to interest and
principal payments. See "DESCRIPTION OF
THE NOTES AND INDENTURE -- OPTIONAL
PURCHASE OF CLASS A-5 NOTES" in this
prospectus supplement.
o Optional Redemption When
the Aggregate Note Principal
Amount is Less Than 10%
of Initial Contract Pool
Principal Balance..................[ ], the seller of contracts to the
depositor, has the option to purchase
the owner trust's assets when the
outstanding note principal balance is
less than 10% of the initial contract
pool principal balance. If the seller
exercises this option, the indenture
trustee will redeem all notes on the
next payment date. The redemption price
for each note will be the note's
principal amount plus unpaid accrued
interest to but excluding the redemption
date.
The contract principal balance of any
contract is the present value of the
unpaid scheduled payments due on that
contract discounted at the discount
rate, called the "discount rate," of [
]%. This prospectus supplement uses this
discount rate to calculate principal
balances of contracts throughout. The
"contract pool principal balance" is the
aggregate of the individual discounted
contract principal balances.
See "DESCRIPTION OF THE NOTES AND
INDENTURE -- OPTIONAL PURCHASE OF
CONTRACTS" in this prospectus
supplement.
Cut-off Date............................[ ].
Closing Date............................On or about [ ].
Servicing; Servicing Fee................The servicer will be responsible for
servicing, managing and administering
the contracts and related interests, and
enforcing and making collections on the
contracts. The servicer may make
advances for delinquent scheduled
payments, to the extent it determines
that advances will be recoverable in
future periods. Servicer advances are
reimbursable from contract payments. See
"Description of the Pooling and
Servicing Agreements -- Servicing" in
the accompanying prospectus.
The servicer's monthly fee will equal
the product of
o one twelfth of one percent and
o the aggregate contract pool
principal balance as of the last
day of the second preceding
collection period.
The servicer fee is payable out of
contract payments. The servicer will pay
any sub-servicer servicing fees from its
monthly servicing fee. See "DESCRIPTION
OF THE NOTES -- SERVICING" in this
prospectus supplement.
Ratings.................................The owner trust will not issue any class
of notes unless [ ], and [ ]. assign at
least the following ratings to each
class of notes:
CLASS [ ] [ ]
-----
A-1
A-2
A-3
A-4
A-5
B
C
D
See "Ratings of the Notes" in this
prospectus supplement and the
accompanying prospectus.
Owner Trust Assets
A. The Contracts...................The contracts will consist of the
following:
o equipment lease contracts,
o installment payment agreements,
o conditional sales/financing
agreements,
o promissory notes, and
o loan and security agreements.
As of [ ]the pool of contracts for the
owner trust had the following
characteristics. Percentages are based
on the contract pool principal balance:
o Initial contract pool principal
balance..............$[ ]
o Number of contracts [ ]
o Average contract principal
balance.............$[ ]
o Leases as a percentage of the
contracts..........[ ]%
o Loans and other financing
arrangements as a percentage of the
contracts...............[ ]%;
o Underlying equipment type
concentration:
PRINCIPAL BALANCE
EQUIPMENT TYPE CONCENTRATION
-------------- -----------------
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]%
No other single type of equipment
accounted for more than 5% of the
initial contract pool principal balance.
o Geographic concentration:
PRINCIPAL BALANCE
STATE CONCENTRATION
----- -------------
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]%
[ ]................ [ ]
No other state represented more
than 5% of the initial contract
pool principal balance.
o Remaining terms of the
contracts....[ ]month to [ ] months
o The weighted average remaining term
of the contracts........[ ] months
o Weighted average age of the
contracts............[ ] months
See "THE CONTRACTS -- STATISTICS
RELATING TO THE CUT-OFF DATE CONTRACT
POOL" in this prospectus supplement.
B. Cash Collateral
Account.............................The indenture trustee will establish a
cash collateral account having an
initial balance of $[ ] ([ ]% of initial
contract pool principal balance) for the
benefit of the noteholders, which may
include proceeds of loans from third
party lenders to the owner trust under a
cash collateral account loan agreement.
The indenture trustee will use cash
collateral account funds to pay the
following amounts if payments on the
contracts are insufficient:
o interest due on the notes, with
interest on the Class A-3 Notes
being calculated for this purpose
at the assumed fixed rate of [ ]%
in connection with the swap
agreement;
o the lesser of
o losses on liquidation of
defaulted contracts during the
relevant collection period,
and
o the excess of the aggregate
note principal amount over the
contract pool principal
balance, including all
scheduled payments for the
relevant collection period and
unpaid scheduled payments from
prior periods; and
o principal on the notes on the
applicable stated maturity date.
See "DESCRIPTION OF THE NOTES AND
INDENTURE -- CASH COLLATERAL ACCOUNT" in
this prospectus supplement.
Use of Proceeds.........................After the deposit of funds from the note
sale proceeds into the cash collateral
account and payment of expenses, the
indenture trustee will pay the remaining
proceeds of the sale of notes to the
depositor. The depositor will pay the
proceeds to a warehousing trustor to
[ ]. in payment of the purchase price of
contracts acquired from them,
respectively. See "USE OF PROCEEDS" in
this prospectus supplement.
Legal Investment........................The Class A-1 Notes will be eligible
securities for purchase by money market
funds under Rule 2a-7 under the
Investment Company Act of 1940.
<PAGE>
BACKGROUND INFORMATION
The information in this section will help you understand the
information in this prospectus supplement and the accompanying prospectus.
The principal balance of any contract is the present value of the
unpaid scheduled payments due on the contract after a cut-off date. The
principal balance of a contract excludes all scheduled payments due on or prior
to, but not received as of, that date, as well as any scheduled payments due
after but received before that date. The principal balance also excludes any
prepayments received on or prior to that date. The scheduled payments are
discounted monthly at the rate of [ ]% per annum.
The aggregate principal balance of the contracts expected to be held
by the owner trust as of any particular date is referred to as the contract pool
principal balance. The contract pool principal balance, as of the initial
cut-off date, is referred to as the initial cut-off date contract pool principal
balance or the initial contract pool. The initial cut-off date is [ ]for all
contracts transferred to the owner trust on the closing date for the sale of the
notes. It will be the first day of the month of transfer to the owner trust for
each substitute contract.
Contract balance percentages and amounts discussed below are based on
the aggregate principal balance of the contracts being transferred to the owner
trust as of the initial cut-off date, unless a different date is noted. Changes
in the characteristics of the contract pool between the initial cut-off date and
the closing date will not affect more than 5% of the initial cut-off date
contract pool principal balance.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE NOTES.
FUTURE CONTRACT DELINQUENCY AND The sponsor presents the historical
LOSS EXPERIENCE OF THE CONTRACT contract delinquency and loss experience
POOL MAY VARY SUBSTANTIALLY of the originators' portfolios of
FROM THE ORIGINATORS' contracts similar to those being
HISTORICAL EXPERIENCE transferred to the owner trust under
"THE CONTRACTS -- STATISTICS RELATING TO
DELINQUENCIES AND DEFAULTS." However,
the actual results for the owner trust's
contracts could be substantially worse.
If so, you may not receive note interest
and principal payments in the amounts
and at the times you expect.
SOME NOTE CLASSES WILL BE The owner trust will pay interest,
ENTITLED TO INTEREST OR PRINCIPAL principal or both on some classes of
PAYMENTS BEFORE OTHER NOTE CLASSES notes prior to paying interest,
AND THE SWAP COUNTERPARTY WILL BE principal or both on other classes of
ENTITLED TO PAYMENT BEFORE SOME NOTE notes. CLASSES The subordination of some
classes of notes to others means that
the subordinated classes are more likely
to suffer the consequences of delinquent
payments and defaults on the contracts
than the classes having prior payment
rights. See "DESCRIPTION OF THE NOTES
AND INDENTURE -- DISTRIBUTIONS," "--
SUBORDINATION OF SUBORDINATE NOTES" and
"-- CASH COLLATERAL ACCOUNT" in this
prospectus supplement.
Similarly, if the owner trust has
to pay any amounts to the swap
counterparty under the Class A-3 Notes
swap agreement, that amount will have
the same priority of payment as interest
owed to the Class A-3 noteholders. This
means that the amount owed to the swap
counterparty must be paid before the
payment of interest to the Class B, C
and D noteholders and before the payment
of principal to any noteholders. See
"DESCRIPTION OF THE NOTES AND INDENTURE
-- CLASS A-3 SWAP AGREEMENT" in this
prospectus supplement.
Moreover, the more senior classes
of notes could lose the credit
enhancement provided by the more
subordinate classes and the cash
collateral account if delinquencies and
defaults on contracts increase and the
collections on contracts and amounts in
the cash collateral account are
insufficient to pay even the more senior
classes of notes.
ANY FAILURE BY THE SWAP The Class A-3 Notes will be
COUNTERPARTY TO PAY AMOUNTS dependent upon payments to be made by
OWED UNDER THE SWAP AGREEMENT the swap counterparty under the swap
WOULD REDUCE THE FUNDS AVAILABLE agreement for receipt of the full amount
TO PAY INTEREST ON THE CLASS A-3 NOTES of interest on the Class A-3 Notes. This
will be the case if the interest due on
the Class A-3 Notes at their floating
rate exceeds the amount available to the
owner trust to pay the Class A-3 Note
interest at the assumed fixed rate of [
]%. Any shortfall in the payment of
interest on the Class A-3 Notes due
entirely to the failure of the swap
counterparty to make a required payment
under the swap agreement will not
constitute an event of default under the
indenture. Except to the extent the
amount available on any payment date
exceeds the amount necessary to pay
o the servicing fee and
servicer advances,
o all interest and principal
payable on the notes, with
Class A-3 Note interest
being calculated at the
assumed fixed rate for this
purpose and
o all amounts payable in
connection with the cash
collateral account, no
amounts in addition to those
available under the swap
agreement will be available
under the indenture to make
up the shortfall. The only
remedies in these
circumstances will be those
available to the owner trust
under the swap agreement.
As a general matter, the
obligations of the swap counterparty
under the swap agreement are unsecured.
However, in the event that the swap
counterparty's long-term unsecured
senior debt ceases to be rated at a
level acceptable to [ ] and [ ], the
swap counterparty will be obligated
either to (a) post collateral or
establish other arrangements to secure
its obligations under the swap agreement
or (b) arrange for a substitute swap
counterparty to assume the rights and
obligations of the swap counterparty
under the swap agreement, in either case
so that the ratings of the notes are
maintained or, if applicable, restored
to their level immediately prior to the
downgrading or withdrawal of the swap
counterparty's debt. If the swap
counterparty fails to take either of
these actions, the owner trust will be
entitled to terminate the swap agreement
and to claim from the swap counterparty
the cost of obtaining a replacement swap
from a swap counterparty satisfactory to
the note rating agencies. The Class A-3
noteholders bear the risk of any failure
by the swap counterparty to take the
actions required of it and the risk of
any inability of the owner trust to
obtain a replacement swap agreement.
ADVERSE EVENTS IN [ ] HIGH If adverse events or economic
CONCENTRATION STATES MAY conditions were particularly severe in a
CAUSE INCREASED DEFAULTS AND geographic region where there is a
DELINQUENCIES substantial concentration of obligors,
the amount of delinquent payments and
defaults on the contracts may increase.
As a result, the overall timing and
amount of collections on the contracts
held by the owner trust may differ from
what you expect, and you may experience
delays or reductions in payments.
The following are the approximate
percentages of the initial contract pool
principal balance of the owner trust's
contracts whose obligors are located in
the following states:
o [ ]% in [ ],
o [ ]% in [ ],
o [ ]% in [ ],
o [ ]% in [ ] and
o [ ]% in [ ].
The remaining states accounted for [ ]%
of the initial contract pool principal
balance, and none of these remaining
states accounted for more than 5% of the
initial contract pool principal balance.
[Although the sponsor does not know
of any matters likely to increase the
rate of delinquencies or defaults in
these states, an example of an adverse
event specific to a geographic region is
the possibility of a catastrophic
earthquake in California. An earthquake
in California could have negative
regional economic repercussions and
potentially cause obligors in that
region to delay or reduce their payments
on contracts. Additionally, a
substantial downturn in the financial
services industry, which is highly
concentrated in the states of New York
and New Jersey, or in the oil and gas
industry, which is concentrated in the
state of Texas could reduce revenues for
obligors in those states and ultimately
reduce the associated obligors' ability
to make timely payments on their related
contracts].
ADVERSE ECONOMIC CONDITIONS If the industries in which there is
IN HIGH CONCENTRATION INDUSTRIES a substantial concentration of contracts
MAY CAUSE INCREASED DEFAULTS AND experience adverse events or economic
DELINQUENCIES conditions, the timing and amount of
collections on the contracts held by the
owner trust may differ from what you
expect. This could result in delays or
reduced payments to you. As of the
initial cut-off date, of the contract
pool principal balance, approximately
o [ ]% related to the
manufacturing industry,
o [ ]% related to equipment
used in the services
industry, excluding medical
and professional services,
o [ ]% related to the retail
and wholesale trade
industry,
o [ ]% related to equipment
used in transportation,
o [ ]% related to equipment
used in professional
services, and
o [ ]% related to the
financial services industry.
While the sponsor does not know of
any industry conditions, practices or
other matters likely to increase the
rate of delinquencies or defaults on
contracts with end-users in these
industries, some of them may be
adversely affected by various economic
conditions. For example, a rise in
interest rates may weaken the demand for
construction services. Moreover, the
retail trade industry is dependent upon
the level of consumer confidence and
spending. Adverse developments
concerning these conditions will tend to
increase the rate of delinquencies and
defaults by contract obligors in those
industries. This, in turn, could result
in reductions of or delays in the
collection of funds for payment of the
notes.
The sponsor does not believe that
any other industry accounts for more
than 5.00% of the contract pool
principal balance. However, as shown in
the table below under the heading "Types
of Obligor," the depositor's records
list [ ]% of the contract pool principal
balance in the category of "Other"
obligor. The depositor has not analyzed
this category to determine whether or
not the contracts included in it could
be grouped into some other more specific
type of equipment category. Any
contracts in this "Other" category that
relate to any particular industry would
be subject to all economic and other
risks associated with that industry. Any
adverse developments in that industry
will tend to increase the rate of
delinquencies and defaults by contract
obligors in that industry. This, in
turn, could result in reductions or
delays in collection of funds for
payment of the notes.
PRODUCT DEFECTS OR OBSOLESCENCE [ ], a [ ]and [ ] a [ ] is the
OR ADVERSE ECONOMIC EVENTS vendor of equipment for approximately
FOR TWO VENDORS ACCOUNTING FOR HIGH [ ]% of the contract pool principal
PROPORTIONS OF THE CONTRACTS MAY balance calculated as of the initial
CAUSE INCREASED DEFAULTS AND cut-off date. Products of [ ], a leading
DELINQUENCIES producer of computer systems, accounted
for approximately [ ]% of the contract
pool balance calculated as of the
initial cut-off date. Although the
sponsor is unaware of conditions likely
to increase the rate of defaults or
delinquencies on contracts pertaining to
equipment produced by these two vendors,
some events concerning these vendors or
their products could have that effect.
For example, if either of these vendors
were to experience financial
difficulties, the obligors' payment
performance with respect to the related
contracts may decline as the obligors
may be less inclined to make payments on
contracts with respect to a vendor which
is suffering financial difficulties.
Additionally, the occurrence of a
substantial number of defects in
products produced by either of these
vendors may result in decisions by the
obligors on the contracts relating to
equipment that proved defective not to
pay the contract amounts, to pay late or
to pay smaller amounts. This could
result in reductions of or delays in
payments you expect on the notes.
Moreover, obsolescence of the products
of either of these vendors could result
in prepayments of contracts that would
cause the notes to be paid earlier than
you expect. No other single vendor
originated more than [ ]% of the
contract pool principal balance as of
the initial cut-off date.
PRODUCT DEFECTS OR OBSOLESCENCE OF If the types of equipment in which
TYPES OF EQUIPMENT ACCOUNTING FOR contracts are concentrated suffer
HIGH PROPORTIONS OF THE CONTRACTS unexpectedly high rates of defects or
MAY CAUSE INCREASED DEFAULTS OR become obsolete, the obligors on the
DELINQUENCIES contracts may default, pay late or pay
less than the amounts owed on the
contracts. This could result in
reductions of or delays in payments you
expect on the notes.
As of the initial cut-off date, of
the contract pool principal balance,
approximately
o [ ]% related to contracts
involving telecommunications
equipment,
o [ ]% related to contracts
involving transportation
equipment,
o [ ]% related to contracts
involving computer and
point-of-sale equipment,
o [ ]% related to contracts
involving computer software,
o [ ]% related to contracts
involving manufacturing,
o [ ]% related to contracts
involving construction
equipment, and
o [ ]% related to contracts
involving medical equipment.
The depositor does not believe that any
other type of equipment accounts for
more than [ ]% of the contract pool
principal balance. However, as shown in
the table below under the heading "Types
of Equipment," the depositor's records
list [ ]% of the contract pool principal
balance in the category of "Other" types
of equipment. The depositor has not
analyzed this category to determine
whether or not the contracts included in
it could be grouped into some other more
specific type of equipment category. Any
contracts in this "Other" category that
relate to any particular type of
equipment would be subject to all
defect, obsolescence and other risks
associated with that type of equipment.
Any adverse developments concerning that
type of equipment will tend to increase
the rate of delinquencies and defaults
by obligors on contracts involving that
type of equipment. This, in turn, could
result in reductions or delays in
collection of funds for payment of the
notes.
THE OWNER TRUST'S NOT HAVING The owner trust will have no security
SECURITY INTERESTS IN COMPUTER interest in computer software and
SOFTWARE AND SERVICES AND THE computer services contracts, which
OWNER TRUST'S NOT bEING NAMED accounted for [ ]% of the initial
AS SECURED PARTY IN MOTOR VEHICLE contract pool balance, and the owner
TITLE CERTIFICATES WILL LEAVE trust will not be named as a secured
THE OWNER TRUST WITHOUT COLLATERAL party in the title certificates for
FOR THE ASSOCIATED CONTRACTS motor vehicle contracts, which accounted
for a substantial portion of the [ ]% of
the initial contract pool principal
balance attributable to the
transportation industry. If the obligor
on this type of contract fails to pay or
is late in paying, the owner trust will
have no recourse to the software,
services or motor vehicles, as the case
may be, underlying the contracts. This
increases the risk that the owner trust
will be unable to pay or will be late in
paying the amounts you expect on the
notes.
THE TRUST ASSETS ARE THE ONLY SOURCE All distributions on the notes will be
OF PAYMENTS ON THE NOTES made from payments by borrowers under
the receivables. The Trust has no other
assets [other than[ ]] to make
distributions on the notes. The
receivables are NOT insured or
guaranteed by any person. The Trust is
the only person that is obligated to
make distributions of the notes.
<PAGE>
THE OWNER TRUST
THE OWNER TRUST
The sponsor created the owner trust on [ ] under a trust agreement,
which the parties will amend and restate on the closing date for the sale of the
notes, among the sponsor the depositor and the owner trustee.
Under a pooling and servicing agreement, dated as of [ ], among
o the depositor,
o the owner trust,
o [ ], an originator and the seller of contracts to the
depositor and
o the servicer.
The depositor will transfer all of the contracts and the related security
interests to the owner trust. As noted in "THE SELLER AND ORIGINATORS --
UNDERWRITING AND SERVICING - DOCUMENTATION" and "THE CONTRACTS -- SOFTWARE AND
SERVICES" in the accompanying prospectus, some transferred contracts will not
have associated security interests.
The owner trust will issue an equity certificate, representing the
beneficial ownership interest in the owner trust, to the depositor. The equity
certificate will be entitled to any excess amount available on any payment date
after reimbursement of servicer advances and payment of servicing fees,
principal and interest on the notes, any amount owed to the swap counterparty
and amounts payable in connection with the cash collateral account. See
"DESCRIPTION OF THE INDENTURE AND NOTES -- DISTRIBUTIONS" in this prospectus
supplement. The sponsor is not offering and selling the equity certificate under
this prospectus supplement and the accompanying prospectus.
THE INDENTURE
Under an indenture dated as of [ ] between the owner trust and [ ], as
indenture trustee, the indenture trustee will authenticate and deliver the
notes.
CAPITALIZATION OF THE OWNER TRUST
If the issuance and sale of the notes had taken place on the initial
cut-off date, the capitalization of the owner trust on that date would have
consisted of notes with an aggregate principal amount of $[ ] and an equity
certificate.
THE OWNER TRUSTEE
[ ] will be the owner trustee under the trust agreement. The owner
trustee is a [ ] and its principal offices are located at [ ].
THE ORIGINATORS, THE SERVICER, THE SELLER AND THE DEPOSITOR
[TO BE INSERTED]
ORIGINATION OF THE CONTRACTS
[TO BE INSERTED]
THE CONTRACTS
DESCRIPTION OF THE CONTRACTS
All of the contracts are commercial, rather than consumer, leases,
loans or agreements. See "THE CONTRACTS" in the accompanying prospectus.
STATISTICS RELATING TO THE INITIAL CUT-OFF DATE CONTRACT POOL
The initial contract pool principal balance is $[ ]. This amount is
based upon the contract pool principal balance determined as of the initial
cut-off date, but also includes an amount in respect of scheduled payments on
the contracts due prior to, but not received as of, the cut-off date. The
following tables set forth the characteristics of the contracts as of the
cut-off date. Tables presented in this section may not total due to rounding.
COMPOSITION OF THE INITIAL CUT-OFF DATE CONTRACT POOL
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
INITIAL AVERAGE AVERAGE CONTRACT
CONTRACT POOL ORIGINAL REMAINING PRINCIPAL
NUMBER OF PRINCIPAL TERM TERM BALANCE
CONTRACTS BALANCE (RANGE) (RANGE) (RANGE)
----------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
[ ] $[ ] [ ] months [ ] months $[ ]
([ ] months to ([ ] month to ($[ ] to
[ ] months) [ ] months) $[ ])
TYPE OF CONTRACTS
AGGREGATE % OF INITIAL
TYPE AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
OF NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
CONTRACT CONTRACTS CONTRACTS BALANCE BALANCE
------------ --------- --------- ------- -------
True Lease...........
Finance Leases.......
Loans/Conditional Sales.
Installment Payment
Agreements..........
Total............. 100.00% $ 100.00%
========= =========== ========= =========
GEOGRAPHICAL DIVERSITY
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
STATE CONTRACTS CONTRACTS BALANCE BALANCE
---------.........
----------........
---------.........
---------.........
-----------.......
----------........
----------........
----------........
--------..........
---------.........
Total..... 100.00% $ 100.00%
========= ========== ========= ===========
PAYMENT STATUS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
DAYS DELINQUENT CONTRACTS CONTRACTS BALANCE BALANCE
Current, including 1 to
30 day delinquent
contracts...............
31 - 60 days delinquent...
Total................. 100.00% 100.00%
========= ======= ========= =======
TYPES OF EQUIPMENT
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF EQUIPMENT CONTRACTS CONTRACTS BALANCE BALANCE
----------------- --------- --------- --------- ---------
Telecommunications.......
Transportation...........
Computer.................
Computer Software........
Manufacturing............
Construction.............
Medical..................
Automotive Diagnostic
Equipment.............
Printing.................
Resources................
Office Equipment.........
Commercial Retail Fixtures
Industrial................
Other, including $[ ]
as the largest and $[ ]
as the average contract
principal balance.......
Total............... 100.00% $ 100.00%
========= ============ ========= ========
</TABLE>
The depositor does not believe that any other type of equipment accounts for
more than 5% of the contract pool principal balance. However, the depositor has
not analyzed the contracts included in the category "Other" in the above table
to determine whether or not the contracts included in it could be grouped into
some other more specific type of equipment category.
CONTRACT PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
CONTRACT PRINCIPAL BALANCE CONTRACTS CONTRACTS BALANCE BALANCE
-------------------------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
$ 0.01 to $ 5,000.00.....
$ 5,000.01 to $ 25,000.00.....
$ 25,000.01 to $ 50,000.00.....
$ 50,000.01 to $ 100,000.00.....
$ 100,000.01 to $ 500,000.00.....
$ 500,000.01 to $1,000,000.00
$ 1,000,000.01 to $2,000,000.00.....
$ 2,000,000.01 to $3,000,000.00.....
$3,000,000.01 to $4,000,000.00
$ 4,000,000.01 to $5,000,000.00.....
Over $5,000,000, the largest
single contract principal
balance being $[ ]...........
Total...................... 100.00% $ 100.00%
========= ======== ========= =========
REMAINING TERMS OF CONTRACTS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
REMAINING TERMS OF CONTRACTS CONTRACTS CONTRACTS BALANCE BALANCE
(MONTHS)
0 - 12.............................
13 - 24............................
25 - 36............................
37 - 48............................
49 - 60............................
61 - 72............................
73 - 84............................
85 - 96............................
97 - 108............................
Over 108............................
Total......................... 100.00 $ 100.00
========= ====== ========= ======
TYPES OF OBLIGOR
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF OBLIGOR CONTRACTS CONTRACTS BALANCE BALANCE
--------------- --------- --------- ------- -------
Manufacturing......................
Service Organizations..............
Retail & Wholesale.................
Transportation.....................
Professional.......................
Financial Services.................
Manufacturing &
Construction....................
Machine tools......................
Medical............................
Resources..........................
Government.........................
Print Center.......................
Other, including $[ ]
as the largest and $[ ]
as the average principal
balance.........................
Total......................... 100.00% $ 100.00%
========== ====== ============= =======
The sponsor does not believe that any other industry accounts for more than
5.00% of the contract pool principal balance. However, the depositor has not
analyzed the contracts included in the category "Other" in the above table to
determine whether or not the contracts could be grouped into some other more
specific industry category.
OBLIGOR CONCENTRATION
AGGREGATE
AGGREGATE CONTRACT % OF INITIAL
OBLIGORS (INCLUDING CONTRACTS NUMBER OF PRINCIPAL CONTRACT POOL
SECURING VENDOR LOANS) CONTRACTS BALANCE PRINCIPAL BALANCE
---------------------- --------- ------- -----------------
Top 5.............................. [ ] $[ ] [ ]%
</TABLE>
STATISTICS RELATING TO DELINQUENCIES AND DEFAULTS
The following table shows contract delinquency statistics for the
originators' portfolios of receivables similar to the contracts, on an aggregate
basis, as of December 31 in each of the past five years and as of [ ] and [ ].
The applicable originators used the underwriting standards described in the
prospectus under the section titled "THE ORIGINATORS -- UNDERWRITING --" for all
of these receivables. For these purposes, a "DELINQUENCY" means that the obligor
on the contract has failed to make a required scheduled payment in an amount
equal to at least 90% of the required scheduled payment within 60 days of the
due date. For these purposes, any payment made by the obligor on a contract
subsequent to the required payment date is applied to the earliest payment which
was unpaid. These statistics are not necessarily indicative of the future
performance of the contracts. The following table is based on the net investment
for all contracts originated by [ ]. and the gross receivable for contracts
originated by the other originators. Net investment is the sum of all payments
plus any expected equipment residual value under a contract discounted to
present value using the contract's implicit interest rate. The gross receivable
is the undiscounted sum of all payments under a contract.
CONTRACT DELINQUENCIES
<TABLE>
<CAPTION>
PERCENT OF CONTRACT BALANCES
WHICH WERE DELINQUENT
--------------------------------------------------
CONTRACT 31 TO 60 61 TO 90 OVER 90
BALANCE DAYS DAYS DAYS TOTAL
------- ---- ---- ---- -----
AS OF (IN THOUSANDS)
-----
<S> <C> <C> <C> <C> <C>
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ [ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
03/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
03/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
</TABLE>
LOSSES AND RECOVERIES
The following table shows statistics for gross losses and losses net
of recoveries on defaulted contracts within the originators' portfolios of
receivables similar to the contracts during the twelve-month period ending
December 31 in each of the past five years and the three-month periods ended
March 31, [ ] and [ ]. Gross losses means total losses before recoveries
measured against the net investment of the contracts, gross of any allowance for
losses. Losses net of recoveries means losses after recoveries measured against
the net investment of the contracts, gross of any allowance for losses. These
statistics are not necessarily indicative of the future performance of the
contracts.
<TABLE>
<CAPTION>
AGGREGATE NET GROSS LOSSES AS A NET LOSSES AS A
INVESTMENT OF PERCENTAGE OF NET PERCENTAGE OF NET
TWELVE MONTHS ENDED CONTRACTS INVESTMENT INVESTMENT
(IN THOUSANDS)
<S> <C> <C> <C>
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
THREE MONTHS ENDED
03/31/[ ]................... $[ ] [ ]% [ ]%
03/31/[ ]................... $[ ] [ ]% [ ]%
</TABLE>
WEIGHTED AVERAGE LIFE OF THE NOTES
The rate of payments on contracts will directly affect
o the rate of note principal payments;
o the aggregate amount of each note interest payment; and
o the yield to maturity of the notes.
The payments on the contracts may be in the form of payments scheduled
to be made under the terms of the contracts, prepayments or liquidations due to
default, casualty and other events which cannot be predicted. [ ] may purchase
contracts from the owner trust if the contracts were ineligible for transfer at
the time of transfer to the owner trust. Any payments for these reasons, other
than scheduled payments may result in distributions to you of amounts which
would otherwise have been distributed over the remaining term of the contracts.
Each prepayment, liquidation or repurchase of a contract, if the contract is not
replaced by the depositor with a comparable substitute contract as described
under "THE CONTRACTS -- SUBSTITUTION OF CONTRACTS" in the accompanying
prospectus, will shorten the weighted average remaining term of the contracts
and the weighted average life of the notes. See "RISK FACTORS -- CONTRACT
PREPAYMENTS, INELIGIBILITY OR DEFAULT MAY CAUSE EARLIER REPAYMENT OF THE NOTES
THAN YOU EXPECT AND YOU MAY NOT BE ABLE TO FIND INVESTMENTS WITH THE SAME YIELD
AS THE NOTES AT THE TIME OF REPAYMENT" in the accompanying prospectus.
The following chart sets forth the percentage of the initial principal
amount of each class of notes which would be outstanding on the distribution
dates set forth below assuming the conditional prepayment rates ("CPR")
indicated in the chart. This information is hypothetical. The conditional
prepayment rate assumes that a fraction of the outstanding contracts is prepaid
on each payment date, which implies that each contract in the pool of contracts
is equally likely to prepay. This fraction, expressed as a percentage, is
annualized to arrive at the conditional prepayment rate for the contracts. The
conditional prepayment rate measures prepayments based on the contract pool
principal balance, after the payment of all payments scheduled to be made under
the terms of the contracts during each collection period. The conditional
prepayment rate further assumes that all contracts are the same size and
amortize at the same rate. The conditional prepayment rate also assumes that
each contract will be either paid as scheduled or prepaid in full. The amounts
set forth below are based upon the timely receipt of scheduled monthly contract
payments, and assume that:
o the seller exercises its option to cause a redemption of the
notes when the aggregate note principal balance is less than 10%
of the initial aggregate discounted contract balance of the
contracts, and
o the closing date for the sale of the contracts to the owner trust
is [ ].
These tables are based upon the contract pool principal balance
determined using the discount rate of [ ]%. In addition, it is assumed for the
purposes of these tables only, that the owner trust issues the notes in the
following initial principal amounts and at the following fixed interest rates:
CLASS INITIAL PRINCIPAL AMOUNT INTEREST RATE
----- ------------------------ -------------
A-1................ $[ ] [ ]%
A-2................ [ ] [ ]
A-3................ [ ] [ ]
A-4................ [ ] [ ]
A-5................ [ ] [ ]
B.................. [ ] [ ]
C.................. [ ] [ ]
D.................. [ ] [ ]
<PAGE>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-1 NOTES
CPR
----------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
Closing Date......................
_____________.....................
_____________.....................
_____________.....................
____________......................
_____________.....................
____________......................
____________......................
____________......................
____________......................
____________......................
____________......................
____________......................
____________......................
____________......................
____________......................
____________......................
------------
------------......................
------------......................
------------......................
------------......................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
-------------.....................
--------------....................
---------------...................
-------------.....................
--------------....................
---------------...................
----------........................
Weighted Average Life To Call (in years......
Weighted Average Life To Maturity (in years).
<PAGE>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-2 NOTES
CPR
-------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date.......................
________________...................
_________________..................
___________________................
___________________................
_______________....................
__________________.................
___________________................
_________________..................
___________________................
__________________.................
_____________________..............
_______________....................
___________________................
_________________..................
____________.......................
_________________..................
_____________________..............
__________________.................
________________...................
___________________................
________________...................
______________.....................
_________________..................
______________.....................
________________...................
_____________......................
_________________..................
_________________..................
_____________________..............
_______________________............
____________________...............
_________________..................
______________.....................
_________________..................
______________.....................
_________________..................
______________.....................
_________________..................
______________.....................
______________.....................
____________.......................
______________.....................
_________________..................
_____________......................
________________...................
_____________......................
____________.......................
_________________..................
_____________......................
----------
Weighted Average Life To Call (in years).......
Weighted Average Life To Maturity (in years)...
<PAGE>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-3 NOTES
CPR
-----------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date......................
_________________.................
________________..................
______________....................
______________....................
____________......................
____________......................
_______________...................
____________......................
____________......................
______________....................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
_____________.....................
________________..................
________________..................
_________________.................
___________________...............
________________..................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
___________________...............
________________..................
__________________................
______________....................
________________..................
______________....................
_________________.................
______________....................
______________....................
_____________.....................
________________..................
______________....................
________________..................
_________________.................
____________________..............
________________..................
_______________...................
_________________.................
__________________................
_______________...................
________________..................
______________....................
__________________................
---------
Weighted Average Life To Call (in years).......
Weighted Average Life To Maturity (in years)...
<PAGE>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-4 NOTES
CPR
-----------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date......................
_________________.................
________________..................
______________....................
______________....................
____________......................
____________......................
_______________...................
____________......................
____________......................
______________....................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
_____________.....................
________________..................
________________..................
_________________.................
___________________...............
________________..................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
___________________...............
________________..................
__________________................
______________....................
________________..................
______________....................
_________________.................
______________....................
______________....................
_____________.....................
________________..................
______________....................
________________..................
_________________.................
____________________..............
________________..................
_______________...................
_________________.................
__________________................
_______________...................
________________..................
______________....................
__________________................
---------
Weighted Average Life To Call (in years)......
Weighted Average Life To Maturity (in years)..
<PAGE>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-5 NOTES
CPR
-----------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date......................
_________________.................
________________..................
______________....................
______________....................
____________......................
____________......................
_______________...................
____________......................
____________......................
______________....................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
_____________.....................
________________..................
________________..................
_________________.................
___________________...............
________________..................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
___________________...............
________________..................
__________________................
______________....................
________________..................
______________....................
_________________.................
______________....................
______________....................
_____________.....................
________________..................
______________....................
________________..................
_________________.................
____________________..............
________________..................
_______________...................
_________________.................
__________________................
_______________...................
________________..................
______________....................
__________________................
---------
Weighted Average Life To Call (in years)......
Weighted Average Life To Maturity (in years)..
<PAGE>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS B NOTES
CPR
-----------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date......................
_________________.................
________________..................
______________....................
______________....................
____________......................
____________......................
_______________...................
____________......................
____________......................
______________....................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
_____________.....................
________________..................
________________..................
_________________.................
___________________...............
________________..................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
___________________...............
________________..................
__________________................
______________....................
________________..................
______________....................
_________________.................
______________....................
______________....................
_____________.....................
________________..................
______________....................
________________..................
_________________.................
____________________..............
________________..................
_______________...................
_________________.................
__________________................
_______________...................
________________..................
______________....................
__________________................
---------
Weighted Average Life To Call (in years)........
Weighted Average Life To Maturity (in years)....
<PAGE>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS C NOTES
CPR
CPR
-----------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date......................
_________________.................
________________..................
______________....................
______________....................
____________......................
____________......................
_______________...................
____________......................
____________......................
______________....................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
_____________.....................
________________..................
________________..................
_________________.................
___________________...............
________________..................
______________....................
____________......................
_______________...................
_________________.................
_______________...................
___________________...............
________________..................
__________________................
______________....................
________________..................
______________....................
_________________.................
______________....................
______________....................
_____________.....................
________________..................
______________....................
________________..................
_________________.................
____________________..............
________________..................
_______________...................
_________________.................
__________________................
_______________...................
________________..................
______________....................
__________________................
---------
Weighted Average Life To Call (in years)......
Weighted Average Life To Maturity (in years)..
<PAGE>
DESCRIPTION OF THE NOTES AND INDENTURE
This section adds to the information in the accompanying prospectus
under the caption "DESCRIPTION OF THE NOTES AND INDENTURE." However, as these
statements are only summaries, you should read the pooling and servicing
agreement and the indenture. The sponsor filed the forms of these documents as
exhibits to the registration statement it filed with the Securities and Exchange
Commission for the notes.
The notes will be issued under an indenture between the owner trust
and the indenture trustee.
The owner trust will issue eight classes of notes, consisting of five
classes of senior notes, designated as the
o Class A-1 Notes,
o Class A-2 Notes,
o Class A-3 Notes,
o Class A-4 Notes and
o Class A-5 Notes.
These are referred to in this document as "Class A Notes." The owner trust will
also issue three classes of subordinate notes, designated as the Class B Notes,
the Class C Notes and the Class D Notes. The Class B, Class C and Class D Notes
are the "Subordinate Classes."
Investors may purchase the notes in book-entry form in minimum
denominations of $1,000 and in integral multiples of $1 in excess of $1,000.
Each class will initially be represented by one or more notes registered in the
name of the nominee of The Depository Trust Company. The owner trustee will pay
note interest and principal on the 20th day of each month, or, if not a business
day, the next succeeding business day, commencing in [ ], to registered
noteholders as of the related record date. So long as the notes remain in
book-entry form, the record date for any payment date will be the business day
immediately preceding the payment date. If the notes are no longer in book-entry
form, the record date will be the last business day of the month immediately
preceding the payment date. However, the owner trust will make the final payment
on the notes only upon presentation and surrender of the notes to the indenture
trustee. The owner trust will make all payments on the notes in immediately
available funds. See "DESCRIPTION OF THE NOTES AND INDENTURE -- BOOK-ENTRY
REGISTRATION" in the accompanying prospectus.
DISTRIBUTIONS
The owner trust will pay note principal and interest on each payment
date from the "Available Pledged Revenues" for the payment date, as well as
amounts permitted to be withdrawn from the cash collateral account. See "--CASH
COLLATERAL ACCOUNT" below. The "Available Pledged Revenues" as of any payment
date are the sum of
(a) the following amounts on deposit in the collection account which
the owner trust received during the related collection period
(1) scheduled contract payments, except payments in respect of
o taxes,
o insurance premium reimbursements,
o security deposits,
o late charges,
o documentation fees,
o extension fees,
o administrative charges or,
o maintenance premiums,
(2) prepayments of contracts, and
(3) proceeds of liquidating defaulted contracts,
(b) the purchase price paid by the seller in repurchasing ineligible
contracts from the owner trust,
(c) the amounts that the seller paid to purchase the contracts in
exercise of its option to do so when the aggregate note principal
amount is reduced to less than 10% of the initial contract pool
principal balance and that were on deposit in the collection
account as of the business day before the payment date,
(d) investment earnings on amounts held in the collection or note
distribution account and
(e) to the extent necessary to pay interest, amounts of the type
described in (a) above that the owner trust received after the
end of the related collection period.
However, Available Pledged Revenues do not include any amount allocable
to the depositor as representing the residual value of equipment subject to a
lease, except to the extent that the end-user or a vendor guaranteed the
equipment residual value.
On each payment date, the servicer will direct the indenture trustee to
apply Available Pledged Revenues to the following payments in the following
order of priority:
(1) reimbursement of servicer advances;
(2) the servicing fee;
(3) interest on the notes in the following order of priority:
(a) interest on the Class A-1, A-2, A-3, A-4, and A-5 Notes,
including any overdue interest, allocated pro rata based on
the respective principal amounts of the Class A-1, A-2, A-3,
A-4 and A-5 Notes,
(b) interest on the Class B Notes, including any overdue
interest,
(c) interest on the Class C Notes, including any overdue
interest,
(d) interest on the Class D Notes, including any overdue
interest,
(4) principal on the notes in the amounts and priority described
under "PRINCIPAL" below;
(5) any amount necessary to increase the cash collateral account
balance to its required level;
(6) amounts payable in connection with the cash collateral account;
(7) any shortfall in the payment of interest on the Class A-3 Notes
due to the failure of the swap counterparty to pay amounts owed
to the owner trust under the swap agreement, together with
interest on the shortfall; and
(8) any remainder to the holder of the equity certificate.
The owner trust is to make payments first from the Available Pledged Revenues,
and second, but only as to amounts described in clauses (3) and (4) immediately
above, from amounts permitted to be withdrawn from the cash collateral account
as described under "CASH COLLATERAL ACCOUNT" below. For purposes of the above
allocation of Available Pledged Revenues in respect of interest, the Class A-3
interest rate will be assumed to be the assumed fixed rate of [ ]% determined in
connection with the swap agreement.
INTEREST
The priorities of interest payments are set forth under "DISTRIBUTIONS"
above.
The owner trust will pay interest on each class of notes from and
including the closing date to but excluding [ ], and after that date for each
successive interest period. Interest on the Class A-1 and A-3 Notes will be
computed on the basis of the actual number of days elapsed and a 360-day year.
Interest on the other classes of notes will be computed on the basis of a
360-day year comprised of twelve 30-day months.
The rates for classes other than Class A-3 are set forth on the cover
page of this prospectus supplement. The Class A-3 interest rate shall be the
one-month London interbank offered rate, referred to as One-Month LIBOR, plus
[ ]%.
One-Month LIBOR means as of any LIBOR Determination Date and with
respect to the related interest period, the rate of interest per annum equal to
the London interbank offered rate for deposits in U.S. dollars having a maturity
of one month which appears on Telerate Page 3750 as of 11:00 a.m., London time,
on the LIBOR Determination Date. If the rate does not appear on Telerate Page
3750, One-Month LIBOR for the LIBOR Determination Date will be determined on the
basis of the rates at which deposits in U.S. dollars having a maturity of one
month and in a principal amount of not less than U.S. $1,000,000, are offered at
approximately 11:00 a.m., London time, on the LIBOR Determination Date to prime
banks in the London interbank market by the Reference Banks. The servicer will
request the principal London office of each of the Reference Banks to provide a
quotation of its rate to the indenture trustee. If at least two quotations are
provided, One-Month LIBOR will be the arithmetic mean, rounded upwards, if
necessary, to the nearest .01%, of the offered rates. If fewer than two
quotations are provided, One-Month LIBOR will be the arithmetic mean, rounded
upwards, if necessary to the nearest .01%, of the rates quoted at approximately
11:00 a.m., New York City time, on the LIBOR Determination Date to the indenture
trustee by three major banks in New York, New York, selected by the servicer,
for loans in United States dollars to leading European banks having a maturity
of one month and in a principal amount of not less than U.S. $1,000,000.
However, if those banks do not quote a rate to the indenture trustee as
described in this sentence, One-Month LIBOR will be the One-Month LIBOR in
effect for the immediately preceding interest period.
LIBOR Determination Date means for the interest period from and
including the closing date to but excluding [ ] the second business day
preceding the closing date for the sale of the notes, and for each subsequent
interest period the second business day preceding the interest period. For
purposes of computing One-Month LIBOR, a business day is any business day on
which dealings in deposits in United States dollars are transacted in the London
interbank market.
Telerate Page 3750 means the display page so designated on the Dow
Jones Telerate Service, or another page replacing that page on that service for
the purpose of displaying comparable rates or prices.
Reference Banks means four leading banks, selected by the servicer,
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market and having an established place of business in London.
If on any payment date, the owner trust does not have sufficient
funds, after payment of servicer advances and the servicing fee, to make a full
payment of interest on any class of notes, the amount of the shortfall will be
carried forward and, together with interest on the shortfall amount at the
applicable interest rate for that class, added to the amount of interest the
affected class of noteholders will be entitled to receive on the next payment
date.
PRINCIPAL
This section gives only an overview of how the owner trust will pay
principal. The sponsor recommends that you read this section in connection with
the more detailed terms set forth in the pooling and servicing agreement
included as an exhibit to the registration statement filed with the Securities
and Exchange Commission for the notes.
OVERVIEW OF PRINCIPAL DISTRIBUTIONS
The principal required to be paid on the notes on each payment date
will be the amount necessary to pay the notes down so that their aggregate
principal balance equals the contract pool principal balance as of the last day
of the prior month. This amount will be allocated among the various classes of
notes according to the priorities described in this section.
For so long as the Class A-1 Notes are outstanding, 100% of the
principal will be allocated between the Class A-1 Notes and the Class A-5 Notes.
After the Class A-1 note principal balance has been paid to zero, the principal
will be allocated:
first, among the Class A Notes as a group, between the Class A-5
Notes on one hand and the Class A-2, Class A-3 and Class A-4
Notes, on the other hand, sequentially in that order, then again
to the Class A-5 Notes;
second, to the Class B Notes;
third, to the Class C Notes; and
fourth, to the Class D Notes
Subject to the operation of the floors for each of the Subordinate
Classes, after the payment date on which the the Class A-1 note principal amount
has been paid to zero, the owner trust will pay principal proportionately, among
the Class A Notes as a group, the Class B Notes, the Class C Notes and the Class
D Notes, in the priorities listed above. However, the principal paydown rules
incorporate a concept of a floor on each class of the Subordinate Classes, which
means that the Subordinate Classes, for so long as any notes senior to that
class are outstanding, cannot be paid an amount of principal which would reduce
that Subordinate Class below its floor principal amount. If a Subordinate Class
is at its floor level, that Subordinate Class is "locked out" from receiving
further principal payments, with the additional effect of reallocating the
principal that would otherwise have been paid to that Subordinate Class to the
most senior class then outstanding. The levels of the floors are not static, but
are subject to increase if the owner trust experiences contract pool losses that
cannot be funded from the current period's Available Pledged Revenues or the
cash collateral account. This increase in the level of the floors tends to "lock
out" the Subordinate Classes earlier, which accelerates the payment of the
reallocated principal to the senior classes. If unfunded losses become severe
and the cash collateral account is depleted, the unfunded loss amount could be
so large that the principal paydown rules result in a sequential-pay senior
subordinated structure among the various note classes, with no principal being
paid to a Subordinate Class unless the note principal amount of each class
senior to it has been paid in full. The floors operate both before and after an
event of default.
BEFORE AN EVENT OF DEFAULT
This chart summarizes how principal will be paid on the notes before
any event of default. The section headed "Definitions Concerning Principal
Payments" below defines various terms relating to the payment of principal.
--------------- -------------------------------------------------------
CLASS PRINCIPAL PAYMENTS
--------------- -------------------------------------------------------
Class A-1 o Begins receiving principal on first payment date
o Receives [ ]% of Total Principal Payment Amount
until paid in full, but will receive 100% of the
Total Principal Payment Amount if any of its
principal is outstanding after its stated maturity
date until paid in full
--------------------------------------------------------
Class A-2 o Begins receiving principal once Class A-1 is paid
in full
o Receives the Class A Principal Payment Amount
reduced by any amount paid to Class A-5, until
Class A-2 is paid in full, but will receive 100%
of the Class A Principal Payment Amount if any of
its principal is outstanding after its stated
maturity date, until paid in full
o May also receive principal payments reallocated
away from the Subordinate Classes through the
operation of the floors
-------------------------------------------------------------------------------
Class A-3 o Begins receiving principal once Class A-2 is paid
in full
o Receives the Class A Principal Payment Amount
reduced by any amount paid to Class A-5, until
Class A-3 is paid in full, but will receive 100%
of the Class A Principal Payment Amount if any of
its principal is outstanding after its stated
maturity date, until paid in full
o May also receive principal payments reallocated
away from the Subordinate Classes through the
operation of the floors
-------------------------------------------------------------------------------
Class A-4 o Begins receiving principal once Class A-3 is paid
in full
o Receives the Class A Principal Payment Amount
reduced by any amount paid to Class A-5, until
Class A-4 is paid in full, but will receive 100%
of the Class A Principal Payment Amount if any of
its principal is outstanding after its stated
maturity date, until paid in full
o May also receive principal payments reallocated
away from the Subordinate Classes through the
operation of the floors
-------------------------------------------------------------------------------
Class A-5 o Begins receiving principal on first payment date
o Receives [ ]% of the Total Principal Payment
Amount until Class A-1 is paid in full and the
same percentage after Class A-1 is paid in full
until Class A-4 is paid in full but only to the
extent of the Class A Principal Payment Amount
o Once Class A-4 is paid in full, Class A-5 receives
100% of the Class A Principal Payment Amount until
paid in full
o May also receive principal payments reallocated
away from the Subordinate Classes through the
operation of the floors
-------------------------------------------------------------------------------
Class B o Begins receiving principal once Class A-1 is paid
in full
o Receives the Class B Principal Payment Amount
until paid in full
o Through the operation of its floor, Class B's
principal payments are subject to reallocation for
the benefit of Class A
o May also receive principal payments reallocated
away from Class C and Class D through the
operation of the floors
-------------------------------------------------------------------------------
Class C o Begins receiving principal once Class A-1 is paid
in full
o Receives the Class C Principal Payment Amount
until paid in full
o Through the operation of its floor, Class C's
principal payments are subject to reallocation for
the benefit of Class A and Class B
o May also receive principal payments reallocated
away from Class D through the operation of the
floors
-------------------------------------------------------------------------------
Class D o Begins receiving principal once Class A-1 is paid
in full
o Receives the Class D Principal Payment Amount
until paid in full
o Through the operation of its floor, Class D's
principal payments are subject to re-allocation
for the benefit of Class A, Class B and Class C
-------------------------------------------------------------------------------
DETAILED PRINCIPAL DISTRIBUTION RULES
The priority of principal payments will be in the following order:
(1) prior to the payment date on which the Class A-1 Note principal
amount has been reduced to zero, the Class A Principal Payment
Amount will be equal to the Total Principal Payment Amount and
will be allocated [ ]% to the Class A-1 Notes and [ ]% to the
Class A-5 Notes. However, if the Class A-1 Notes have not been
paid to zero by their stated maturity date, 100% of the Class A
Principal Payment Amount will be paid to the Class A-1 Notes on
their stated maturity date and on each subsequent payment date
until their note principal amount is zero;
(2) on and after the payment date on which the Class A-1 principal
amount has been reduced to zero, and disregarding the amount that
must first be applied to reduce the Class A-1 principal amount to
zero, the Total Principal Payment Amount will be allocated among
the various classes in the following order of priority:
(a) the Class A Principal Payment Amount to the Class A
noteholders, allocated as follows:
(1) [ ]% of the Total Principal Payment Amount, but in no
event greater than the Class A Principal Payment
Amount, to the Class A-5 noteholders, and
(2) the Class A Principal Payment Amount reduced by any
payments to the Class A-5 noteholders under clause
(2)(a)(1) to the Class A-2 noteholders until the Class
A-2 principal amount equals zero, then to the Class A-3
noteholders until the Class A-3 principal amount equals
zero, then to the Class A-4 noteholders until the Class
A-4 principal amount equals zero and then to the Class
A-5 noteholders until the Class A-5 principal amount
equals zero;
However, if the Class A-2, Class A-3 or Class A-4 Notes
have not been paid to zero by their respective stated
maturity dates, 100% of the Class A Principal Payment
Amount will be paid to that class on its stated
maturity date and on each subsequent payment date until
its note principal amount is zero;
(b) the Class B Principal Payment Amount to the Class B
noteholders;
(c) the Class C Principal Payment Amount to the Class C
noteholders;
(d) the Class D Principal Payment Amount to the Class D
noteholders; and
(e) any Reallocated Principal, sequentially to the Class A-2,
Class A-3, Class A-4, Class A-5, Class B, Class C and Class
D Notes.
PRINCIPAL DISTRIBUTIONS AFTER AN EVENT OF DEFAULT
After an event of default occurs, all principal distributions among
the classes will be made as follows:
CLASS PRINCIPAL PAYMENTS
----- -------------------
Class A-1 100% of the Class A Principal Payment Amount until paid in full
Class A-2 100% of the Class A Principal Payment Amount until paid in full
Class A-3 100% of the Class A Principal Payment Amount until paid in full
Class A-4 100% of the Class A Principal Payment Amount until paid in full
Class A-5 100% of the Class A Principal Payment Amount until paid in full
Class B 100% of the Class B Principal Payment Amount until paid in full
Class C 100% of the Class C Principal Payment Amount until paid in full
Class D 100% of the Class D Principal Payment Amount until paid in full
The principles described above in the sections labelled
"PRINCIPAL--OVERVIEW OF PRINCIPAL DISTRIBUTIONS," "--BEFORE AN EVENT OF DEFAULT"
and "DETAILED PRINCIPAL DISTRIBUTION RULES" will also apply after an event of
default except that the allocations between Class A-5, on the one hand, and the
other classes of Class A Notes, on the other hand, as described in those
sections, will not apply after an event of default.
Also, any Reallocated Principal will be allocated sequentially to the
Class A-1, A-2, A-3, A-4, A-5, B, C and D noteholders in that order.
DEFINITIONS CONCERNING PRINCIPAL PAYMENTS
The CLASS A BASE PRINCIPAL PAYMENT AMOUNT is:
(1) as to any payment date until the payment date on which the Class
A-1 principal amount equals zero, 100% of the Total Principal
Payment Amount; and
(2) for any subsequent payment date, and disregarding any amount
first used on the payment date on which the Class A-1 principal
amount is paid to zero, the excess of:
(x) the sum of the Class A-2, A-3, A-4 and A-5 notes principal
amounts over
(y) the Class A Target Principal Amount;
However, the Class A Principal Payment Amount may not exceed the Class
A principal balance.
The CLASS A PERCENTAGE will be approximately [ ]%.
The CLASS A TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class A Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS A PRINCIPAL PAYMENT AMOUNT is the sum of the Class A Base
Principal Payment Amount plus the Class A Principal Shortfall Amount.
The CLASS A PRINCIPAL SHORTFALL AMOUNT means, for any payment date
that is the stated maturity date for a class of Class A Notes and any subsequent
payment date until that class' principal amount is zero, the excess of (a) sum
of the principal amount of that class, plus, until the Class A-4 principal
amount has been reduced to zero, [ ]% of the Total Principal Payment Amount,
over (b) the Total Principal Payment Amount.
The CLASS B FLOOR for any payment date will equal:
(1) [ ]% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for that payment date, minus,
(3) the sum of the Class C principal amount, and the Class D principal
amount, prior to giving effect to any payments of principal on the Class C or D
Notes on that payment date, and the amount on deposit in the cash collateral
account after giving effect to withdrawals to be made on the payment date.
However, the Class B Floor may not be greater than the Class B principal amount
or less than zero.
The CLASS B PERCENTAGE will be approximately [ ]%.
The CLASS B PRINCIPAL PAYMENT AMOUNT will equal
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date the excess, if any, of:
(a) the Class B principal amount over
(b) the greater of
(x) the Class B Target Principal Amount and
(y) the Class B Floor.
However, the Class B Principal Payment Amount may not exceed the Class
B principal amount.
The CLASS B TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class B Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS C FLOOR for any payment date will equal:
(1) [ ]% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for the payment date, minus
(3) the sum of the Class D principal amount, prior to giving effect to
any payments of principal on the Class D Notes on the payment date, and the
amount on deposit in the cash collateral account after giving effect to
withdrawals to be made on the payment date.
However, the Class C Floor may not be greater than the Class C principal amount
or less than zero. Furthermore, if the Class B principal amount immediately
prior to any payment date is less than or equal to the Class B Floor for that
payment date, the Class C Floor for that payment date will equal the Class C
principal amount immediately prior to that payment date.
The CLASS C PERCENTAGE will be approximately [ ]%.
The CLASS C PRINCIPAL PAYMENT AMOUNT will equal
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date, the excess, if any, of:
(a) the Class C principal amount over
(b) the greater of
(x) the Class C Target Principal Amount and
(y) the Class C Floor.
However, the Class C Principal Payment Amount may not exceed the Class
C principal amount.
The CLASS C TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class C Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS D FLOOR for any payment date will equal:
(1) [ ]% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for the payment date, minus,
(3) the amount on deposit in the cash collateral account after giving
effect to withdrawals to be made on the payment date.
However, the Class D Floor may not be greater than the Class D principal amount
or less than zero. Furthermore, if the Class C principal amount on any payment
date is less than or equal to the Class C Floor on that payment date, the Class
D Floor for that payment date will equal the Class D principal amount
immediately prior to that payment date.
The CLASS D PERCENTAGE will be approximately [ ]%.
The CLASS D PRINCIPAL PAYMENT AMOUNT will equal:
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date, the excess, if any, of:
(a) the Class D principal amount minus
(b) the greater of
(x) the Class D Target Principal Amount and
(y) the Class D Floor.
However, Class D Principal Payment Amount may not exceed the Class D
principal balance.
The CLASS D TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class D Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The COLLECTION PERIOD for any payment date is the calendar month
preceding the month in which the payment date occurs.
A DEFAULTED CONTRACT as to any collection period is any contract:
(a) which the servicer has determined is uncollectible in accordance
with its credit and collection policies and procedures,
(b) as to which during the collection period 10% or more of a
scheduled payment shall have become delinquent 180 days or more, or
(c) as to which the end-user has suffered an insolvency event.
PLEDGED REVENUES means the sum of
o all scheduled payments on the contracts received on or after the
cut-off date;
o any prepayment received on the contracts on or after the cut-off
date;
o the purchase amount of any contracts purchased by the seller;
o the amount paid by the depositor to purchase the contracts under
its option to purchase all contracts when the aggregate principal
amount of the notes is less than 10% of the initial contract pool
principal balance;
o the liquidation proceeds received in respect of any contracts;
and
o any earnings on the investment of amounts credited to the
collection account or the note distribution account.
However, Pledged Revenues shall not include any amounts received with
respect to any residual value of leased equipment except to the extent
guaranteed by a vendor or end-user.
PRINCIPAL AMOUNT means, when used with respect to a class of notes,
the initial principal balance of the class set forth on the cover page of this
prospectus supplement, less the sum of all distributions previously made to the
class and all amounts held on deposit for payment to that class in respect of
principal.
The REALLOCATED PRINCIPAL for any payment date will equal the excess,
if any, of (1) the Total Principal Payment Amount, over (2) the sum of the Class
A Principal Payment Amount, the Class B Principal Payment Amount, the Class C
Principal Payment Amount and the Class D Principal Payment Amount.
The RELATED COLLECTION PERIOD PLEDGED REVENUE means as to any payment
date, the amount of Pledged Revenues in the collection account as of the
business day preceding the payment date which were received by the depositor
during the related collection period, including all liquidation proceeds as to
Defaulted Contracts, but not including the residual value of leased equipment
except to the extent guaranteed by a vendor or end-user.
The REQUIRED PAYOFF AMOUNT as to a collection period for any contract
is the sum of
(1) the scheduled payment due in that collection period plus any
scheduled payments not received that were due in prior collection
periods and
(2) the contract principal balance determined as if the scheduled
payment due in that collection period had been received.
The TOTAL PRINCIPAL PAYMENT AMOUNT for any payment date is the excess
of (x) the aggregate note principal amount immediately prior to that payment
date over (y) the contract pool principal balance as of the last day of the
collection period immediately preceding the payment date. For this purpose, the
contract pool principal balance will be deemed to be zero on any payment date on
which the contract pool principal balance is less than $10,000,000. The contract
principal balance of any contract which became a defaulted contract during a
given collection period or which was a contract subject to a warranty claim
which the depositor was obligated to purchase as of the end of a given
collection period will, for purposes of computing the Total Principal Payment
Amount and the requisite amount for the cash collateral account, be deemed to be
zero on and after the last day of the collection period.
The UNFUNDED LOSS AMOUNT for any payment date will equal any excess
of:
(a) the remainder of
(1) the aggregate note principal amount, prior to giving
effect to the payment of principal on the notes on the
payment date, minus
(2) the lesser of
(A) the contract pool principal balance as of the last
day of the collection period immediately preceding
the preceding payment date, minus the contract
pool principal balance as of the last day of the
collection period immediately preceding the
payment date, or
(B) the Related Collection Period Pledged Revenue
remaining after payment of amounts owing to the
servicer and note interest on the payment date
plus any withdrawal from the cash collateral
account for payment of note principal on the
payment date,
over
(b) the Required Payoff Amount for all contracts as of the end of the
related collection period.
CLASS A-3 SWAP AGREEMENT
The owner trust will enter into a swap agreement with [ ] as swap
counterparty for the sole benefit of the Class A-3 Notes. Under the swap
agreement, the swap counterparty's payments will be calculated at the Class A-3
Note interest rate and the owner trust's payments will be calculated at an
assumed fixed rate of [ ]%. To the extent that on any payment date interest
calculated at the Class A-3 Note interest rate exceeds interest calculated at
the assumed fixed rate:
o the swap counterparty will be obligated to pay an amount equal to
the excess to the owner trust,
o the payment will constitute a portion of the Available Pledged
Revenues, but only in respect of the Class A-3 Notes, and
o the Class A-3 Notes will be dependent upon the payment for
receipt of the interest to the extent of the excess.
Likewise, under the swap agreement to the extent that interest calculated at the
assumed fixed rate exceeds interest calculated at the Class A-3 Note interest
rate,
o the owner trust will be obligated to pay an amount equal to the
excess to the swap counterparty, and
o the payment will have the same priority, in terms of application
of the Available Pledged Revenues, as payment of interest on the
Class A-3 Notes.
Any shortfall in the payment of interest on the Class A-3 Notes due
entirely to the failure of the swap counterparty to make a required payment
under the swap agreement will not constitute an event of default under the
indenture. Except to the extent the amount available on any payment date exceeds
the amount necessary to pay the servicing fee, all interest and principal
payable on the notes, with Class A-3 Note interest being calculated at the
assumed fixed rate for this purpose, and all amounts payable in connection with
the cash collateral account, no amounts in addition to those available under the
swap agreement will be available under the indenture to make up the shortfall.
The only remedies in these circumstances will be those available to the owner
trust under the swap agreement.
As a general matter, the obligations of the swap counterparty under
the swap agreement are unsecured. However, if the swap counterparty's long-term
unsecured senior debt ceases to be rated at a level acceptable to [ ] and [ ],
the swap counterparty will be obligated either to (a) post collateral or
establish other arrangements to secure its obligations under the swap agreement
or (b) arrange for a substitute swap counterparty to assume the rights and
obligations of the swap counterparty under the swap agreement, in either case so
that the ratings of the notes are maintained or, if applicable, restored to
their level immediately prior to the downgrading or withdrawal of the swap
counterparty's debt. If the swap counterparty fails to take either of these
actions, the owner trust will be entitled to terminate the swap agreement and to
claim from the swap counterparty the cost of obtaining a replacement swap
agreement from a swap counterparty satisfactory to the note rating agencies. The
Class A-3 noteholders bear the risk of any failure by the swap counterparty to
take the actions required of it and the risk of any inability of the owner trust
to obtain a replacement swap agreement.
The swap counterparty currently has an "[ ]" long-term unsecured
senior debt credit rating from [ ] and an "[ ]" long-term unsecured senior debt
credit rating from [ ].
OPTIONAL PURCHASE OF CLASS A-5 NOTES
The depositor may purchase all of the Class A-5 Notes, on any payment
date. The purchase price shall be equal to the Class A-5 principal amount plus a
premium equal to the excess, discounted as described below, of (1) the scheduled
future interest payments on the Class A-5 Notes, over (2) the interest that
would have accrued on the Class A-5 Notes over the same period at a per annum
rate of interest equal to [ ]% plus the bond equivalent yield to maturity on the
fifth business day preceding that payment date on a United States Treasury
security maturing on a date closest to the end of the remaining weighted average
life of the Class A-5 Notes. That excess shall be discounted to present value to
the payment date at the yield described in clause (2) above. For purposes of
this paragraph only, the depositor will determine (1) the Class A-5 principal
amount upon which interest will be deemed to accrue, and (2) the weighted
average remaining life of the Class A-5 Notes, based upon the amortization of
the contract pool principal balance remaining at the payment date at a
conditional prepayment rate of [ ]%. The depositor will pay the holders of
record on the related record date interest payable on the Class A-5 Notes on the
payment date in the ordinary manner. Following purchase, the owner trust will
not retire the Class A-5 Notes, but will, after the authentication and issuance
of replacement notes to the depositor, continue to treat them as being entitled
to interest and principal payments on each payment date in the manner described
above. Following the giving of proper notice of purchase, all holders of Class
A-5 Notes must surrender them for purchase on the relevant purchase date.
Effective on the purchase date, the owner trust will not treat the former
holders of the Class A-5 Notes as the holders of the notes except for purposes
of their right to be paid the purchase price.
CASH COLLATERAL ACCOUNT
The indenture trustee will establish the cash collateral account on or
prior to the closing date. It will be available to the indenture trustee for the
benefit of the noteholders. The depositor will initially fund the cash
collateral account in the amount of $[ ] ([ ]% of initial contract pool
principal balance), which may include proceeds of loans from third party lenders
to the owner trust under a cash collateral account loan agreement. Available
amounts on deposit from time to time in the cash collateral account shall be
used to fund the amounts specified below in the following order of priority to
the extent that amounts on deposit in the collection account, after payment of
servicer fees and advances, as of any deposit date are insufficient:
(1) to pay interest on the notes in the order of priority described
under "DISTRIBUTIONS" above;
(2) to pay any principal deficiency amount, which is equal to the
lesser of:
(a) the aggregate Liquidation Losses on all contracts that
became Defaulted Contracts during the related collection
period, or
(b) the excess, if any, of
(A) the aggregate principal amount of the notes, after
giving effect to all distributions of principal from
Available Pledged Revenues on the payment date, over
(B) the aggregate of the Required Payoff Amounts for all
contracts as of the last day of the related collection
period; and
(3) to pay principal on the notes at the applicable stated
maturity dates and on the first payment date on which the
contract pool principal balance is less than $10,000,000.
Liquidation Loss means, as to any Defaulted Contract, the excess, if
any, of
(1) the required payoff amount of the contract for the
collection period during which the contract became a
Defaulted Contract, over
(2) that portion of the liquidation proceeds for the Defaulted
Contract allocated to the owner trust, as described under
"DESCRIPTION OF THE NOTES AND INDENTURE--LIQUIDATION
PROCEEDS" in the accompanying prospectus.
To the extent that the amount on deposit in the cash collateral
account as of any payment date is less than the required amount, the servicer is
to restore this deficiency from the remaining amount available in the collection
account, after payment of any servicer advances, the servicing fee, interest and
principal on the notes and amounts due to the swap counterparty under the swap
agreement, as described under "DISTRIBUTIONS" above.
The required amount of the cash collateral account will be
(1) for any payment date on or prior to the payment date
occurring in [ ], $[ ] ([ ]% of the initial contract pool
principal balance), and
(2) for any payment date after that, the greater of
(a) the sum of
(1) [ ]% of the contract pool principal balance for
the payment date, plus
(2) the excess, if any, of
(A) the sum of the principal amounts of the
notes, after giving effect to all
distributions of principal on the payment
date, over
(B) the contract pool principal balance for the
payment date, and
(b) $[ ] ([ ]% of the initial contract pool principal balance).
However, in no event will the requisite amount exceed the sum of the
principal amounts of the notes.
The servicer or the indenture trustee acting at the direction of the
servicer will release any amount on deposit in the cash collateral account in
excess of the required amount and all investment earnings on funds in the cash
collateral account. The indenture trustee will pay these amounts to or upon the
servicer's order, and they will not be available to make payments on the notes.
The cash collateral account must be maintained with a qualified
institution. Funds on deposit in the cash collateral account will be invested in
eligible investments, as defined under "DESCRIPTION OF THE NOTES AND
INDENTURE--TRUST ACCOUNTS" in the accompanying prospectus.
OPTIONAL PURCHASE OF CONTRACTS AND REDEMPTION OF NOTES
The seller may purchase all of the contracts on any payment date
following the date on which the aggregate note principal amount at the time is
less than 10% of the initial contract pool principal balance. The purchase price
that the seller would pay in connection with a purchase shall be the sum of the
o unpaid servicer fees and advances,
o remaining principal amount of the notes, together with
accrued interest calculated at the swap agreement assumed
fixed rate in the case of the Class A-3 Notes,
o unreimbursed servicer advances and unpaid servicer fees, and
o any other amounts payable at the time from Available Pledged
Revenues, minus
o available amounts on deposit in the collection account.
If the seller does purchase the contracts, the notes shall be redeemed
on the payment date on which the purchase occurs. The redemption price will be
the principal amount of the notes redeemed plus accrued and unpaid interest on
the principal amount of each class of notes to but excluding the redemption
date.
REPORTS TO NOTEHOLDERS
The servicer will furnish to the indenture trustee, and the indenture
trustee will include with each distribution, a statement in respect of the
related payment date. The statement shall set forth, among other things, all
information necessary to enable the indenture trustee to make the distribution
required for the notes and to reconcile all deposits to and withdrawals from
accounts. See "DESCRIPTION OF THE NOTES AND INDENTURE--REPORTS TO NOTEHOLDERS"
in the accompanying prospectus. You will not receive reports directly from the
indenture trustee. The servicer will file the reports with the Securities and
Exchange Commission. However, in accordance with the Securities Exchange Act of
1934 and the rules and regulations of the Securities and Exchange Commission,
the owner trust expects that its obligation to file these reports will be
terminated at the end of [ ].
SERVICING
The servicer will be responsible for
o managing,
o administering,
o servicing and
o making collections
on the contracts. Compensation to the servicer will include
(1) a monthly servicing fee, which will be payable to the
servicer from the amount available on each payment date, in
an amount equal to the product of one-twelfth of one percent
per annum multiplied by the contract pool principal balance
determined as of the first day of the related collection
period;
(2) any late fees, late payment interest, documentation fees,
insurance administration charges, extension fees and other
administrative charges, collectively, the administrative
fees, collected with respect to the contracts during the
related collection period; and
(3) any investment earnings on collections prior to their
deposit in the collection account.
The indenture trustee may terminate the servicer as servicer under
some circumstances, in which event the indenture trustee would appoint a
successor servicer to service the contracts. See "DESCRIPTION OF THE POOLING AND
SERVICING AGREEMENTS--SERVICING--EVENTS OF TERMINATION" in the accompanying
prospectus.
THE INDENTURE TRUSTEE
[ ] will serve as the indenture trustee. The indenture trustee may
resign at any time, in which event the owner trust will be obligated to appoint
a successor trustee. The owner trust may also remove the indenture trustee if
(1) the indenture trustee ceases to be eligible to continue as
indenture trustee under the indenture,
(2) a bankruptcy proceeding results in the event of relief or
appointment of a receiver as to the indenture trustee,
(3) the indenture trustee commences bankruptcy or similar
proceedings or
(4) the indenture trustee becomes incapable of acting.
Any resignation or removal of the indenture trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by a successor trustee.
REPRESENTATION AND WARRANTIES
The seller will make representations and warranties with respect to
the contracts as described in the accompanying prospectus under "THE
CONTRACTS--REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER."
On the date that the depositor adds a substitute contract to the
contract pool, the seller and the depositor will make the same representations
and warranties as if the transfer occurred on the closing date. However, for
these purposes (a) the contract pool on the closing date shall be deemed to
include the substitute contract in lieu of the contract being replaced or
substituted and (b) the contract principal balance of the substitute contract
shall be equal to or greater than the contract principal balance of the contract
being replaced or substituted as of the related cut-off date.
The owner trust shall reassign to the depositor, and the seller will
be obligated to purchase from the depositor, any contract transferred by the
owner trust at any time there is a breach of any of these representations or
warranties. However, the cure of the breach in all material respects, or the
waiver of the breach, will be an adequate remedy. This purchase shall occur no
later than the second deposit date after the servicer becomes aware, or receives
written notice, of the breach. The "deposit date" means the business day
preceding a payment date. This purchase obligation will constitute the sole
remedy against the depositor and the seller available to the owner trust, the
indenture trustee and the noteholders or equity certificateholder for a breach
of these representations or warranties.
Under the pooling and servicing agreement, a contract transferred by
the owner trust shall be reassigned to the seller and the seller shall make a
deposit in the collection account in immediately available funds in an amount
equal to the contract principal balance of the contract. Any amount the seller
deposits into the collection account in connection with the reassignment of a
contract transferred by the owner trust shall be considered payment in full of
the ineligible contract. This amount shall be treated as Available Pledged
Revenues. In the alternative, the seller may cause the depositor to convey to
the owner trust a substitute contract satisfying the terms and conditions
applicable to substitute contracts in replacement for the affected contract. The
affected contract shall be deemed released by the owner trust and indenture
trustee and reconveyed to the depositor and by the depositor to the seller.
INDEMNIFICATION
The pooling and servicing agreement provides that the servicer will
indemnify
o the depositor,
o the sponsor,
o the owner trust,
o the owner trustee,
o the indenture trustee,
o the holder of the equity certificate and
o the noteholders
from and against any loss or injury sustained from third party claims resulting
from acts or omissions of the servicer with respect to trust assets or any duty
or obligations of the servicer under the agreement, except where the claims
result from willful misconduct, gross negligence or bad faith of the indemnified
person.
AMENDMENTS
When the pooling and servicing agreement and the indenture may be
amended only with the consent of the required majority of the noteholders, see
"DESCRIPTION OF THE NOTES AND INDENTURES--MODIFICATION OF INDENTURE WITH
NOTEHOLDER CONSENT" and "DESCRIPTION OF THE POOLING AND SERVICING
AGREEMENTS--AMENDMENT," the required majority means 66 2/3% of the principal
amount of the Class A Notes until paid in full, then of the Class B Notes until
paid in full, then of the Class C Notes until paid in full and then of the Class
D Notes.
The parties may amend the cash collateral account loan agreement
without noteholder consent to cure any ambiguity or inconsistency or to address
any other matter but only if the amendment will not adversely affect the
noteholders. The parties may also amend the cash collateral account loan
agreement in any other manner with the consent of the required majority of
noteholders determined as provided above. However, without the consent of all
noteholders, no amendment may reduce the amount available in the cash collateral
account for the payment of interest or principal on notes or reduce the
noteholder consent required for any amendment.
The parties may amend the swap agreement without noteholder consent to
cure any ambiguity or inconsistency or to address any other matter but only if
the amendment will not adversely affect the Class A-3 noteholders. The parties
may also amend the swap agreement in any other manner with the consent of at
least 66 2/3% of the principal amount of the Class A-3 Notes. However, without
the consent of all Class A-3 noteholders, no amendment may reduce the amount
available under the swap agreement for paying Class A-3 Note interest or reduce
the Class A-3 noteholder consent required for any amendment. Also, without the
consent of the swap counterparty, the parties may not amend the pooling and
servicing agreement so as to adversely affect the priority of payments from the
owner trust to the swap counterparty under the swap agreement.
Also, any amendment of the cash collateral account loan agreement or
the swap agreement requiring noteholder approval will not be effective unless
each rating agency confirms that the amendment will not result in a reduction,
qualification or withdrawal of the ratings on the relevant notes.
RATINGS OF THE NOTES
It is a condition of issuance that each of [ ] and [ ].
o rate the Class A-1 Notes [in its highest short-term rating
category],
o rate the Class A-2, Class A-3, Class A-4 and Class A-5 Notes
in its highest long-term rating category,
o rate the Class B Notes at least [ ] and [ ], respectively,
o rate the Class C Notes at least [ ], [ ] and [ ],
respectively, and
o rate the Class D Notes at least [ ], [ ] and [ ],
respectively.
The ratings address the likelihood of the timely receipt of interest
and payment of principal on each class of notes on or before the stated maturity
date for the class. The ratings will be based primarily upon the Available
Pledged Revenues, the cash collateral account and the subordination provided by
o the Subordinate Classes, in the case of the Class A Notes,
o the Class C and Class D Notes, in the case of the Class B
Notes and
o the Class D Notes, in the case of the Class C Notes.
There is no assurance that any rating will not be lowered or withdrawn
by the assigning rating agency. In the event that ratings with respect to the
notes are qualified, reduced or withdrawn, no person or entity will be obligated
to provide any additional credit enhancement with respect to the notes.
The ratings should be evaluated independently from similar ratings on
other types of securities. A rating is not a recommendation to buy, sell or hold
notes, inasmuch as these ratings do not comment as to market price or
suitability for a particular investor. The ratings do not address the likelihood
of payment of principal on any class of notes prior to the stated maturity date
or the possibility of the imposition of United States withholding tax with
respect to non-United States Persons.
The term "United States Person" means
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws
of the United States or any political subdivision of the United
States,
(3) an estate the income of which is includable in gross income
for United States federal income tax purposes, regardless of its
source, or
(4) a trust,
(A) with respect to which a court within the United States
is able to exercise primary supervision over its administration,
and one or more United States fiduciaries have the authority to
control all of its substantial decisions, or
(B) otherwise, the income of which is subject to U.S.
federal income tax regardless of its source.
USE OF PROCEEDS
The owner trust will use the proceeds from the sale of notes, after
paying funds into the cash collateral account and paying expenses, to pay the
purchase price for the contracts to the depositor. The depositor will use the
proceeds to pay amounts owed to another trust for the acquisition of contracts
from the trust. The trust from which the owner trust acquired contracts will use
the proceeds it receives to pay down a warehouse receivables securitization
facility.
LEGAL PROCEEDINGS
None of
o the depositor,
o the sponsor,
o the servicer,
o the originators,
o the seller or
o the owner trust
are parties to any legal proceedings which could have a material adverse impact
on noteholders' interests in notes or the owner trust's assets.
PLAN OF DISTRIBUTION
Under the terms of an underwriting agreement dated [ ], the
underwriters have severally agreed to purchase the following respective initial
principal amounts of notes at the respective public offering prices less the
respective underwriting discounts shown on the cover page of this prospectus
supplement:
<TABLE>
<CAPTION>
INITIAL INITIAL INITIAL INITIAL INITIAL
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES CLASS A-3 NOTES CLASS A-4 NOTES CLASS A-5 NOTES
----------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Deutsche Banc Alex. Brown
[ ]
</TABLE>
<TABLE>
<CAPTION>
INITIAL INITIAL INITIAL
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITER CLASS B NOTES CLASS C NOTES CLASS D NOTES
----------- ------------- ------------- --------------
<S> <C> <C> <C>
Deutsche Banc Alex.Brown
[ ]
</TABLE>
In the underwriting agreement, the underwriters have agreed to
purchase all of the notes being offered, if any of the notes are purchased. The
underwriters have advised the sponsor that they propose initially to offer the
notes to the public at the respective public offering prices shown on the cover
page of this prospectus supplement, and to dealers at that price, less a
concession not in excess of the amount noted in the table below. The
underwriters may allow and the dealers may reallow to other dealers a discount
not in excess of the amount noted in the table below.
DEALER DEALER
CONCESSION DISCOUNT
CLASS OF NOTE NOT TO EXCEED NOT TO EXCEED
A-1
A-2
A-3
A-4
A-5
B
C
D
After the notes are released for sale to the public, the offering
prices and other selling terms may be varied by the underwriters.
In connection with the offering of the notes, Deutsche Banc Alex.
Brown, on behalf of the underwriters, may engage in overallotment, stabilizing
transactions and syndicate covering transactions in accordance with Regulation M
under the Securities Exchange Act of 1934. Overallotment involves sales in
excess of the offering size, which creates a short position for the
underwriters. Stabilizing transactions involve bids to purchase the notes in the
open markets for the purpose of pegging, fixing or maintaining the price of the
notes. Syndicate covering transactions involve purchases of notes in the open
market after the distribution has been completed in order to cover short
positions. Stabilizing and syndicate covering transactions may cause the price
of the notes to be higher than it would otherwise be in the absence of those
transactions. If Deutsche Banc Alex. Brown, on behalf of the Underwriters,
engages in stabilizing or syndicate covering transactions, it may discontinue
them at any time.
The sponsor, the depositor and some of its affiliates have agreed to
indemnify the underwriters against some liabilities in connection with the sale
of notes, including liabilities under the Securities Act of 1933, as amended.
The notes are new issues of securities with no established trading
market. The underwriters have advised the sponsor that the underwriters intend
to make a market in the notes but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the notes.
The sponsor has estimated that it will spend approximately $[ ] for
printing, rating agency, trustee and legal fees and other expenses related to
the offering.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP, has provided a legal opinion relating
to the notes in its capacity as special counsel to the owner trust, the
Underwriters and the sponsor. Other legal matters for the underwriters will be
passed upon by [ ]. The indenture, the pooling and servicing agreement, the
trust agreement and the notes will be governed by the laws of the State of New
York.
<PAGE>
Index of Defined Terms
Available Pledged Revenues.........................................S-36
Class A Base Principal Payment Amount..............................S-43
Class A Percentage.................................................S-44
Class A Principal Payment Amount...................................S-44
Class A Principal Shortfall Amount.................................S-44
Class B Floor......................................................S-44
Class B Percentage.................................................S-44
Class B Principal Payment Amount...................................S-44
Class B Target Principal Amount....................................S-45
Class C Floor......................................................S-45
Class C Percentage.................................................S-45
Class C Principal Payment Amount...................................S-45
Class C Target Principal Amount....................................S-46
Class D Floor......................................................S-46
Class D Percentage.................................................S-46
Class D Principal Payment Amount...................................S-46
Class D Target Principal Amount....................................S-46
collection period..................................................S-10
contract pool principal balance....................................S-10
contract principal balance.........................................S-10
CPR................................................................S-26
Defaulted Contract.................................................S-47
delinquency........................................................S-14
deposit date.......................................................S-51
LIBOR Determination Date...........................................S-38
Liquidation Loss...................................................S-51
One-Month LIBOR....................................................S-38
Pledged Revenues...................................................S-47
principal amount...................................................S-47
principal deficiency amount........................................S-51
Reallocated Principal..............................................S-47
Reference Banks....................................................S-38
Related Collection Period Pledged Revenue..........................S-48
Required Payoff Amount.............................................S-48
Subordinate Classes................................................S-35
Telerate Page 3750.................................................S-38
Total Principal Payment Amount.....................................S-48
Unfunded Loss Amount...............................................S-48
United States Person...............................................S-57
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS
EQUIPMENT RECEIVABLE-BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
SPONSOR
THE OWNER TRUST:
The sponsor will form an owner trust for each series of notes. Each
owner trust will offer equipment receivable-backed notes under this prospectus
and a prospectus supplement. The prospectus supplement will be prepared
separately for each series of notes. Each series may include one or more classes
of notes.
Each owner trust will use the note sale proceeds to acquire a pool of
contracts from the depositor specified in your prospectus supplement.
The assets in your owner trust are specified in the prospectus
supplement for that particular owner trust, while the types of assets that may
be included in a owner trust, whether or not in your owner trust, are described
in greater detail in this prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
owner trust that the series relates to. A prospectus supplement for a series
will specify all of the terms of the series and of each of the classes in the
series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is [ ], 2000
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
THE ABSENCE OF AN EXISTING MARKET There is currently no public market
FOR THE NOTES MAY LIMIT for the notes and the sponsor cannot
YOUR ABILITY TO RESELL THE NOTES assure you that one will develop. Thus,
you may not be able to resell your notes
at all, or may be able to do so only at
a substantial discount. The underwriters
may assist in resales of the notes but
they are not obligated to do so. The
sponsor does not intend to apply for
listing of the notes on any securities
exchange or for the inclusion of the
notes on any automated quotation system.
Even if a secondary market does develop,
it may not continue.
CONTRACT PREPAYMENT, INELIGIBILITY OR A higher than anticipated level of
DEFAULT MAY CAUSE EARLIER prepayments or liquidation of contracts
REPAYMENTS OF THE NOTES THAN that become defaulted may cause an owner
YOU EXPECT AND YOU MAY NOT BE trust to pay principal on the notes
ABLE TO FIND INVESTMENTS WITH sooner than you expected. Also, an owner
THE SAME YIELD AS THE NOTES AT trust may pay principal sooner than you
THE TIME OF THE REPAYMENT expected if the depositor or a seller
repurchases ineligible contracts.
Similarly, upon the occurrence of an
event of default under the indenture,
you may receive principal of the notes
sooner than you expected. See
"DESCRIPTION OF THE NOTES AND INDENTURE
-- EVENTS OF DEFAULT; RIGHTS UPON EVENT
OF DEFAULT." You may not be able to
reinvest those distributions of
principal at yields equivalent to the
yield on the notes; therefore, the
ultimate return you receive on your
investment in the notes may be less than
the return you expected on the notes.
The rate of early terminations or
repurchases of contracts due to
prepayments ineligibility, or defaults
is influenced by various factors
including:
o technological change;
o changes in customer requirements;
o the level of interest rates;
o the level of casualty losses; and
o the overall economic environment.
Unless otherwise set forth in your
prospectus supplement, under the pooling
and servicing agreement, the servicer
may allow an obligor to prepay a
contract at any time if the payment,
alone, or together with the contract's
remaining contract principal balance and
any scheduled payment owed and not yet
received, is equal to the entire
contract principal balance of the
contract. The principal balance of a
contract is the present value of the
future scheduled payments under the
contract, discounted at a discount rate
that will be specified in the prospectus
supplement for your notes.
The sponsor cannot predict the
actual rate of prepayments which will be
experienced on the contracts. However,
your prospectus supplement will present
information as to the principal balances
of the notes remaining at various times
under several hypothetical prepayment
rates. See "WEIGHTED AVERAGE LIFE OF THE
NOTES" in your prospectus supplement.
THE PRICE AT WHICH YOU CAN RESELL At any time, the rating agencies
YOUR NOTES MAY DECREASE IF THE may lower their respective ratings of
RATINGS OF YOUR NOTES CHANGE the notes or withdraw their ratings
entirely. In the event that a rating
assigned to any note is subsequently
lowered or withdrawn for any reason, you
may not be able to resell your notes or
to resell them without a substantial
discount. For more detailed information
regarding the ratings assigned to any
class of the notes, See "RATINGS OF THE
NOTES" in this prospectus and the
prospectus supplement.
THE SUBORDINATION OF SOME An owner trust will pay interest
CLASSES OF NOTES IS ONLY A and principal on some classes of notes
LIMITED FORM OF CREDIT ENHANCEMENT prior to paying interest and principal
AND DOES NOT ENSURE PAYMENT on other classes of notes. The
OF THE MORE SENIOR CLASSES subordination of some classes of notes
to others means that the subordinated
classes of notes are more likely to
suffer the consequences of delinquent
payments and defaults on the contracts
than the more senior classes of notes.
The more senior classes of notes
could lose the credit enhancement
provided by the more subordinate classes
if delinquencies and defaults on the
contracts increase and if the
collections on the contracts and any
credit enhancement described in your
prospectus supplement are insufficient
to pay even the more senior classes of
notes.
Your prospectus supplement will
describe any subordination provisions
applicable to your notes.
LIMITED ASSETS ARE AVAILABLE FOR Each owner trust will be a limited
PAYMENT OF THE NOTES; NOTEHOLDERS purpose trust with limited assets.
WILL HAVE NO RECOURSE TO THE Moreover, you have no originator or
ORIGINATORS, SPONSOR, DEPOSITOR, their affiliates. Therefore, you must
SERVICER OR THEIR AFFILIATES IN recourse to the general credit of the
THE EVENT DELINQUENCIES AND servicer, rely solely upon sponsor,
LOSSES REDUCE THE TRUST'S ASSETS depositor, the contracts and any credit
enhancement described in your prospectus
supplement for payment of principal and
interest on the notes.
An increase in delinquent or
defaulted payments on contracts could
result in your being paid less than you
expect on the notes or in delays in
payment.
If a contract is a vendor loan, you
must rely solely upon the end-user
contracts securing the vendor loan for
payments in respect of that contract.
Most vendor loans are non-recourse to
the vendors. In non-recourse loans you
are limited to recovering amounts due
solely from the end-user contracts and
related security.
EVEN IF AN OWNER TRUST REPOSSESSES If a contract held by the trust
AND SELLS THE EQUIPMENT RELATING TO becomes a defaulted contract, the only
A CONTRACT AFTER AN OBLIGOR DEFAULTS, sources of payment for amounts owed on
SHORTFALLS IN AMOUNTS AVAILABLE TO PAY that contract will be the income and
THE NOTES MAY OCCUR IF THE MARKET proceeds from the sale of any related
VALUE OF THE EQUIPMENT HAS DECLINED equipment and a deficiency judgment, if
any, against the obligor under the
defaulted contract. Since the market
value of the equipment may decline
faster than the discounted contract
balance, the owner trust may not recover
the entire amount due on the contract
and might not receive any recoveries on
the equipment. The prospectus supplement
for your notes may describe some forms
of credit enhancement which are intended
to make up for deficiencies in the
proceeds and recoveries on the
contracts. However, this protection is
limited and could be depleted if those
deficiencies are larger than the sponsor
anticipates.
NOT HAVING POSSESSION OF CONTRACT To facilitate servicing and reduce
FILES MAY HINDER AN administrative costs, the servicer or a
OWNER TRUST'S ABILITY TO REALIZE sub-servicer, unless otherwise specified
THE VALUE OF EQUIPMENT SECURING in your prospectus supplement, will
THE CONTRACTS retain possession of the documents
evidencing the contracts held by the
owner trust. As a result, a subsequent
purchaser of contracts could take
physical possession of the documents
without knowledge of their assignment.
That subsequent purchaser could then
have a security interest in the
contracts senior to the owner trust's
security interest. In the event that the
owner trust must rely upon repossession
and sale of the equipment securing
defaulted contracts to recover amounts
due on the defaulted contracts, the
owner trust's ability to realize upon
the equipment would be limited by the
existence of the third party's senior
security interest in those contracts. In
this event, there may be a delay or
reduction in distributions to you.
Similarly, with respect to
contracts securing vendor loans, the
vendor will retain the original
documents associated with some
contracts. The applicable originator
will file Uniform Commercial Code
financing statements reflecting the
pledge of those contracts to the
applicable originator as security for
the vendor loans. However, the related
documents will remain in the vendor's
possession. If a subsequent purchaser
were able to take physical possession of
the related documents without knowledge
of the pledge to the originator, the
owner trust's security interest in those
contracts could be defeated. In this
event, there may be a delay or reduction
in distributions to you.
FAILURE TO TAKE ALL STEPS NECESSARY The depositor will receive security
TO PERFECT SECURITY INTERESTS IN interests in financed equipment securing
EQUIPMENT, TO RECORD ASSIGNMENT OF contracts from the seller of such
SECURITY INTERESTS TO THE financed equipment, which will obtain
OWNER TRUST OR TO RECORD SECURITY security interests in financed equipment
INTERESTS IN TITLED EQUIPMENT from other originator or through its own
MAY HINDER THE OWNER TRUST'S origination activities. The depositor
ABILITY TO REALIZE THE VALUE OF will assign the security interests to
EQUIPMENT SECURING THE CONTRACTS the owner trust. However, in some
instances, the originators may not file
financing statements for equipment
relating to a single obligor in a single
jurisdiction when the value of the
equipment is less than a minimum amount
which will be specified in the related
prospectus supplement. As a result, the
originator will not acquire, and the
depositor and owner trust will not have,
a perfected security interest in the
equipment. As a result, creditors of the
end-user may acquire superior interests
in the equipment.
Additionally, regardless of
equipment value, the sponsor will
require the originators to annotate
their records to note the depositor's
security interest but may not require
the filing of assignments of financing
statements for the equipment to reflect
the depositor's, the owner trust's or
the indenture trustee's interests.
Because of this, an originator or the
servicer could inadvertently release the
security interest in the equipment
securing a contract. The owner trust
would then not have a security interest
in the equipment.
Also, any transfer to the depositor
of an originator's security interest in
motor vehicles securing the contracts is
subject to state vehicle registration
laws. The depositor's transfer of a
security interest in motor vehicles to
the owner trust is also subject to these
registration laws. These registration
laws require that the secured party's
name appear on the certificate of title
or similar registration of title to a
motor vehicle in order for the secured
party's security interest to be
perfected. The applicable originator
will be identified on the certificates
or similar registrations of title.
However, the certificates of title or
similar registrations of title will not
identify the depositor or owner trust as
secured party. In addition, some
equipment related to the contracts may
constitute fixtures under the real
estate or Uniform Commercial Code
provisions of the state in which the
equipment is located. The relevant
originator will not file assignments of
fixture filings in favor of the
depositor or owner trusts. Therefore, a
third party could acquire an interest in
the motor vehicles or real estate
fixtures superior to that of the owner
trusts.
REPURCHASE OBLIGATION OF THE SELLER Federal or state law may grant
PROVIDES YOU ONLY LIMITED liens on contracts or equipment that
PROTECTION AGAINST PRIOR LIENS have priority over the owner trust's
ON THE CONTRACTS OR EQUIPMENT interest. If the creditor associated
with any prior lien exercises its
remedies it is unlikely that sufficient
cash proceeds from the contract and
related equipment will be available to
pay the contract balance to the trust.
In that event, there may be a delay or
reduction in distributions to you. An
example of a lien arising under federal
or state law is a tax lien on property
of the originator or the depositor
arising prior to the time a contract is
conveyed to the owner trust. The tax
lien has priority over the interest of
the owner trust in the contracts.
In most cases where vendors have
assigned contracts to originators, the
vendors have warranted to the
originators that there are no prior
liens on the contracts. Additionally,
where vendors have assigned contracts to
originators, the vendors have agreed not
to grant any lien on any contracts
transferred to the originators. In all
cases, the seller will warrant to the
depositor and the owner trust that there
are no prior liens on the contracts. The
seller also will warrant to the
depositor and the owner trust that it
will not grant any lien on the
contracts. In the event that those
warranties are not true as to any
contract, the seller will be required
under the pooling and servicing
agreement to repurchase the contract.
There can be no assurance that the
seller will be able to repurchase a
contract at the time when it is asked to
do so.
IF A BANKRUPTCY COURT RULES THAT Vendors sell contracts to the
THE TRANSFER OF CONTRACTS originators, which contracts will be
FROM A VENDOR TO AN ORIGINATOR transferred directly or indirectly to
WAS NOT A TRUE SALE THEN PAYMENTS the depositor and then the owner trust.
ON THE CONTRACTS MAY BE REDUCED If a bankruptcy court decides that the
OR DELAYED acquisition of a contract by an
originator is not a sale of the contract
from the vendor to the originator, the
contract would be part of the vendor's
bankruptcy estate. Accordingly, the
contract would be available to the
vendor's creditors. In that case, it is
unlikely the trust will receive all of
the scheduled payments on the contracts,
and there may be a delay or reduction in
distributions to you. In order to treat
the transfer of contracts to the trust
as not being a true sale, the bankruptcy
court would recharacterize the transfer
as a pledge of the contracts to secure
borrowings by the vendor. Additionally,
if the transfer of contracts to an
originator from a vendor is
recharacterized as a pledge, then a tax
or government lien on the property of
the pledging vendor arising before the
contracts came into existence may have
priority over the owner trust's interest
in the contracts.
A BANKRUPTCY COURT DETERMINATION THAT If an originator, the seller or the
THE TRANSFER OF CONTRACTS FROM depositor became a debtor in a
ORIGINATORS TO THE SELLER, FROM THE bankruptcy case, creditors of that
SELLER TO THE DEPOSITOR OR FROM party, or that party acting as a
THE DEPOSITOR TO THE OWNER TRUST debtor-in-possession, may assert that
WAS NOT A TRUE SALE THEN PAYMENTS the transfer of the contracts was
ON THE CONTRACTS COULD BE REDUCED ineffective to remove the contracts from
OR DELAYED that party's estate. In that case, the
distribution of contract payments to the
trust might be subject to the automatic
stay provisions of the United States
Bankruptcy Code. This would delay the
distribution of those payments to the
noteholders for an uncertain period of
time. Furthermore, if the bankruptcy
court rules in favor of the creditors or
the debtor in possession, the result may
be reductions in payments under the
contracts to the trust. In either case,
you may experience delays or reduction
in distributions to you. In addition, a
bankruptcy trustee would have the power
to sell the contracts if the proceeds of
the sale could satisfy the amount of the
debt deemed owed by the originator, the
seller or the depositor, as the case may
be. The bankruptcy trustee could also
substitute other collateral in lieu of
the contracts to secure the debt.
Additionally, the bankruptcy court could
adjust the debt if the originator, the
seller or the depositor were to file for
reorganization under Chapter 11 of the
Bankruptcy Code. Each of these parties
will represent and warrant that the
conveyance of the contracts by it is in
each case a valid sale and transfer of
the contracts. In addition, in
agreements conveying the contracts, the
originators, the seller and the
depositor have agreed that they will
each treat the transactions described in
this prospectus as a sale of the
contracts.
INSOLVENCY OF THE VENDORS COULD In the event a vendor under a
DELAY OR REDUCE PAYMENTS TO YOU vendor loan becomes subject to
insolvency proceedings, the end-user
contracts and equipment securing the
vendor loan as well as the vendor's
obligation to make payments would also
become subject to the insolvency
proceedings. In that event, payments to
the owner trust in respect of those
vendor contracts may be reduced or
delayed. Payments to you may be reduced
if collections from the remaining
unaffected contracts are insufficient to
cover losses to the owner trust. In
those cases in which transfers of
end-user contracts by vendors to
originator provide that the originator
have recourse to the vendor for all or a
portion of the losses the originator may
incur as a result of a default under
those end-user contracts, the vendor's
bankruptcy, may similarly result in
reductions or payment delays in amounts
due from the vendor.
END-USER BANKRUPTCY MAY REDUCE OR Bankruptcy and insolvency laws
DELAY COLLECTIONS ON THE could affect your interests in contracts
CONTRACTS, AND DISPOSITION OF with end-user obligors who become
EQUIPMENT RELATING TO THESE OR subject to bankruptcy proceedings. Those
OTHER DEFAULTING END-USERS MAY laws could result in contracts of a
BE DELAYED OR MAY NOT RESULT bankrupt end-user being written off as
IN COMPLETE RECOVERY OF AMOUNTS DUE uncollectible or result in delay in
payments due on the contracts. As a
result, you may be subject to delays in
receiving payments, and you may also
suffer losses if collections from the
remaining unaffected contracts are
insufficient to cover losses to the
trust. Foreclosure sales of equipment
and obtaining deficiency judgments
following foreclosure sales may not
yield sufficient proceeds to pay off the
balance owed on a contract. If you must
rely on repossession and disposition of
equipment to recover amounts due on
defaulted contracts, those amounts may
be insufficient. Factors that may affect
whether you receive the full amount due
on a contract include the failure to
file financing statements to perfect the
originator's or owner trust's security
interest in the equipment securing the
contract. The depreciation,
obsolescence, damage, or loss of any
item of equipment will also affect
whether you receive the full amount due
on a contract.
COMMINGLING OF COLLECTIONS Cash held by the servicer may be
COULD RESULT IN REDUCED commingled and used for the benefit of
PAYMENTS TO YOU the servicer prior to the date on which
the collections are required to be
deposited in a collection account as
described under "DESCRIPTION OF THE
POOLING AND SERVICING AGREEMENTS --
COLLECTIONS ON CONTRACTS." In the event
of the insolvency or receivership of the
servicer, an owner trust may not have a
perfected ownership or security interest
in these collections. In that case, you
may suffer losses on your investment as
a result.
BANKRUPTCY OF DEPOSITOR OR THE If an owner trust or the depositor
OWNER TRUST MAY CAUSE becomes insolvent under any federal
DELAYS IN OR REDUCE COLLECTIONS bankruptcy or similar state laws, the
UNDER THE CONTRACTS right of an indenture trustee to
foreclose upon and sell the assets of an
owner trust is likely to be
significantly impaired by applicable
bankruptcy laws. This would be the case
before or possibly even after an
indenture trustee has foreclosed upon
and sold the assets of an owner trust.
Under the bankruptcy laws, payments on
debts are not made, and secured
creditors are prohibited from
repossessing their security from a
debtor in a bankruptcy case or from
disposing of security repossessed from
the debtor, without bankruptcy court
approval. Moreover, the bankruptcy laws
may permit the debtor to continue to
retain and to use collateral even though
the debtor is in default under the
applicable debt instruments, if the
secured creditor is provided adequate
protection. The meaning of the term
adequate protection may vary according
to circumstances, but it is intended in
general to protect the value of the
security from any diminution in the
value of the collateral as a result of
its use by the debtor during the
pendency of the bankruptcy case. Because
there is no precise definition of the
term adequate protection and because the
bankruptcy court has broad discretionary
powers, it is impossible to predict if
or how you would be compensated for any
diminution in value of the owner trust
assets.
THE SELLER'S OBLIGATION TO The seller of contracts to the
REPURCHASE CONTACTS COULD BE depositor, will make representations and
IMPAIRED BY BANKRUPTCY warranties regarding the contracts, the
equipment and other matters. See "THE
CONTRACTS -- REPRESENTATIONS AND
WARRANTIES MADE BY THE SELLER." If any
representation or warranty with regard
to a specific contract is breached, is
not cured within a specified period of
time, and the value of the contract is
materially and adversely affected by the
breach, the seller must purchase the
contract from the applicable owner trust
at a price equal to the amount required
to pay off the contract. If the seller
becomes bankrupt or insolvent, each
indenture trustee's right to compel a
purchase would both be impaired and have
to be satisfied out of any available
"assets" of the seller's bankruptcy
estate. In that case, you may suffer a
loss on your investment in a note as a
result.
CONTRACTS RELATING TO SOFTWARE Some of the contracts held by the
OR RELATED SUPPORT AND CONSULTING owner trust may relate to software that
SERVICES ARE NOT SECURED BY THE is not owned by an originator or related
SOFTWARE OR RELATED SERVICES support and consulting services. In
these cases, the vendor or a licensor
traditionally owns the software, and the
software and related support and
consulting services do not serve as
collateral for the contracts. Thus, the
owner trust will not have an interest in
the software or related support and
consulting services. The owner trust
will own solely the associated
contracts' cash flow. Accordingly, if
any of these contracts becomes a
defaulted contract, the owner trust will
not be able to foreclose on the software
or related support and consulting
services. Because there will be no
proceeds from the software or related
support and consulting services which
could be used to make payments to you,
the owner trust must look solely to the
obligor to collect amounts due on the
contract. There can be no assurance that
the obligor will be able to pay in full
amounts due under the contract.
LIMITATIONS ON ENFORCEABILITY State law limitations on the
OF SECURITY INTERESTS IN THE enforceability of security interests and
EQUIPMENT MAY HINDER THE OWNER the manner in which a secured party may
TRUST'S ABILITY TO REALIZE THE dispose of collateral may limit the
VALUE OF EQUIPMENT SECURING owner trust's ability to obtain or
THE CONTRACTS dispose of collateral in a timely
fashion. This could reduce or delay the
availability of funds to pay the notes.
Under these state law limitations:
o if the obligor becomes bankrupt
or insolvent, the owner trust may
need the permission of a bankruptcy
court to obtain and sell its
collateral;
o some jurisdictions require that
the obligor be notified of the
default and be given a time period
within which it may cure the
default prior to repossession; and
o the obligor may have the right to
redeem collateral for its
obligations prior to actual sale by
paying the lessor or secured party
the unpaid balance of the
obligation plus the secured party's
expenses for repossessing, holding
and preparing the collateral for
disposition.
BANKRUPTCY COURT REJECTION OF "TRUE A bankruptcy trustee or
LEASES" MAY REDUCE FUNDS AVAILABLE debtor-in-possession under federal
TO PAY NOTES bankruptcy or similar state laws has the
right to assume or reject any executory
contract or unexpired lease which is
considered to be a "true lease" under
applicable law. A "true lease" is a
contract under which the applicable
originator or vendor holds a residual
interest in equipment of more than a
nominal amount. Some contracts will be
true leases and thus subject to
rejection by the lessor under federal
bankruptcy or similar state laws. For
this reason, the originator, as
debtor-in-possession or the originator's
bankruptcy trustee may reject the leases
of which that originator is the lessor.
Upon any rejection, payments to the
applicable originator under the rejected
contract may terminate and your
investment may be subject to losses. In
addition, any contract which is a true
lease that a vendor originated and
transferred to an originator in a
transaction in which the vendor
continues to be the lessor, will be
subject to rejection by the vendor, as
debtor in possession, or by the vendor's
bankruptcy trustee. An example of this
transaction is a transfer by a vendor to
an originator of a security interest in
the lease contract or a transfer by a
vendor to an originator of an interest
in the right to payments only under the
lease contract. Upon any rejection,
payments to the applicable originator
under the rejected contract may
terminate and your investment may be
subject to losses.
<PAGE>
THE SPONSOR
ACE Securities Corp., the sponsor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
sponsor does not have, nor is it expected in the future to have, any significant
assets.
The limited purposes of the depositor are, in general, to acquire, own and sell
loans, leases and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in loans,
leases and other financial assets, collections on the loans, leases and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
THE DEPOSITOR
The depositor will be a special purpose entity specified in your
prospectus supplement. The depositor will not be responsible for payment of any
principal, interest or any other amount in respect of any series of notes.
THE OWNER TRUSTS
The sponsor will form each owner trust under a trust agreement among
the sponsor, the depositor and the owner trustee, as described in your
prospectus supplement. Each owner trust may issue one or more classes of
securities, representing debt of or beneficial ownership interests in the owner
trust. The trust will not offer the beneficial ownership interests under this
prospectus.
The assets of each owner trust, as further specified in your
prospectus supplement, will consist of:
(1) a pool including some or all of the following types of contracts:
o equipment lease contracts,
o conditional sale/financing agreements,
o installment payment agreements,
o promissory notes, and
o loan and security agreements;
(2) amounts on deposit in, and any eligible investments allocated to,
accounts established under the related indenture and the pooling
and servicing agreement;
(3) the depositor's rights under the related purchase and sale
agreement or other instrument by which it acquired contracts, if
any; and
(4) the depositor's rights with respect to any cash collateral
account or other form of credit enhancement for the notes.
The owner trust will have the right, as set forth in your prospectus
supplement, to:
o all funds payable under the contracts after the cut-off
date, the date on which the owner trust's right to contract
payments commences. This includes all scheduled but unpaid
amounts due prior to the cut-off date, but excludes any
scheduled payments due on or after, but received prior to,
the date the depositor transfers the contracts to an owner
trust. This does not include contract payments in respect of
taxes, insurance premiums, security deposits, late charges,
administrative fees or charges;
o prepayments, except for any portion allocated to the
depositor in respect of equipment leases;
o liquidation proceeds received with respect to defaulted
contracts, except for any portion allocable to the depositor
under an equipment lease;
o earnings from the investment of funds in the collection
account and note distribution account maintained by the
servicer; and
o security interests in the equipment related to the
contracts, but excluding ownership rights.
No owner trust will engage in any business activity unless otherwise
specified in your prospectus supplement, other than
o issuing notes and ownership interests in the owner trust;
o purchasing contracts and related assets;
o holding and dealing with the assets of the owner trust;
o making payments on the notes and other securities it issued;
o entering into and performing the duties, responsibilities
and functions required under any of the related pooling and
servicing agreement, indenture, contracts, and related
documents; and
o matters incidental to the above.
The assets of an owner trust will be separate from the assets of all
other owner trusts the sponsor or depositor creates. Accordingly, the assets of
one owner trust will not be available to make payments on the securities issued
by any other owner trust.
The sponsor will specify the owner trustee of the owner trust for
notes being offered to you in your prospectus supplement. The owner trustee's
liability in connection with the sale of notes will be limited to the express
obligations of the owner trustee in the related trust agreement and indenture.
An owner trustee may resign at any time, in which event the depositor or the
sponsor, as specified in your prospectus supplement or any designee must appoint
a successor owner trustee. The depositor or the sponsor, as specified in your
prospectus supplement or any designee may also remove an owner trustee if the
owner trustee ceases to be eligible to continue as such under the related trust
agreement or if the owner trustee becomes insolvent. Any resignation or removal
of an owner trustee will not become effective until acceptance of the
appointment of a successor owner trustee.
THE ORIGINATORS, THE SELLER AND THE SERVICER
Your prospectus supplement will provide information on the
originators, the seller and the servicer.
THE CONTRACTS
With respect to any series of notes, this prospectus and any
prospectus supplement refer to the aggregate of the contracts in an owner trust,
as of any particular date, as the contract pool. This prospectus and any
prospectus supplement refer to the contract pool, as of the cut-off date
specified in the prospectus supplement for your notes, as the cut-off date or
initial contract pool. This prospectus and any prospectus supplement refer to
equipment, software and services collectively as financed items.
DESCRIPTION OF THE CONTRACTS
The following description of the contracts describes the material
terms of the contracts to be included in each contract pool, although an
immaterial number of contracts in a contract pool may differ in one or more
provisions from the description below.
END-USER CONTRACTS
Each owner trust will include contracts to which the end-user of the
equipment is a party. The sponsor lists the types of contracts under "THE OWNER
TRUSTS" above.
There will be no limit on the number of contracts in a particular
contract pool which may consist of any of those types. Each contract is
required, however, to be an "eligible contract," as of the date the depositor
transfers the contracts to the respective owner trusts. An eligible contract is
a contract as to which the representations and warranties listed below under
"--REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER" are true as of the
transfer date.
CONDITIONAL SALE AGREEMENTS
Each originator may offer financing for equipment under conditional
sale agreements assigned to the applicable originator by the vendor of the
equipment. Each originator will either use its standard pre-printed form or a
vendor's standard, pre-printed form to document the conditional sale agreements
in a contract pool. The conditional sale agreement sets forth the description of
each financed item and the schedule of installment payments. Typically, loans
under conditional sale agreements are fixed rate and are for a term of one to
seven years. Payments under conditional sale agreements typically are due
monthly. Conditional sale agreements typically:
o provide for a grant by the end-user of the equipment of a
security interest in the equipment, which security interest
is assigned by the vendor to the originator;
o may allow prepayment of the obligation upon payment, where
allowed by applicable state law, of an additional prepayment
fee;
o require the end-user to maintain the equipment, keep it free
and clear of liens and encumbrances and pay all taxes
related to the equipment;
o restrict the modification or disposal of the equipment
without the vendor's, or its assignee's, consent;
o include a disclaimer of warranties;
o include the end-user's indemnity against liabilities arising
from the use, possession or ownership of the equipment;
o include the end-user's absolute and unconditional obligation
to pay the installment payments on the loan; and
o include specific events of default and remedies for default.
A conditional sale agreement typically requires each end-user to maintain
insurance, the terms of which may vary. The terms of a conditional sale
agreement often may be modified at its inception at the end-user's request.
LEASES
The originators, either directly or by assignment from vendors, may
offer financing of equipment, software and services under leases. Leases may
consist of individual lease agreements relating to a single, separate
transaction and financed item. Alternatively, the individual leases may be
governed by a master lease agreement which contains the general terms and
conditions of the transaction. Specific terms and conditions, such as
descriptions of the specific equipment, software and services being leased or
financed and the schedule of related rental payments, are typically contained in
a supplement or schedule to the master lease agreement, which is signed by the
end-user as lessee, and either the vendor or the originator, as lessor. The
supplement to the master lease agreement incorporates the master lease agreement
by reference, and is treated by the originator as a separate lease. The
originator or the vendor originates each lease in the ordinary course of
business. Vendors who originate leases assign them to the originator. An
originator also may purchase leases on a portfolio basis.
The initial terms of the leases in the contract pool typically range
from one to seven years. Each lease provides for the periodic payment by the
end-user of rent in advance or arrears, generally monthly or quarterly. The
periodic payments represent the amortization, generally on a level basis, of the
total amount that an end-user is required to pay throughout the term of a lease.
A contract pool will include "NET LEASES" under which the end-user
assumes responsibility for
o the financed items, including operation, maintenance,
repair, and insurance or self-insurance,
o return of the equipment at the expiration or termination of
the lease, and
o the payment of all sales, use and property taxes relating to
the financed items during the lease term.
The end-user further agrees to indemnify the lessor for any
liabilities arising out of the use or operation of the financed items. In most
cases, the end-user also authorized the lessor to perform the end-user's
obligations under the lease at the end-user's expense, if it so elects, in cases
where the end-user has failed to perform. In addition, the leases often contain
"HELL OR HIGH WATER" clauses unconditionally obligating the end-user to make
periodic payments, without setoff, at the times and in the amounts specified in
the lease. If an originator is the lessor, the lease will often contain no
express or implied warranties with respect to the financed items other than a
warranty of quiet enjoyment. If a vendor is the lessor, the lease or a related
agreement may contain representations and warranties with respect to the
financed items in addition to a warranty of quiet enjoyment. However, the
end-user typically agrees not to assert any warranty claims against any
assignee, including the originator, of the vendor by way of setoff, counterclaim
or otherwise, and further agrees that it may only bring that type of claim
against the vendor. Leases of equipment often require the end-user to maintain,
at its expense, casualty insurance covering damage to or loss of the equipment
during the lease term or to self-insure against these risks, if approved in
advance by the originator or vendor, as applicable.
The leases may include both "TRUE LEASES" and leases intended for
security as defined in Section 1-201(37) of the Uniform Commercial Code. Under a
"TRUE LEASE", the lessor bears the risk of ownership, except for the risk of
loss of the equipment, which is passed to the end-user under the leases. The
lessor also takes any tax benefits associated with the ownership of depreciable
property under applicable law. No title is conferred upon the lessee. The lessee
under a "TRUE LEASE" has the right to the temporary use of property for a term
shorter than the economic life of the property in exchange for payments at
scheduled intervals during the lease term. Additionally, the lessor retains a
significant "RESIDUAL" economic interest in the leased property. End of lease
options for "TRUE LEASES" include purchase or renewal at fair market value.
Under leases intended for security, the lessor in effect finances the
"PURCHASE" of the leased property by the lessee and retains a security interest
in the leased property. The lessee retains the leased property for substantially
all its economic life and the lessor retains no significant residual interest.
Such leases are considered conditional sales type leases for federal income tax
purposes and, accordingly, the lessor does not take any federal tax benefits
associated with the ownership of depreciable property. End of lease options for
these leases depend on the terms of the related individual lease agreement or
master lease agreement supplement, but often these terms provide for the
purchase of the equipment at a prestated price, which may be nominal. The
inclusion of "TRUE LEASES" in a contract pool should have no federal income tax
impact on holders of notes since the notes are treated as debt for federal
income tax purposes. However, the inclusion of "TRUE LEASES" may result in the
imposition of state and local taxes which would reduce cash available for
payment on the notes.
A lease will either prohibit the end-user from altering or modifying
the equipment or permit the end-user to alter or modify the equipment only to
the extent the alterations or modifications are readily removable without damage
to the equipment. Under some master lease agreements, the end-user may assign
its rights and obligations under the lease, but only upon receiving the prior
written consent of the lessor. Under some leases, the lessee may relocate the
equipment upon giving the lessor prompt written notice of the relocation. The
right to grant or deny consent or to receive written notice will be exercised by
the servicer under the authority delegated to it in the related pooling and
servicing agreement. Some leases will permit the end-user to substitute
substantially identical leased equipment for leased equipment scheduled to be
returned to the lessor under the lease.
While the terms and conditions of the leases will not usually permit
cancellation by the end-user, the lessor and the end-user may modify or
terminate some leases before the end of the lease term. The originator, or a
vendor, with the consent of the originator, may permit the modifications to a
lease term or early lease terminations. The modifications typically arise in
connection with additional financing opportunities from the same end-user.
End-users may also negotiate with the originator, at the originator's
discretion, an early termination arrangement allowing the end-user to purchase
the equipment during the term of a lease. The early-termination purchase price
is often equal to or in excess of the present value of the remaining rental
payments under the lease plus the anticipated market value of the related
equipment as of the end of the lease term. The originator may permit early
termination of a lease in connection with the acquisition of new technology
requiring replacement of the equipment. In these cases, the end-user returns the
related equipment to the vendor or originator and pays an amount generally equal
to the present value of the remaining rental payments under the lease plus an
early termination fee to the originator. Modifications usually involve repricing
a lease or modification of the lease term. Occasionally the lessor and the
end-user may modify a lease in connection with an increase in the capacity or
performance of equipment by adding additional equipment that includes new
technology. Coincident with the financing of an upgrade to the equipment, the
originator may reprice and extend the related base lease term to be coterminous
with the desired term of the lease relating to the upgrade. In some cases,
subject to conditions described under "DESCRIPTION OF THE POOLING AND SERVICING
AGREEMENTS -- SERVICING," base lease extensions may remain in a contract pool.
The sponsor expects that the servicer will continue to permit these
modifications and terminations with respect to leases included in a contract
pool under the authority delegated to it in the related pooling and servicing
agreement. The servicer's ability to modify leases is limited by the conditions
and covenants of the servicer described under "DESCRIPTION OF THE POOLING AND
SERVICING AGREEMENTS -- SERVICING."
The originator may modify the standard terms and conditions of the
lease agreement at the inception of a lease at the request of the end-user.
Common permitted modifications include, but are not limited to:
o prearranged mid-lease purchase options, early termination
options and lease extension options as described above;
o modifications to the lessor's equipment inspection rights;
o modifications to the end-user's insurance requirements
permitting the end-user to self-insure against casualty to
the equipment;
o the end-user's right to assign the lease or sub-lease the
financed items to an affiliated entity, so long as the
end-user remains liable under the lease and promptly
notifies the lessor or its assignee of the assignment or
sublease; and
o extended grace periods for late payments of rent.
In some cases, after a lease term expires the originator may permit
the end-user to continue to use the related equipment for so long as the
end-user continues to make lease payments. After the expiration of the term of a
lease, any continued lease payments will belong to the depositor, not the owner
trust.
SECURED NOTES
Each originator may also provide direct initial financing or
refinancing of equipment and software under secured promissory notes, which
consist of an installment note and a separate security agreement. In an initial
financing transaction, the originator pays to the vendor the purchase price for
the equipment or software. In a refinancing transaction, the originator pays off
an end-user's existing financing source, and the initial financing or
refinancing is documented as a direct loan by the originator to the end-user of
the equipment or software using a secured note. In the case of a refinancing
transaction, upon payment to the existing financing source, the originator
obtains a release of the original financing party's lien on the financed
equipment. In either case, the originator records its own lien against the
financed equipment or software and takes possession of the secured note. Except
for the lack of references to "sale" or "purchase" of equipment, a secured note
contains terms and conditions substantially similar to those contained in
conditional sale agreements.
INSTALLMENT PAYMENT/FINANCING AGREEMENTS
Each originator may provide financing for software license fees and
related support and consulting services under
o installment payment supplements to software license
agreements,
o separate installment payment agreements, and
o other forms of financing agreements assigned to the
originator by vendors of software.
Each financing agreement of this type:
o generally is an unsecured obligation of the end-user;
o generally provides for a fixed schedule of payments with no
end-user right of prepayment;
o generally is noncancellable for its term;
o generally contains a "HELL OR HIGH WATER" clause
unconditionally obligating the end-user to make periodic
payments, without setoff, at the times and in the amounts
specified. If a financing agreement does not provide for
noncancellability or a "HELL OR HIGH WATER" clause, the
financing agreement will typically have the benefit of a
vendor guarantee;
o generally permits the assignment of the payment agreement to
a third party, including the originator, and includes the
end-user's agreement not to assert against assignee any
claims or defenses the end-user may have against the vendor;
and
o generally contains default and remedy provisions that
usually include acceleration of amounts due and to become
due and, in some cases, the right of the vendor, or the
originator by assignment, to terminate the underlying
software license and all related support and consulting
activities.
EQUIPMENT
The end-user contracts may consist of some or all of the following
types of new and used equipment:
1) information technology equipment, including:
o computer work stations,
o mainframe, mid-range and personal computers,
o data storage devices,
o media and video production/post production equipment,
o servers and
o computer related peripheral equipment,
2) communications equipment, such as telephone switching and
networking systems,
3) commercial business and industrial equipment, such as:
o printing presses,
o machine tools and other manufacturing equipment,
o photocopiers, facsimile machines and other office equipment,
o energy savings and control equipment,
o corrugated boards,
o plastic injections,
o folding cartons
o silk screening equipment,
o automotive diagnostic and
o automated testing equipment,
4) retail equipment, such as
o petroleum retail equipment,
o fuel dispensers,
o ATM units,
o convenience store operating equipment,
o embroidery machines,
o coin operated, vending, amusement and coffee service
equipment and
o restaurant equipment,
5) medical and dental equipment, such as diagnostic and
therapeutic examination equipment for radiology, nuclear
medicine and ultrasound and laboratory analysis equipment,
6) resources equipment, such as feller-bunchers and grapplers,
7) transportation and construction equipment, such as:
o heavy and medium duty trucks, highway trailers and other
title vehicles,
o school buses,
o bulldozers,
o loaders,
o graders,
o excavators,
o machine tools,
o forklifts,
o other materials handling equipment,
o golf carts,
o aircraft engines,
o other road and off-road machinery and
o electronics manufacturing and testing equipment,
8) other equipment
o forestry,
o pollution control,
o mining and steel mill equipment,
o laundry, janitorial, and cleaning equipment,
o photographic equipment,
o refuse equipment and
o furniture and fixtures equipment.
In each case, the depositor will transfer the security interests of
the originator in the equipment subject to each related end-user contract, but
not ownership interests in the case of leased equipment, to the relevant owner
trust.
SOFTWARE AND SERVICES
Some end-user contracts may cover license fees and other fees owed by
the end-user under either perpetual or term software license agreements and
other related agreements in connection with the end-user's use of computer
software programs. The end-user contracts may also cover related support and
consulting services which are provided by the vendor, an affiliate of the vendor
or a third party contract party and which facilitate the obligor's use of the
software. Neither the vendors or licensors of the software nor the end-users
under the related end-user contracts will convey to the originator any interest
in the software or the software license agreement, other than the right to
collect the payment of software license fees. However, in some cases, the
vendors may convey to the originator the right to exercise rights and remedies
under the relevant software license agreement or related agreements.
Consequently, unless otherwise specified in your prospectus supplement, an owner
trust will not have title to or a security interest in the software, nor will it
own the related services, and would not be able to realize any value from the
software or related servicer under a related end-user contract upon a default by
the end-user.
VENDOR LOANS
The contracts may include limited recourse loan or repayment
obligations of a vendor. These may take the form of promissory notes with
related security interests documented by security agreements or specific
provisions in related program agreements. Each of the obligations is secured by
all of the vendor's interest in an individual end-user contract originated by
the vendor and by the equipment related to the end-user contract.
The originator may originate vendor loans through, and the vendor
loans may incorporate terms and conditions of, a program agreement. See "PROGRAM
AGREEMENTS WITH VENDORS." Vendor loans generally are non-recourse to the vendor,
meaning that the originator may obtain repayment solely from the proceeds of the
end-user contracts and related equipment securing the vendor loan. However, the
originator may have recourse to a vendor for nonpayment of a vendor loan through
a limited recourse arrangement in the related program agreement or other related
agreement. The repayment terms under a vendor loan, including periodic amounts
payable and schedule of payments, will correspond to the payment terms of the
end-user under the end-user contract collaterally assigned under the vendor
loan. Each vendor loan will either include most, if not all, of the
representations and warranties regarding the end-user contract and related
equipment typically included in a vendor agreement, or incorporate these
representations and warranties included in any related program agreement by
reference.
PROGRAM AGREEMENTS WITH VENDORS
An originator's program agreement is typically an agreement with
equipment manufacturers, dealers and distributors, or software licensors or
distributors, located in the United States. The program agreement provides an
originator with the opportunity to finance transactions relating to the
acquisition or use by an end-user of a vendor's equipment, software, services or
other products. Vendor program arrangements provide an originator with a steady,
sustainable flow of new business, often with lower costs of origination than
asset-based financings marketed directly to end-users. Some of the program
agreements take the form of a referral relationship, which is less formal, and
may or may not include credit or remarketing support to the originator from the
vendor.
Each program agreement under which vendors or another party originate
and document contracts and assign them to the originator typically includes
vendor representations, warranties and covenants regarding each contract
assigned to an originator, including that:
o the obligations of the end-user under the assigned contract
are absolute, unconditional, noncancellable, enforceable in
accordance with their terms and free from any rights of
offset, counterclaim or defense;
o the originator holds the sole original of the contract and
has either title to or a first priority perfected security
interest in the equipment, except with respect to situations
where no financing statement is filed due to the minimum
value involved;
o the equipment and the contract are free and clear of all
liens, claims or encumbrances except for permitted liens;
o the end-user has irrevocably accepted the equipment or the
software; and
o the end-user duly authorized and signed the assigned
contract;
Each program agreement under which the originators document and
originate contracts typically include vendor representations, warranties and
covenants regarding each contract, including that
o the equipment has been delivered to and accepted by the
end-user;
o the vendor has not received any advance payments;
o the vendor has good title to the equipment; and
o the vendor has not made any misrepresentations to the
end-user.
In each of the two above described program structures, relevant
agreements also typically provide for
o remedies for misrepresentations or breaches of warranties or
covenants by the vendor regarding an assigned contract.
These remedies usually require the vendor to repurchase the
affected end-user contract for the originator's investment
balance in the contract plus costs incurred by the
originator in breaking any underlying funding arrangement;
and
o the right of an originator to further assign its interests
in assigned contracts, all related payments and any related
interest in equipment.
In addition, the originators may enter into profit sharing arrangements
with some vendors. These arrangements typically will provide for sharing of
revenues generated under the program and for joint participation in management.
Under the terms of these arrangements, the originators typically maintain direct
or indirect control over all credit decision-making activities.
Also, a program agreement or profit sharing arrangement may include
recourse against a vendor with respect to end-user defaults under some end-user
contracts,
o by specifying that the assignment of the contract from the
vendor to the originator is with full recourse against the
vendor;
o by specifying that the vendor will absorb a limited fixed
dollar or percentage amount of "FIRST LOSSES" on the
contract;
o by inclusion of the contract in an ultimate net loss pool
created under the program agreement as well as guarantees by
the applicable vendor with respect to certain contracts
which are cancelable or which do not contain "HELL OR HIGH
WATER" provisions; or
o by providing for vendor repurchase of the contract or vendor
indemnification payments for breaches of certain
representations and warranties made by the vendor with
respect to the contract.
If an end-user defaults under a contract subject to a net loss pool, the
originator may be permitted to draw against the net loss pool up to the amount
of the originator's remaining unpaid investment balance in the defaulted
contract. The originator may also be permitted to draw against the net loss pool
with respect to contracts that are not included in the pool of contracts in a
particular owner trust and, accordingly, there can be no assurance that any
amounts contributed by a vendor to a net loss pool will be available with
respect to a defaulted contract included in the pool of contracts owned by a
particular owner trust.
The manner in which the vendor assigns contracts to the originator
varies from one program agreement to another, depending upon
o the nature of the items financed,
o the form of the contract,
o the accounting treatment sought by the vendor and the
end-user, and
o tax considerations.
For example, an originator might:
o accept a vendor loan and collateral assignment of the
contract and related equipment or security interest in the
equipment from the vendor; or
o accept a full assignment of the contract and a collateral
assignment of the related equipment or security interest
from the vendor, which collateral assignment secures the
end-user's obligations under the contract or lease.
The originator also may receive, from a vendor with respect to software, a full
assignment of leases, installment payment agreements, installment payment
supplements to license agreements, and other types of financing agreements used
in financing software license payments and related support and consulting
services. These assignments may include an assignment of the software vendor's
or licensor's right, or the agreement of the vendor or licensor, at the
originator's instructions, to terminate the software license covered by the
contract and suspend related support in the event of an end-user default under
the contract. In some cases, the software vendor also agrees not to relicense
the same or similar software to a defaulted end-user for some period of time,
e.g., one year, unless the end-user cures its default.
Some portion of the contracts included in the pool of contracts,
especially in the case of conditional sale agreements, may consist of contracts
originated by vendors and assigned to the originator in vendor assignments, each
of which relates to an individual contract, rather than under a program
agreement. Each vendor assignment will either be with or without recourse
against the vendor for end-user defaults. Each vendor assignment will typically
contain many, if not all, of the representations, warranties and covenants
typically contained in program agreements, as well as a vendor repurchase
requirement in the event of a breach by the vendor of the representations,
warranties or covenants. Vendor assignments may or may not provide for any
vendor remarketing support in the event of an end-user default.
RESIDUAL INVESTMENTS
Any of the originators may finance all or a portion of the residual
interest in the equipment under program agreements and under direct transactions
between an obligor and the applicable originator. Any investment by the
originator in a residual interest shall be referred to as a residual investment.
Program agreements may provide that the originator may, at its sole discretion
and in connection with the funding of a lease of equipment, make a residual
investment in that equipment by advancing additional funds against a portion of
the anticipated residual value of the equipment, and not just against the
discounted present value of the rental payments due under the contract. Residual
investments may take the form of an advance of the present value of some
specified percentage of the anticipated residual value of the equipment or a
specified percentage, typically not greater than 10%, of the amount to be paid
by the originator in funding the present value of the rental payments due under
the contract.
With respect to vendor assignments, the originator may advance the
entire purchase price of the equipment subject to a true lease, take title to
the equipment, and accept an assignment of the true lease contract from a
vendor. With respect to the leases originated by the originator the originator
may advance the entire purchase price of the equipment to the vendor, take title
to the equipment from the vendor, and enter into a true lease contract with an
obligor. In either of the two foregoing types of transactions, the originator
will have advanced more than the discounted present value of the rents payable
under the true lease contracts by paying the purchase price for the equipment,
and so will have made a residual investment in the equipment.
In some program agreements, the originator may make the residual
investment in the form of a full recourse loan of additional funds to the
vendor. That loan is repayable by the vendor at the expiration or termination of
the contract with interest and is secured by a security interest in the financed
equipment. In some transactions involving vendor assignments or direct
transactions with obligors under true lease contracts, the originator may obtain
the obligation of either the vendor or the obligor to purchase the equipment at
the end of the lease term for the full amount of the originator's residual
investment in the equipment with accrued interest. Any transaction in which the
originator may look to either the vendor or the obligor, and not just the value
of equipment itself, to recover its residual investment with interest shall be
referred to as a "GUARANTEED RESIDUAL INVESTMENT". Other than guaranteed
residual investments, a residual investment will not be included in the
discounted contract balance of any contract and, therefore, would not be
financed with the proceeds of the notes. This type residual investment is
referred to in this prospectus as the "EXCLUDED RESIDUAL INVESTMENT."
The seller or an affiliate of the seller will transfer the excluded
residual investment associated with any contract included in a pool of contracts
to the depositor or another affiliate under the terms of a purchase and sale
agreement or other transfer agreement. Unless otherwise specified in your
prospectus supplement, the depositor will not transfer the excluded residual
investment to an owner trust under the related pooling and servicing agreement.
The related owner trust's interest in contracts with associated residual
investments, other than with guaranteed residual investments, will typically be
limited to the discounted present value of the rental payments due under the
contract and a security interest in the related equipment. The originator may
assign its excluded residual investment to a third party, including the security
interest in the equipment in respect of the residual investment.
CONTRACT FILES
Each originator will indicate in the appropriate computer files
relating to the contracts being transferred to an owner trust that the
originator has transferred the contracts for the benefit of the holders of the
notes. Each originator will also deliver to the indenture trustee a computer
file, microfiche or written list containing a true and complete list of all
contracts which it has transferred, identified by account number and by the
discounted contract balance of the contracts as of the transfer date.
COLLECTION ON CONTRACTS
Your prospectus supplement will describe how all collections received
with respect to the contracts will be allocated.
PAYMENTS GENERALLY
The contracts usually require that an obligor make periodic payments
on a monthly basis. Some contracts, however, provide for quarterly, semi-annual
or annual payments. Obligors typically must make the payments under all of the
contracts in United States dollars. Payment requirements usually are fixed and
specified, rather than being tied to a formula or are otherwise at a floating
rate. Payments under the contracts are ordinarily payable in advance, although a
small percentage provide for payments in arrears.
EXPENSES RELATING TO EQUIPMENT
The contracts require the obligors to assume the responsibility for
payment of all expenses of the related equipment including, without limitation,
o any expenses in connection with the maintenance and repair
of the related equipment,
o the payment of any and all premiums for casualty and
liability insurance, and
o the payment of all taxes relating to the equipment.
INSURANCE; REPAIR AND REPLACEMENT
Unless otherwise set forth in your prospectus supplement, lease
contracts require that the obligors will maintain liability insurance and which
must name the lessor as additional insured.
o leases, or
o loan and security agreements
An originator may waive this requirement from time to time. For some lease
contracts, the obligor's already existing self-insurance program permits the
obligor to self-insure the equipment. The originators may not track or verify
insurance coverage as to the equipment related to a contract after the
commencement of the contract.
Often, the failure to maintain this insurance constitutes an event of
default under the applicable contract. Usually, the obligor also agrees to
indemnify the originator for all liability and expenses arising from the use,
condition or ownership of the equipment.
If the equipment is damaged or destroyed, each lease contract, unless
otherwise set forth in your prospectus supplement, requires that the obligor:
o repair the equipment;
o make a termination payment to the lessor in an amount not
less than the amount required to pay off the contract; or
o in some cases, replace the damaged or destroyed equipment
with other equipment of comparable use and value.
The related pooling and servicing agreement, unless otherwise set forth in your
prospectus supplement, permits the servicer, in the case of the destruction of
the equipment related to a particular lease contract, either to:
o allow the lessee to replace this equipment, provided that
the replacement equipment is, in the judgment of the
servicer, of comparable use and at least equivalent value to
the value of the equipment which was destroyed, or
o accept the termination payment referred to above.
ASSIGNMENT OF CONTRACTS
Typically the contracts will permit the assignment of the contract by
the lessor or secured party without the consent of the obligor. However,
occasionally, contracts require notification of the assignment to, or the
consent of, the obligor. The seller will represent and warrant in the purchase
and sale agreement that these notices have been given, or approvals will have
been received, not more than ten days following the date of the transfer of the
contract to the depositor. Typically, the contracts do not permit assignment of
the contracts, or the related equipment, by the obligor without the prior
consent of the lessor or secured party, except the contracts often may permit:
o assignments to a parent, subsidiary or affiliate;
o the assignment to a third party, provided the obligor
remains liable under the contract; or
o assignment to a third party with a credit standing, which
the originator determines in accordance with its
underwriting policy and practice at the time for an
equivalent contract type, term and amount, to be equal to or
better than the original obligor.
Under the related pooling and servicing agreement, the servicer may permit an
assignment of a particular contract from an obligor to a third party only if the
servicer, utilizing the current underwriting criteria for its contract
origination activities, determines that the third party is of sufficient credit
quality that the servicer would permit the third party to become an obligor with
respect to a contract that the servicer originates.
EVENTS OF DEFAULT AND REMEDIES
Events of default under the contracts ordinarily include:
o the failure to pay all amounts required by the contract when
due;
o the failure of the obligor to perform its agreements and
covenants under the applicable contract;
o material misrepresentations made by the obligor;
o the bankruptcy or insolvency of the obligor or the
appointment of a receiver for the obligor; and
o in some cases, default by the obligor under other contracts
or agreements.
Some of these default provisions are, in some instances, subject to notice
provisions and cure periods. Remedies available to the lessor or secured party
upon the occurrence of an event of default by the obligor typically include the
right
o to cancel or terminate in the case of a contract subject to
a true lease,
o to accelerate payments in the case of a contract subject to
financing,
o to recover possession of the related equipment and
o to receive an amount intended to make the lessor or secured
party, as the case may be, whole plus costs and expenses,
including legal fees, which the lessor or secured party
incurs as a result of the default.
Notwithstanding these events of default and remedies, unless otherwise set forth
in your prospectus supplement, the pooling and servicing agreement, permits the
servicer to take the actions, with respect to delinquent and defaulted
contracts, a reasonably prudent creditor would take under similar circumstances.
See "DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS -- SERVICING". The
originators may occasionally provide payment extensions, typically of three
months or less. Longer extensions are occasionally granted to customers
experiencing delays in payment due to cash flow shortages or other reasons.
However, originators do not intend extensions to be used to provide a temporary
solution for a delinquent account. Rather, extensions are intended to be used
when, in the judgment of the relevant credit authority, the extension is
necessary to avoid a termination and liquidation of the contract and will
maximize the amount to be received by the related owner trust with respect to
the contract.
PREPAYMENTS AND EARLY TERMINATION
Any contract may either:
o not permit the obligor to prepay the amounts due under the
contract or otherwise terminate the contract prior to its
scheduled expiration date;
o allow for a prepayment or early termination upon payment of
an amount that is at least equal to the contract principal
balance, determined using a discount rate specified in your
prospectus supplement; or
o allow for a prepayment or early termination without the
payment of the contract principal balance.
Some contracts, often written as installment sales contracts, promissory notes
or loan and security agreements, permit the obligor to prepay the contract, in
whole or in part, at any time at par plus accrued interest.
Under each pooling and servicing agreement, the servicer may allow the
prepayment of any contract, but only if the amount paid, or, in the case of a
partial prepayment, the sum of that amount and the remaining principal balance
of the contract after application of that amount, is at least equal to the
amount required to pay off the contract. The required payoff amount, with
respect to any collection period for any contract, is equal to the sum of:
o the scheduled payment due in that collection period and not
yet received, together with any scheduled payments due in
prior collection periods and not yet received; plus
o the discounted contract principal balance of the contract as
of the last day of that collection period, after taking into
account the scheduled payment due in that collection period.
In no event will revenues pledged for a series of notes include, nor
will the notes otherwise be payable from, any portion of a prepayment on a
contract that exceeds the required payoff amount for that contract.
Under the pooling and servicing agreement, the depositor may replace
any prepaid contract with a substitute contract. See " -- SUBSTITUTION OF
CONTRACTS" below.
DISCLAIMER OF WARRANTIES
The contracts which are subject to a true lease contain provisions by
which the lessor, or the originator, as assignee of the lessor, disclaims all
warranties with respect to the equipment. The lessor often assigns the
manufacturer's warranties to the obligor for the term of the lease. Under true
leases, the obligor accepts the equipment under the applicable contract
following delivery and an opportunity to inspect the related equipment.
ADDITIONAL EQUIPMENT
If specified in your prospectus supplement, some of the contracts
which are subject to a true lease constitute leases of additional equipment,
generally costing $25,000 or less, with existing obligors. Pursuant to the terms
of the original contract between the lessor and the obligor, the parties
document leases for additional equipment on a written form that the lessor
prepares and delivers to the obligor, but the obligor does not execute, which
written form describes all of the terms of the lease. Under the terms of the
contract, the obligor agrees that unless it objects in writing within a
specified period of time, it is deemed to have accepted the lease of this
additional equipment.
REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER
Unless otherwise set forth in your prospectus supplement, the seller
of contracts to the depositor, will make the representations and warranties set
forth below regarding the contracts and the related equipment included in each
pool of contracts transferred to an owner trust as of the related transfer date.
The representations and warranties will also apply to contracts that the
depositor reacquires from a trust to which the depositor previously transferred
the contracts in connection with a warehouse receivables securitization
facility.
(1) the information with respect to the contracts is true and correct
in all material respects;
(2) immediately prior to the transfer of a contract, the contract was
owned by the transferring party free and clear of any adverse
claim except for permitted claims;
(3) the contract is not a defaulted or delinquent contract;
(4) no provision of the contract has been waived, altered or modified
in any material respect, except by instruments or documents
contained in the files relating to the contract;
(5) the contract is a valid and binding payment obligation of the
obligor and its terms are enforceable, except as may be limited by
insolvency, bankruptcy, moratorium, reorganization, or other
similar laws affecting enforceability of creditors' rights and the
availability of equitable remedies;
(6) the contract is not and will not be subject to rights of
rescission, setoff, counterclaim or defense;
(7) the contract, at the time it was made, did not violate the laws of
the United States or any state in any material respect;
(8) (A) the contract and any related equipment have not been sold,
transferred, assigned or pledged by the originator to any person
other than the end-user, the seller, the depositor or any related
financing trust; and
(B) either
(x) the contract is secured by a perfected lien, subject to
permitted liens and subject to minimum filing value exceptions,
on the related equipment or, in the case of any vendor loan,
related end-user contract or equipment or
(y) in the case of a contract secured by a vehicle, within 90
calendar days of the origination or a acquisition of the
contract by the originator all required state registration or
recording procedures were initiated, and the originator's
interest will be so noted or recorded within 180 days of the
acquisition or origination;
(9) if the contract constitutes either an "INSTRUMENT" or "CHATTEL
PAPER" for purposes of the Uniform Commercial Code, there is not
more than one "SECURED PARTY'S ORIGINAL" counterpart of the
contract;
(10) all filings necessary to evidence the conveyance or transfer of
the contract to the depositor have been made or provided for in
all appropriate jurisdictions, except that the parties have not
made filings to note the seller;
(11) the obligor is not, to the seller's knowledge, subject to
bankruptcy or other insolvency proceedings;
(12) the contract is a U.S. dollar-denominated obligation and the
obligor's billing address is located in the United States or
Puerto Rico;
(13) the contract does not require the prior written notifications to
a consent of an obligor or contain any other restriction on the
transfer or assignment of the contract other than notifications
that will have been given and consents or waivers of restrictions
that will have been obtained within ten days after the date the
contract was sold to the trust;
(14) the obligations of the related obligor under the contract are
irrevocable and unconditional and non-cancelable or, if not
irrevocable and unconditional, are guaranteed by the vendor; or in
the case of leases with governments, upon a cancellation of the
lease, either the vendor is obligated to repurchase the lease or
the seller will indemnify the depositor in respect of the
cancellation;
(15) no adverse selection procedure was used in selecting the contract
for transfer;
(16) the obligor under the contract is required to maintain casualty
insurance with respect to the related equipment or to self-insure
against casualty with respect to the related equipment in an
amount that is consistent with servicer's normal servicing
requirements;
(17) the contract constitutes chattel paper, an account, an instrument
or a general intangible as defined under the Uniform Commercial
Code;
(18) no lease is a "CONSUMER LEASE" as defined in Section 2A-103(1)(e)
of the Uniform Commercial Code;
(19) to the best knowledge of the relevant originator each lessee has
accepted the related equipment and has had a reasonable
opportunity to inspect the equipment;
(20) except as provided in (14) above, the contract is not guaranteed
by any originator nor has the originator established any specific
credit reserve with respect to the related obligor;
(21) each lease is a "TRIPLE NET LEASE" under which the obligor is
responsible for the maintenance of the related equipment in a
manner that conforms with general industry standards;
(22) each vendor loan is secured by an eligible end-user contract(s)
having an aggregate contract principal balance(s) equal to the
outstanding principal amount of the vendor loan. In this context,
an eligible end-user contract is one that
A. satisfies all of these representations and warranties except
number (2) above and number (8) above, in respect of ownership
by the applicable originator;
B. in which the relevant originator or financing trust has a
perfected lien; and
C. in which the transfer of the relevant originator's or
financing trust's security interest in the contract to the
owner trust creates a duly perfected lien;
(23) the obligor is not the United States of America or any agency,
department, subdivision or instrumentality of the United States
of America;
(24) the contract contains customary provisions for this type of
financing, and the provisions are sufficient and enforceable,
except as listed as noted in (5) above, to enable the relevant
originator or its assignees to realize against the financed items
securing the contract; and
(25) if the obligor is a state or local government entity, the
transfer of the contract does not violate any applicable state or
local laws restricting or prohibiting transfer.
The owner trust may modify the above representations and warranties
and will describe any modification in the relevant prospectus supplement.
In the event of a breach of any representation or warranty with respect
to a contract that materially and adversely affects the owner trust's or any
noteholder's or equity certificateholder's interest in the contract or the
collectibility of the contract, the owner trust will have a warranty claim
against the seller. The seller will then be obligated to repurchase the
contract. However, the seller need not do so if the seller cures the breach by
the second deposit date after the date on which the servicer becomes aware and
gives notice to the seller of the breach. Any purchase shall be made on the
deposit date immediately following the end of the second collection period at a
price equal to the required payoff amount of the contract. The purchase price
will be allocated to the related owner trust plus, if applicable, the book value
of the related equipment which will be allocated to the depositor. The related
indenture trustee may enforce this purchase obligation on your behalf, and this
will constitute your sole remedy available against the seller, the depositor,
the trust or the originators for any uncured breach, except that the seller will
indemnify
o the related indenture trustee,
o the related owner trustee, and
o the related owner trust
against losses, damages, liabilities and claims which may be asserted against
any of them as a result of third-party claims arising out of the facts giving
rise to that breach. The seller may, in lieu of repurchasing the contract, cause
the depositor to deliver a substitute contract as provided in the next-following
section of this prospectus.
Upon the purchase by the seller of a contract, the depositor will
release the contract and related equipment to the seller.
SUBSTITUTION OF CONTRACTS
The depositor will have the option to substitute one or more contracts
having similar characteristics for contracts which are in default or have been
prepaid or which have undergone material modification. In addition, in the case
of a contract subject to a warranty claim, as described in " -- REPRESENTATIONS
AND WARRANTIES MADE BY THE SELLER" above, the seller may choose to replace the
contract with a substitute contract.
Some contracts may permit the obligor to prepay the amounts due under
the contract or otherwise to terminate the contract prior to its scheduled
expiration date. The depositor may replace any prepaid contract with a
substitute contract in lieu of applying the proceeds of the prepaid contract to
the pledged revenues as described in this section.
Material modification of a contract means a termination, release,
amendment, modification or waiver of a contract that is not otherwise permitted
under the pooling and servicing agreement. The depositor may provide substitute
contracts for any that have been so materially modified. The depositor may also
replace any defaulted contract with a substitute contract. The aggregate
contract principal balances of the defaulted contracts for which the depositor
may cause substitution is limited to 10% of the cut-off contract pool principal
balance. The depositor may replace a prepaid contract with a substitute contract
and the seller may choose to replace contracts subject to a warranty claim or a
material modification with substitute contracts, in either case without regard
to the 10% limitation described above.
The same credit criteria and eligibility standards for the contracts
in the contract pool on the closing date will also apply to substitute contracts
added to the assets of the owner trust. The servicer will include information
with respect to these substitute contracts, to the extent the servicer deems
them material, in required periodic reports under the Securities Exchange Act of
1934 filed with the Securities and Exchange Commission on behalf of the owner
trust. The substitute contracts will have contract principal balances equal to
or greater than the contracts being replaced. The representations and warranties
the seller makes with respect to the contracts in " -- REPRESENTATIONS AND
WARRANTIES MADE BY THE SELLER" above will be equally applicable to substitute
contracts.
DELINQUENCY AND NET LOSS EXPERIENCE
Your prospectus supplement will set forth statistics relating to the
delinquency and net loss experience on contracts within the originators' owned
and managed portfolios of receivables similar to the contracts in a contract
pool.
DESCRIPTION OF THE NOTES AND INDENTURE
The issuance of each series of notes will be under an indenture, a
form of which was filed with the Securities and Exchange Commission as an
exhibit to the registration statement of which this prospectus is a part. In
addition, a copy of the indenture for a series of notes will be filed with the
Securities and Exchange Commission following the issuance of each series. The
following summary describes certain material terms which may be common to each
indenture and the related notes, but does not purport to be complete and is
subject to all of the provisions of the indenture, the related notes and the
description set forth in your prospectus supplement.
The notes of each series will be issued in fully registered form only
and will represent the obligations of a separate owner trust.
Payments on the notes will be made by the indenture trustee on each
payment date to persons in whose names the notes are registered as of the
related record date. Unless otherwise specified in your prospectus supplement,
the payment date for the notes will be the 20th day of each month, or if the
20th is not a business day, the next succeeding business day. Unless otherwise
specified in your prospectus supplement, for so long as the notes are in
book-entry form, the record date for any payment date will be the business day
immediately preceding the payment date. Unless otherwise specified in your
prospectus supplement, if the owner trust issues certificated notes, the record
date will be the last business day of the month immediately preceding the
payment date.
A business day is any day other than a Saturday, Sunday or legal
holiday on which commercial banks in New York City or such other jurisdictions
specified in your prospectus supplement are open for regular business.
DISTRIBUTIONS
Your prospectus supplement will describe as to your series of notes
o the timing and priority of distributions,
o the amount or method of determining distributions,
o allocations of loss and
o the interest rates.
If specified in the related prospectus supplement, the trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to the notes of your series.
CREDIT ENHANCEMENT
As further specified in the your prospectus supplement,
o a cash collateral account,
o a financial guaranty insurance policy,
o subordination of one or more classes of notes,
o overcollateralization,
o letters of credit or liquidity facilities,
o repurchase obligations,
o third party payments or other support,
o cash deposits,
o a reserve fund or
o other form of credit enhancement which may become suitable
in light of credit enhancement practices or developments in
the future
may be established on or prior to the date the contracts are transferred. The
credit enhancement would be available to the related indenture trustee to pay
interest and principal on the notes in the manner and to the extent specified in
your prospectus supplement.
LIQUIDATION AND INSURANCE PROCEEDS
The allocation of liquidation proceeds which will consist generally of
all amounts the servicer receives in connection with the liquidation of a
contract and disposition of the related equipment, net of any related
out-of-pocket liquidation expenses, and the allocation of insurance proceeds for
physical damage to or loss of equipment covered by contracts, will be as follows
unless otherwise specified in your prospectus supplement:
1) with respect to any contract subject to financing, the
proceeds will be allocated to the owner trust; and
2) with respect to any contract subject to a lease, the
proceeds will, unless otherwise specified in your prospectus
supplement, be allocated on a pro rata basis between the
depositor, on the one hand, and the owner trust, on the
other, based respectively on
(a) the book value of the related equipment and
(b) the required payoff amount for the contract.
However, if the proceeds in respect of any contract subject to a lease and the
related equipment exceed the sum of the required payoff amount for the contract
and the book value of the equipment, the excess shall be allocated solely to the
depositor. For example, if the servicer, in connection with a defaulted contract
subject to a lease, derived liquidation proceeds in the amount of $100 from the
liquidation of the contract and disposition of the related equipment, and if the
required payoff amount of the contract was, as of the collection period during
which the contract became a liquidated contract, $120 and the book value of the
equipment was $30, the liquidation proceeds would be allocated to the owner
trust in the amount of $80 and to the depositor in the amount of $20. All
liquidation proceeds which are so allocable to the owner trust will be deposited
in a collection account and constitute pledged revenues to be applied to the
payment of interest and principal on the notes in accordance with the priorities
described under " -- DISTRIBUTIONS" above.
OPTIONAL PURCHASE OF CONTRACTS AND REDEMPTION OF NOTES
The seller or other entity specified in your prospectus supplement may
purchase all of the contracts owned by an owner trust on any payment date
following the date on which the unpaid principal balance of the related notes is
less than 10%, or such other percentage specified in your prospectus supplement,
of the initial contract pool principal balance. Except as otherwise described in
the prospectus supplement for your notes, the purchase price to be paid in
connection with the purchase shall be at least equal to the sum of
o the unpaid principal balance of the related notes as of that
payment date,
o accrued but unpaid interest,
o unreimbursed servicer advances, and
o accrued but unpaid servicer fees.
If the seller or another entity does purchase the contracts, the related notes
shall be redeemed on the payment date on which the purchase occurs. The
redemption price will be the principal amount of the notes plus accrued and
unpaid interest to but excluding the redemption date.
TRUST ACCOUNTS
Except as otherwise specified in your prospectus supplement, the
applicable indenture trustee will establish and maintain under each indenture
segregated trust accounts which need not be deposit accounts, but which must be
with a qualified institution. These accounts will include, among others, the
"COLLECTION ACCOUNT" and the "DISTRIBUTION ACCOUNT." The accounts may, as
described in the prospectus supplement for your notes, also include a cash
collateral or reserve fund account as credit enhancement. All of these accounts
are referred to collectively as the "TRUST ACCOUNTS."
"Qualified institution" means the corporate trust department of the
indenture trustee or any other depository institution
o organized under the laws of the United States or any state
or any domestic branch of a foreign bank,
o the deposits of which are insured by the Federal Deposit
Insurance Corporation and
o which has, or whose parent corporation has, short-term or
long-term debt ratings acceptable to Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. and Duff &
Phelps Credit Rating Co.
The servicer, as agent for the indenture trustee of any series, may
designate, or otherwise arrange for the purchase by the indenture trustee of,
investments to be made with funds in the trust accounts. All investments shall
be eligible investments as defined in the related indenture that will mature not
later than the business day preceding the applicable monthly payment date or any
other date approved by the rating agencies. Eligible investments include, among
other investments:
o obligations of the United States or of any agency of the
United States backed by the full faith and credit of the
United States;
o demand deposits, certificates of deposit, time deposits
demand notes or bankers acceptance of eligible financial
institutions;
o highly rated commercial paper or money market funds;
o repurchase agreements in respect of United States government
securities or securities guaranteed or otherwise backed by
the full faith and credit of the United States Government
with eligible institutions; and
o other investments which have been approved by each rating
agency.
REPORTS TO NOTEHOLDERS
With respect to each series of notes, the servicer will furnish to the
applicable indenture trustee, and the indenture trustee will include with each
distribution to you, a statement, as specified in your prospectus supplement, in
respect of the related payment date.
If you purchase a note, you may receive these reports by making a
written request to The Depository Trust Company. These reports do not constitute
financial statements prepared in accordance with generally accepted accounting
principles. None of the depositor, the sponsor, nor the servicer intends to send
any of their respective financial reports to owners of notes. The servicer, on
behalf of an owner trust, will file with the Securities and Exchange Commission
legally required periodic reports concerning the owner trust.
With respect to any series, the notes will be registered in the name
of a nominee of The Depository Trust Company and will not be registered in the
names of the beneficial owners or their nominees. As a result, unless and until
definitive notes are issued in the limited circumstances described under " --
ISSUANCE OF CERTIFICATED NOTES AT A LATER DATE" below, the indenture trustee
will not recognize you as a noteholder, as that term is used in the related
indenture. Hence, until that time, you will receive reports and other
information provided for under the related indenture only if, when and to the
extent The Depository Trust Company and its participating organizations provide
this information. The servicer will file a copy of each report with the
Securities and Exchange Commission on Form 8-K to the extent the Securities
Exchange Act of 1934 and the rules and regulations of the Securities and
Exchange Commission under the Exchange Act require it.
BOOK-ENTRY REGISTRATION
Unless your prospectus supplement states otherwise, you may hold your
notes through The Depository Trust Company, referred to as "DTC," in the United
States, or Clearstream, Luxembourg or Euroclear System in Europe, if you are a
participant of those systems, or indirectly through organizations that are
participants in those systems.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under to Section 17A of the Exchange Act. DTC was
created to hold securities for its direct participants and to facilitate the
clearance and settlement of securities transactions between its direct
participants through electronic book-entries, thus eliminating the need for
physical movement of certificates. DTC's direct participants include
o the underwriters offering the notes to you,
o securities brokers and dealers,
o banks,
o trust companies and
o clearing corporations, and may include other organizations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly.
To facilitate subsequent transfers, DTC will register all deposited
notes in the name of DTC's nominee, Cede & Co. You will maintain beneficial
ownership of the notes despite the deposit of notes with DTC and their
registration in the name of Cede. DTC has no knowledge of the actual
noteholders; DTC's records reflect only the identity of its direct participants
to whose accounts the notes are credited, which may or may not be the
noteholders. DTC's direct and indirect participants will remain responsible for
keeping account of their holdings on behalf of their customers.
You have no entitlement to receive a certificate representing your
interest in a class of notes. As long as the notes are registered in the name of
Cede & Co., any action to be taken by you or any other noteholders will be taken
by DTC upon instructions from DTC's participants. All distributions, notices,
reports and statements to noteholders will be delivered to Cede, as the
registered holder of the notes, for distribution to noteholders in compliance
with DTC procedures.
You will receive all payments of principal and interest on the notes
through direct participants or indirect participants. DTC will forward the
payments to its direct participants which will forward them to indirect
participants or noteholders. Under a book-entry format, you may experience some
delay in their receipt of payments, since payments will be forwarded to Cede as
nominee of DTC. The indenture trustee will not recognize you as a noteholder, as
that term is used in the indenture. You may exercise the rights of noteholders
only indirectly through DTC and its direct participants and indirect
participants. Because DTC can act only on behalf of direct participants, who in
turn act on behalf of indirect participants, and on behalf of banks, trust
companies and other persons approved by it, there may be limits on your ability
to pledge the notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to notes, due to the absence of
physical notes for the notes.
Arrangements among the various parties govern conveyance of notices
and other communications by
o DTC to direct participants,
o by direct participants to indirect participants and
o by direct participants and indirect participants to
noteholders, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Standing instructions and customary practices govern payments by DTC
participants to noteholders, as is the case with securities held for the
accounts of customers in bearer form or registered in "street name" and will be
the responsibility of the DTC participant and not of DTC, the indenture trustee,
the owner trustee, the originators or the originator, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of
principal and interest to DTC is the responsibility of the indenture trustee,
disbursement of the payments to direct participants shall be the responsibility
of DTC and disbursement of payments to noteholders shall be the responsibility
of direct participants and indirect participants.
Purchases of notes under the DTC system must be made by or through
direct participants, which will receive a credit for the notes on DTC's records.
The ownership interest of each actual noteholder is in turn to be recorded on
the direct participants' and indirect participants' records. Noteholders will
not receive written confirmation from DTC of their purchase, but noteholders are
expected to receive written confirmations providing details of the transaction,
as well as periodic statements of their holders, from the direct participant or
indirect participant through which the noteholder entered into the transaction.
Entries made on the books of DTC's participants acting on behalf of noteholders
evidence transfers of ownership interests in the notes.
DTC will not comment or vote with respect to the notes. DTC has
advised that it will take any action permitted to be taken by a noteholder under
the indenture only at the direction of one or more direct participants to whose
accounts with DTC the notes are credited. Additionally, DTC has advised that to
the extent that the indenture requires that any action may be taken only by
noteholders representing a specified percentage of the aggregate outstanding
principal amount of the notes, DTC will take the action only at the direction of
and on behalf of direct participants, whose holdings include undivided interests
that satisfy the specified percentage.
DTC may discontinue providing its services as securities depositary
with respect to the notes at any time by giving reasonable notice to the
indenture trustee. Under these circumstances, in the event that a successor
securities depositary is not obtained, fully registered, certificated notes are
required to be printed and delivered. The originator may decide to discontinue
use of the system of book-entry transfers through DTC or a successor securities
depositary. In that event, fully registered, certificated notes will be
delivered to noteholders. See " -- ISSUANCE OF DEFINITIVE NOTES AT A LATER
DATE."
The information in this section concerning DTC and DTC's book-entry
system are from sources that the sponsor believes to be reliable, but neither
the sponsor nor the owner trustee take any responsibility for the accuracy of
this information.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on
behalf of the participants in the Clearstream, Luxembourg and Euroclear systems,
respectively, through customers' securities accounts in Clearstream, Luxembourg
's and Euroclear's names on the books of their respective depositaries which in
turn will hold these positions in customers' securities accounts in the
depositaries' names on the books of DTC.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg
as a professional depositary. Clearstream, Luxembourg holds securities for its
participants and facilitates the clearance and settlement of securities
transactions between its participants through electronic book-entry changes in
accounts of its participants, thus eliminating the need for physical movement of
certificates.
Indirect access to Clearstream, Luxembourg is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Clearstream, Luxembourg participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear's participants
through simultaneous electronic book-entry delivery against payment, thus
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. The Brussels, Belgium
office of Morgan Guaranty Trust Company of New York operates Euroclear, under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation. Euroclear's operator conducts all operations and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
Euroclear's operator. Euroclear Clearance Systems S.C. establishes policy for
Euroclear on behalf of Euroclear's participants, including 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.
Morgan Guaranty Trust Company of New York is the Belgian branch of a
New York banking corporation which is a member bank of the Federal Reserve
System. As such, the Board of Governors of the Federal Reserve System and the
New York Banking Department, as well as the Belgian Banking Commission,
regulates and examines it.
Euroclear holds all securities on a fungible basis without attribution
of specific certificates to specific securities clearance accounts. The
Euroclear operator acts under the Euroclear Terms and Conditions only on behalf
of Euroclear's participants, and has no record of or relationship with persons
holding through Euroclear's participants.
Transfers between direct participants will comply with DTC rules.
Transfers between Clearstream, Luxembourg 's participants and Euroclear's
participants will comply with their rules and operating procedures.
DTC will effect, under DTC rules, cross-market transfers between
persons holding directly or indirectly through DTC in the United States, on the
one hand, and directly or indirectly through Clearstream, Luxembourg or
Euroclear, on the other, through the relevant European international clearing
system through its Depositary; however, these cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in this system as required by its rules and
procedures and within its established deadlines, European time. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment using its normal procedures for same-day
funds settlement applicable to DTC. Clearstream, Luxembourg participants and
Euroclear participants may not deliver instructions directly to the
depositaries.
Because of time-zone differences, credits of securities in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during the subsequent securities settlement processing
day, dated the business day following the DTC settlement date, and the credits
or any transactions in the securities settled during the processing day will be
reported to the relevant Clearstream, Luxembourg participant or Euroclear
participant on that business day. Cash received in Clearstream, Luxembourg or
Euroclear as a result of sales of securities by or through a Clearstream,
Luxembourg participant or a Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of notes among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Except as required by law, none of the seller, the company, any
originator, the owner trustee, the depositor or the indenture trustee will have
any liability for any aspect of the records relating to, actions taken or
implemented by, or payments made on account of, beneficial ownership interests
in the notes held through DTC, or for maintaining, supervising or reviewing any
records or actions relating to beneficial ownership interests.
ISSUANCE OF CERTIFIED NOTES AT A LATER DATE
The owner trust will issue notes in fully registered, certificated
form to beneficial owners or their nominees rather than to DTC or its nominee,
only if:
(1) the owner trustee advises the indenture trustee in writing
that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the notes, and the
owner trustee or the indenture trustee is unable to locate a qualified
successor,
(2) the owner trustee elects to terminate the book-entry system,
or
(3) after the occurrence of an event of default under the
indenture, the holder of at least 66 2/3% of the principal amount of
its outstanding notes advises the indenture trustee that the
continuation of the book-entry system is met in their best interests.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee must notify all beneficial owners for
each class of notes held through DTC of the availability of notes in fully
registered, certificated form. Upon surrender by DTC of the global note
representing the notes and instructions for reregistration, the indenture
trustee will issue these fully registered, certificated notes, and the indenture
trustee will recognize the holders of fully registered, certificated notes as
noteholders under the indenture.
Additionally, upon the occurrence of any event described above, the
indenture trustee will distribute principal of and interest on the notes
directly to you as required by the indenture. Distributions will be made by
check, mailed to your address as it appears on the note register. Upon at least
five days' notice to noteholders for the class, however, the indenture trustee
will make the final payment on any note only upon presentation and surrender of
the note at the office or agency specified in the notice of final distribution
to noteholders. The indenture trustee will make the final payment in this manner
whether the notes are fully registered, certificated notes or the note for the
class registered in the name of Cede & Co. representing the notes of the class.
You may transfer any fully registered, certificated notes of any class
at the offices of the indenture trustee or its agent in New York, New York,
which the indenture trustee shall designate on or prior to the issuance of any
fully registered, certificated notes with respect to that class. There is no
service charge for any registration of transfer or exchange, but the indenture
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection with the transfer or exchange.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT
Unless your prospectus supplement states otherwise, the owner trust
and the indenture trustee for a note series may, without your consent, enter
into one or more supplemental indentures for any of the following purposes:
o to change the collateral description;
o to provide for a successor to the owner trust to assume the
notes and the indenture obligations;
o to add additional covenants for your benefit, or to
surrender any rights or power of the owner trust;
o to transfer or pledge any property to the indenture trustee;
o if not adverse to the interests of noteholders, to correct
or supplement any provision in the indenture that is
ambiguous or inconsistent with any other provision of the
indenture or to make any other provision in respect of
matters under the indenture;
o to accept a successor indenture trustee or to change the
provisions of the indenture to facilitate the administration
by more than one trustee;
o to comply with the Trust Indenture Act of 1939, as amended;
or
o to elect to come under the FASIT provision of the Internal
Revenue Code, if the owner trust provides an opinion of
counsel as to no adverse impact on noteholders.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT
Unless your prospectus supplement states otherwise, with the consent of
the required majority of the noteholders determined as described in the
prospectus supplement for your notes, prior notice to each rating agency and an
opinion of counsel, the owner trustee and the indenture trustee may modify the
indenture and your rights under it.
Without the consent of the holder of each outstanding note affected,
however, no modification of the indenture may:
o reduce the note principal amount, interest rate or
redemption price or change the timing of payments;
o modify the manner of application of payments in respect to
contracts to the notes;
o impair your right to sue to enforce payment provisions of
the indenture;
o reduce the percentage needed for consents of noteholders;
o permit the creation of any lien on collateral under the
indenture ranking prior to or on a parity with the lien of
the indenture;
o adversely affect the manner of determining notes outstanding
or the requisite note for liquidating the trust estate; or
o modify the provisions of the indenture relating to these
types of indenture modification without the consent of all
noteholders.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Except as otherwise provided in the prospectus supplement for your
notes, events of default under each indenture will consist of:
o a default for five calendar days or more in the payment of
interest due on any note;
o failure to pay the unpaid principal amount of any class of
notes on the maturity date for the notes;
o failure of the owner trust or the depositor to observe any
provisions set forth in the pooling and servicing agreement
or the indenture, which failure has a material adverse
effect on the noteholders and continues for 60 calendar days
after written notice;
o any representation or warranty made by the owner trust or
the depositor in the pooling and servicing agreement or
indenture was incorrect as of the time made, and continues
to be incorrect for a period of 60 calendar days after
notice is given and as a result of which the noteholders are
materially and adversely affected. A breach of a
representation or warranty as to a contract will be
considered not to have occurred if the seller purchases the
contract or effects a substitution for it, as provided in
"THE CONTRACTS -- REPRESENTATIONS AND WARRANTIES MADE BY THE
SELLER" and " -- SUBSTITUTION OF CONTRACTS" above;
o events of bankruptcy, insolvency, receivership or
liquidation of the owner trust or the depositor; or
o the owner trust becomes an investment company.
If an event of default should occur and be continuing with respect to
the notes of a series, the required holders may, except as to a bankruptcy or
insolvency event of default, deem the event not to have occurred.
If the indenture trustee declares the notes of a series due and payable
following an event of default, the indenture trustee may:
o institute proceedings to collect amounts due or foreclose on
the indenture collateral,
o exercise remedies as a secured party, or
o sell the indenture collateral, or elect to have the owner
trust maintain possession of the pledged revenues.
Unless otherwise provided in your prospectus supplement, the indenture
trustee, however, may not sell the indenture collateral following an event of
default, except an event arising from the owner trust's failure to pay interest
or principal, unless:
o the holders of all the outstanding notes consent to the
sale;
o the proceeds of the sale distributable to holders of the
notes are sufficient to pay in full the principal and
accrued interest on all the outstanding notes at the date of
the sale; or
o the indenture trustee determines, in complete reliance on
investment banking or accounting firm certifications, that
the trust estate would not be sufficient on an ongoing basis
to make all payments on the notes as the payments would have
become due if the obligations had not been declared due and
payable, and the indenture trustee obtains the consent of
the required holders.
Following a declaration upon an event of default that the notes are immediately
due and payable, the application of any proceeds of liquidation of the pledged
revenues will be in the order of priority described in the prospectus supplement
for your class of notes.
If an event of default occurs and is continuing, the indenture trustee
will be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders of the notes, if the
indenture trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which it may incur in complying with
that request. A majority of the noteholders will have the right to direct the
time, method and place of conducting any proceeding or any remedy available to
the indenture trustee. Additionally, a majority of the noteholders may, in some
cases, waive any default, 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 of the holders of
the outstanding notes.
Unless otherwise provided in your prospectus supplement, no holder of a
note will have the right to institute any proceeding with respect to the
indenture, unless:
o the holder previously has given to the indenture trustee
written notice of a continuing event of default;
o the holders of not less than 25% in principal amount of the
outstanding notes make written request of the indenture
trustee to institute the proceeding in its own name as
indenture trustee;
o the holder or holders offer the indenture trustee reasonable
indemnity;
o the indenture trustee has for 60 days failed to institute
the proceeding; and
o no direction inconsistent with that written request has been
given to the indenture trustee during the 60-day period by
the holders of a majority in principal amount of the
outstanding notes.
In addition, the indenture trustee and you, by accepting the notes,
will covenant that they will not at any time institute against the sponsor, the
seller, the depositor or the owner trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
Neither the indenture trustee nor the owner trustee in its individual
capacity, nor the sponsor, the seller, the depositor, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will be personally liable for the payment of
the notes or for any agreement or covenant of the owner trust contained in the
indenture.
OWNER TRUST COVENANTS
Each indenture will provide that the related owner trust may not
consolidate with or merge into any other entity, unless:
o the entity formed by or surviving the consolidation or
merger is organized under the laws of the United States or
any state;
o the entity expressly assumes the owner trust's obligation to
make due and punctual payments upon the notes and the
performance or observance of every agreement and covenant of
the owner trust under the indenture;
o no event of default shall have occurred and be continuing
immediately after the merger or consolidation;
o the rating agencies advise the owner trustee that the rating
of the notes then in effect would not be reduced or
withdrawn as a result of the merger or consolidation;
o the owner trustee has received an opinion of counsel to the
effect that the consolidation or merger would have no
material adverse tax consequence to the owner trust or to
any noteholder or equity certificate holder; and
o the owner trust or the person, if other than the owner
trust, formed by or surviving the consolidation or merger
has a net worth, immediately after the consolidation or
merger, that is (a) greater than zero and (b) not less than
the net worth of the owner trust immediately prior to giving
effect to the consolidation or merger.
Each owner trust will not, among other things:
o except as expressly permitted by the related indenture or
trust agreement, transfer any of the assets of the owner
trust;
o claim any credit on or make any deduction from, the
principal and interest payable in respect of the related
notes, other than amounts withheld under the bankruptcy code
or applicable state law, or assert any claim against any
present or former holder of notes because of the payment of
taxes levied or assessed upon the owner trust;
o dissolve or liquidate in whole or in part;
o permit the validity or effectiveness of the indenture to be
impaired or permit the release of any person from any
covenants or obligations relating to the notes under the
indenture except as expressly permitted in the indenture; or
o except as expressly permitted in the indenture, the pooling
and servicing agreement or the trust agreement, permit any
lien or claim to burden any assets of the owner trust.
No owner trust may engage in any activity other than as specified above
under "THE OWNER TRUSTS." Each owner trust will not incur, assume or guarantee
any indebtedness other than indebtedness incurred under the related notes and
the related indenture or otherwise in accordance with the related indenture,
trust agreement and pooling and servicing agreement.
ANNUAL COMPLIANCE STATEMENT
Each owner trust will be required to file annually with the applicable
indenture trustee a written statement as to the fulfillment of its obligations
under the indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
Each indenture trustee will be required to mail each year to all
noteholders of the related series a brief report relating to:
o its eligibility and qualification to continue as indenture
trustee under the related indenture,
o any amounts advanced by it under the indenture,
o the amount, interest rate and maturity date of certain
indebtedness owing by the owner trust to the indenture
trustee in its individual capacity,
o the property and funds physically held by the indenture
trustee and
o any action taken by it that materially affects the notes and
that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The discharge of an indenture will occur with respect to the collateral
securing the notes of a series upon the delivery to the related indenture
trustee for cancellation of all the notes or, with certain limitations, upon
deposit with the indenture trustee of funds sufficient for the payment in full
of all of the notes.
THE INDENTURE TRUSTEE
The indenture trustee for any series will be specified in your
prospectus supplement. An indenture trustee may resign at any time, in which
event the depositor or the sponsor will be obligated to appoint a successor
trustee. The owner trust may also remove an indenture trustee
o if the indenture trustee ceases to be eligible to continue
to serve under the indenture,
o if the indenture trustee becomes subject to bankruptcy
proceedings, or
o if the indenture trustee becomes incapable of acting.
In these circumstances, the owner trust will be obligated to appoint a successor
trustee. Any resignation or removal of an indenture trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by a successor trustee.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The following summarizes the material terms of each pooling and
servicing agreement, a form of which was filed with the registration statement
of which this prospectus is a part. In addition, a copy of the pooling and
servicing agreement relating to a series of notes will be filed with the
Securities and Exchange Commission following the sale of those notes. This
summary describes terms expected to be common to each pooling and servicing
agreement, but the sponsor does not intend this summary to be complete. This
summary is subject to the provisions of the pooling and servicing agreement
relating to a particular series and the description set forth in your prospectus
supplement. You should read the form of the pooling and servicing agreement
filed as noted above.
TRANSFER OF CONTRACTS AND EQUIPMENT
Prior to the offering of a series of notes, the seller may have sold
contracts to the depositor for deposit into a trust used in connection with
temporary financing arrangements. The depositor may reacquire some or all of
these contracts for deposit into the owner trust in connection with the offering
and sale of a particular series of notes. On or before the applicable closing
date, the seller will transfer to the depositor under one or more purchase
agreements all of its interest in the following:
o the contracts, its security interest in the related
equipment and the related equipment,
o the right to receive all scheduled payments and prepayments
received on the contracts on or after the date of transfer,
but excluding any scheduled payments due on or after, but
received prior to, the transfer date,
o all rights under insurance policies maintained on the
equipment under the contracts,
o all documents contained in the files and
o all proceeds derived from any of the above.
Under the pooling and servicing agreement, on the applicable closing
date, the depositor will transfer to the owner trust:
o all of its rights in the contracts and rights in the
equipment and other rights listed above, except that in the
case of leased equipment, the depositor will typically
retain ownership of the equipment, any rights to payments
made or attributable to the leased equipment upon expiration
of the related lease contract, of contract prepayments and
liquidation proceeds allocable to the depositor under the
pooling and servicing agreement and of any portion of the
purchase amount attributable to the book value of the leased
equipment, other than any guaranteed residual investment;
o all funds on deposit from time to time in the trust
accounts; and
o all its rights under the purchase and sale agreement.
Each pooling and servicing agreement will designate the servicer as
custodian to maintain possession, as the owner trust's agent, of the contracts
and all related documents. To facilitate servicing and save administrative
costs, the documents often will not be physically segregated from other similar
documents that are in the servicer's possession. Financing statements will be
filed on the transfer date in the applicable jurisdictions reflecting:
o the transfer of the contracts and the equipment by the
originators, other than the seller, to the seller,
o the transfer of the contracts and the equipment by the
seller to the depositor and, as applicable by any temporary
financing trust to the depositor,
o the transfer by the depositor to the owner trust, and
o the pledge by the owner trust to the indenture trustee.
The originators' accounting records and computer systems will also
reflect these assignments and this pledge.
COLLECTIONS ON CONTRACTS
The applicable indenture trustee will maintain a collection account,
into which the servicer will deposit the following amounts no later than, unless
otherwise set forth in your prospectus supplement, the second business day after
their processing:
o all scheduled payments made under the contracts;
o all prepayments, excluding any portion which your prospectus
supplement states is allocable to the depositor;
o amounts constituting liquidation proceeds on liquidated
contracts, to the extent specified in your prospectus
supplement;
o all payments made by the seller under the pooling and
servicing agreement to repurchase any contract as a result
of a breach of a representation or warranty, as described
under "THE CONTRACTS -- REPRESENTATIONS AND WARRANTIES MADE
BY THE SELLER," excluding, in the case of a lease contract,
any portion which your prospectus supplement states is
allocable to the depositor; and
o the amount paid by the depositor to purchase the contracts,
as described under "DESCRIPTION OF THE NOTES AND INDENTURE."
So long as no event of termination shall have occurred and be
continuing with respect to the servicer, the servicer may make the required
remittances to the collection account net of its servicing fees.
The servicer may withdraw from the collection account any amounts
deposited in error or required to be repaid to an obligor, based on the
servicer's good-faith determination that the amount was deposited in error or
must be returned to the obligor.
The servicer will pay to the depositor all proceeds from the
disposition of equipment subject to a true lease, to the extent allocable to the
depositor.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion
of the principal collections may be applied by the trustee to the acquisition of
subsequent leases during a specified period rather than used to distribute
payments of principal to noteholders during that period. These notes would then
possess an interest only period, also commonly referred to as a "revolving
period", which will be followed by an "amortization period", during which
principal will be paid. Any interest only or revolving period may terminate
prior to the end of the specified period and result in the earlier than expected
principal repayment of the notes.
SERVICING
Your prospectus supplement will identify the servicer for your trust.
The servicer will be obligated under each pooling and servicing agreement to
service the contracts typically with reasonable care, using that degree of skill
and attention that the servicer generally exercises with respect to all
comparable contracts and related assets that it services for itself or others in
accordance with its credit and collections policy and applicable law. The
servicer may delegate servicing responsibilities to third parties or affiliates,
provided that the servicer will remain obligated to the related owner trust and
the depositor for the proper performance of the servicing responsibilities.
The servicer is obligated to act in a commercially reasonable manner
with respect to the repossession and disposition of equipment following a
contract default with a view to realizing proceeds at least equal to the
equipment's fair market value. The servicer may choose to dispose of equipment
through a new lease or in some other manner which provides for payment for the
equipment over time. In these cases, the servicer will be required to pay from
its own funds an amount which, in its reasonable judgment, is equal to the fair
market value of the equipment, less liquidation expenses, and the servicer will
be entitled to all subsequent payments in respect of the equipment. Any amounts
the servicer pays will constitute additional liquidation proceeds with respect
to the related contract and equipment and will be allocated as described under
"DESCRIPTION OF THE NOTES AND INDENTURE -- LIQUIDATION AND INSURANCE PROCEEDS."
The servicer is, unless otherwise set forth in your prospectus
supplement, responsible for:
o reviewing and certifying that the contract files are
complete;
o monitoring and tracking any property and sales taxes to be
paid by obligors;
o billing, collecting, and recording payments from obligors;
o communicating with and providing billing records to
obligors;
o depositing funds into the collection account;
o receiving payments as the owner trust's agent on the
insurance policies maintained by the obligors and
communicating with insurers;
o issuing reports to the indenture trustee specified in the
indenture and in the pooling and servicing agreement;
o repossessing and remarketing of equipment following obligor
defaults; and
o paying the fees and ordinary expenses of the indenture
trustee and the owner trustee.
The servicer shall be entitled to recover all reasonable out-of-pocket
expenses incurred by it in liquidating a contract and disposing of the related
equipment. The servicer is entitled to retain, from liquidation proceeds, a
reserve for out-of-pocket liquidation expenses in an amount equal to the
expenses, in addition to those previously incurred, as it reasonably estimates
will be incurred. The servicer is permitted to grant payment extensions on a
contract in accordance with its credit and collection policies and procedures if
the servicer believes in good faith that an extension is necessary to avoid a
termination and liquidation of the contract and will maximize the amount to be
received by the owner trust under the contract. The servicer is permitted to
agree to modifications or amendments to a contract in accordance with its credit
and collection policies and procedures.
PREPAYMENTS
The servicer may allow a prepayment of any lease contract, but only if
the amount paid or, in the case of a partial prepayment, the sum of its
prepayment and the remaining contract principal balance, is at least equal to
the required payoff amount of the contract.
EVIDENCE AS TO COMPLIANCE
Annually, the servicer must deliver to the indenture trustee a report
from a nationally recognized accounting firm stating that the accounting firm
has audited the financial statements of the servicer or its parent and issued an
opinion on those financial statements and that the accounting firm has examined
and provided a report as to statements of the servicer concerning the servicer's
controls over the servicing of:
o equipment contracts,
o installment sales contracts,
o promissory notes,
o loan and security agreements and
o other similar types of receivables under servicing
agreements substantially similar one to another.
MATTERS REGARDING THE SERVICER
The servicer may not resign from its obligations under a pooling and
servicing agreement except if its duties are no longer permissible under
applicable law. No resignation will become effective until a successor servicer
has assumed the servicer's obligations and duties under the pooling and
servicing agreement. Removal of the servicer is permissible only upon the
occurrence of an event of termination as discussed below.
The servicer typically must maintain an insurance policy or financial
guarantee bond in customary form covering errors and omissions by the servicer.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Compensation to the servicer will include a monthly fee equal:
o to the product of one-twelfth of a percentage per annum
specified in your prospectus supplement multiplied by the
contract pool principal balance as of the last day of the
second preceding collection period, or
o in the case of the servicing fee with respect to the
collection period commencing on the date of transfer of the
contracts, the contract pool principal balance as of the
cut-off date,
plus any
o late fees,
o late payment interest,
o documentation fees,
o insurance administration charges, other administrative fees
and any extension fees collected with respect to the
contracts during the prior collection period and investment
earnings on collections prior to deposit of these amounts in
the collection account.
The servicer will pay all expenses incurred by it in connection with its
activities under the pooling and servicing agreement and, unless otherwise set
forth in your prospectus supplement, the annual fees and expenses of the owner
trustee as indenture trustee in connection with the notes. The servicer is
authorized to waive any administrative fees or extension fees that may be
collected in the ordinary course of servicing any contract.
EVENTS OF TERMINATION
An event of termination under a pooling and servicing agreement will
occur if:
o the servicer fails to make any required payment or deposit
and the failure continues for five business days after
notice from the indenture trustee or discovery by the
servicer;
o the servicer fails to observe in any material respect any
agreements of the servicer set forth in the pooling and
servicing agreement and the failure (1) materially and
adversely affects the rights of the owner trust, the equity
certificate holder or you, and (2) continues unremedied for
30 days after written notice to the servicer;
o events of bankruptcy or insolvency occur with respect to the
servicer; or
o any representation, warranty or statement of the servicer
made under the pooling and servicing agreement is incorrect
in any material respect, and (1) has a material adverse
effect on the owner trust or holders of the notes, and (2)
continues uncured for 30 days after the acquiring of written
notice.
RIGHTS UPON EVENT OF TERMINATION
If an event of termination remains unremedied, the indenture trustee
may, and at the written direction of the required majority of the noteholders,
which shall be the same as that required for amendment of the pooling and
servicing agreement, See "AMENDMENT" below, shall, terminate all of the rights
and obligations of the servicer under the pooling and servicing agreement. A
successor servicer will succeed to all the responsibilities, duties and
liabilities of the servicer under the pooling and servicing agreement. The
successor servicer will be entitled to similar compensation arrangements, except
that any successor servicer will not be liable for any acts or omissions of the
prior servicer occurring prior to a transfer of the servicer's servicing and
related functions or for any breach by the prior servicer of any of its
obligations. A majority of the noteholders may waive any default by the servicer
under the pooling and servicing agreement and its consequences.
AMENDMENT
The parties may amend any pooling and servicing agreement:
o to cure any ambiguity,
o to correct or supplement any provision in the pooling and
servicing agreement that may be inconsistent with any other
provision, or
o to make any other provisions with respect to matters or
questions arising under the pooling and servicing agreement
but only if the amendment will not adversely affect in any
material respect the interests of the noteholders.
Any pooling and servicing agreement may also be amended in any respect
by the parties with the consent of the required majority of the noteholders
determined as described in the prospectus supplement for your notes, except that
no amendment
o that reduces the amount or changes the timing of any
contract collections on any contracts or payments required
to be distributed on any note,
o that changes the interest rate on any note, that adversely
affects the priority of payment of principal or interest to
noteholders or
o that reduces the noteholder percentage required to consent
to these amendments or any waiver under the pooling and
servicing agreement,
may be effective without the consent of the holder of each note. Also, an
amendment under the foregoing sentence will not be effective unless each rating
agency confirms that the amendment will not result in a reduction, qualification
or withdrawal of the ratings on the notes.
CERTAIN LEGAL MATTERS AFFECTING THE CONTRACTS
To the extent provided in your prospectus supplement, certain of the
contracts are "chattel paper", "general intangibles" and "accounts" as defined
in the Uniform Commercial Code, or the UCC, in effect in the applicable state.
Pursuant to the UCC for most purposes, a sale of chattel paper is treated in a
manner similar to a transaction creating a security interest in chattel paper.
To the extent provided in your prospectus supplement, the depositor will cause
the filing of appropriate UCC-1 financing statements to be made with the
appropriate governmental authorities. The servicer will be obligated from time
to time to take such actions as are necessary to protect and perfect the trust's
interests in such contracts and their proceeds.
THE SECURITY INTEREST IN THE EQUIPMENT
The seller will convey the seller's interest in the equipment to the
depositor. The depositor will convey such security interest in the equipment to
the trust. UCC financing statements will not be filed to perfect any security
interest in the equipment unless otherwise specified in your prospectus
supplement. Moreover, in the event of the repossession and resale of equipment,
it may be subject to a superior lien. In such case, the senior lienholder may be
entitled to be paid the full amount of the indebtedness owed to it out of the
sale proceeds before such proceeds could be applied to the payment of claims of
the servicer on behalf of the trust.
In the event of a default by the lessee, the servicer on behalf of the
trust may take action to enforce such defaulted contract by repossession and
resale of the leased equipment. Under the UCC in most states, a creditor can,
without prior notice to the debtor, repossess assets securing a defaulted
contract by the lessee's voluntary surrender of such assets or by "self-help"
repossession that does not involve a breach of the peace and by judicial
process.
In the event of a default by the lessee, some jurisdictions require
that the lessee be notified of the default and be given a time period within
which it may cure the default prior to repossession. Generally, this right of
reinstatement may be exercised on a limited number of occasions in any one-year
period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the lessee with reasonable
notice of the date, time and place of any public sale and/or the date after
which any private sale of the collateral may be held and that any such sale be
conducted in a commercially reasonable manner. Each pooling and servicing
agreement may require the servicer to sell promptly any repossessed item of
equipment, reacquire such equipment, re-lease such equipment for the benefit of
the noteholders or take such other action as specified in your prospectus
supplement.
Under most state laws, a lessee has the right to redeem collateral for
its obligations prior to actual sale by paying the secured party the unpaid
balance of the obligation plus reasonable expenses for repossession, holding and
preparing the collateral for disposition and arranging for its sale, plus, to
the extent provided for in the written agreement of the parties, reasonable
attorneys' fees.
In addition, because the market value of the equipment of the type
financed pursuant to the contracts generally declines with age and because of
obsolescence, the net disposition proceeds of leased equipment at any time
during the term of the lease may be less than the outstanding balance on the
contract principal balance which it secures. Because of this, and because other
creditors may have rights in the related leased equipment superior to those of
the trust, the servicer may not be able to recover the entire amount due on a
defaulted contract in the event that the servicer elects to repossess and sell
such leased equipment at any time.
Under the UCC and laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a lessee for any deficiency on
repossession and resale of the asset securing the unpaid balance of such
lessee's contract. However, some states impose prohibitions or limitations on
deficiency judgments. In most jurisdictions the courts, in interpreting the UCC,
would impose upon a creditor an obligation to repossess the equipment in a
commercially reasonable manner and to "mitigate damages" in the event of a
lessee's failure to cure a default. The creditor would be required to exercise
reasonable judgment and follow acceptable commercial practice in seizing and
disposing of the equipment and to offset the net proceeds of such disposition
against its claim. In addition, a lessee may successfully invoke an election of
remedies defense to a deficiency claim in the event that the servicer's
repossession and sale of the leased equipment is found to be a retention
discharging the lessee from all further obligations under UCC Section 9-505(2).
If a deficiency judgment were granted, the judgment would be a personal judgment
against the lessee for the shortfall, but a defaulting lessee may have very
little capital or sources of income available following repossession. Therefore,
in many cases, it may not be useful to seek a deficiency judgment or, if one is
obtained, it may be settled at a significant discount.
Certain statutory provisions, including federal and state bankruptcy
and insolvency laws, may also limit the ability of the servicer to repossess and
resell collateral or obtain a deficiency judgment. In the event of the
bankruptcy or reorganization of a lessee, various provisions of the Bankruptcy
Code of 1978 and related laws may interfere with or eliminate the ability of the
servicer or the trustee to enforce its rights under the contracts. If bankruptcy
proceedings were instituted in respect of a lessee, the trustee could be
prevented from continuing to collect payments due from or on behalf of such
lessee or exercising any remedies assigned to such trustee without the approval
of the bankruptcy court, and the bankruptcy court could permit the lessee to use
or dispose of the leased equipment and provide the trustee with a lien on
substitute collateral, so long as such substitute collateral constituted
"adequate protection" as defined under the Bankruptcy Code.
In addition, certain of the contracts may be leased by the seller to
governmental entities. Payment by governmental authorities of amounts due under
such contracts may be contingent upon legislative approval. Accordingly, payment
delays and collection difficulties as described in your prospectus supplement
may limit collections with respect to certain governmental contracts.
These UCC and bankruptcy provisions, in addition to the possible
decrease in value of a repossessed item of equipment, may limit the amount
realized on the sale of the collateral to less than the amount due on the
related contract.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general and brief discussion of the material United
States federal income tax consequences of the purchase, ownership and
disposition of the notes. The discussion that follows constitutes the opinion of
Stroock & Stroock & Lavan LLP, special tax counsel to the sponsor, and is based
upon current provisions of the Internal Revenue Code of 1986, as amended,
existing and proposed Treasury Regulations, current administrative rulings,
judicial decisions and other applicable authorities in effect as of the date of
this prospectus, all of which are subject to change, possibly with retroactive
effect. There are no cases, regulations, or Internal Revenue Service rulings on
comparable transactions or instruments to those described in this prospectus. As
a result, there can be no assurance that the Internal Revenue Service will not
challenge the conclusions reached in this description of Material Federal Income
Tax Consequences, and no ruling from the Internal Revenue Service has been or
will be sought on any of the issues discussed below. Furthermore, legislative,
judicial or administrative changes may occur, perhaps with retroactive effect,
which could affect the accuracy of the statements set forth below.
The following does not attempt to explain fully every relevant
technical aspect of the applicable tax provisions. Additionally, this summary
does not include some of the complex technical rules which would not be
applicable to most investors but may apply to some specific types of investors,
such as dealers in securities. Also, the descriptions of the relevant tax rules
are intended to explain the general application of the rules. BECAUSE THIS
SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES IS INTENDED TO BE GENERAL IN
NATURE, THE SPONSOR SUGGESTS THAT YOU CONSULT WITH YOUR OWN TAX ADVISORS AS TO
THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO YOU OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.
This summary of material federal income tax matters is divided into
two parts. The first part describes the classification of the notes as debt and
the treatment of the trust as a pass-through entity rather than as a corporation
or other entity subject to tax at the entity level. The second part describes
the taxation of an investor in the notes. Under the caption "GENERAL TAX
TREATMENT OF NOTEHOLDERS" is a description of the tax consequences for what is
expected to be the typical investment situation. The description of "GENERAL TAX
TREATMENT OF NOTEHOLDERS" provides a summary of federal income tax consequences
for investors who are citizens or residents of the United States who purchase
U.S. dollar denominated notes for investment at a purchase price equal to the
principal amount of the notes plus accrued interest, if any. There are a variety
of technical tax rules which can be expected to apply only to particular types
of investors or in particular special circumstances. Those rules and the
investors and circumstances to which they apply are separately described under
the caption "SPECIAL TAX RULES." THE SPONSOR SUGGESTS THAT YOU CONSULT A TAX
ADVISOR TO DETERMINE WHETHER ANY OF THE SPECIAL TAX RULES ARE APPLICABLE.
CLASSIFICATION OF THE NOTES AND THE TRUST
Under existing federal income tax law each trust will not be treated
as an association or publicly traded partnership taxable as a corporation and
the notes will be treated as indebtedness. In rendering these opinions Stroock &
Stroock & Lavan LLP has assumed that the terms of the various documents relating
to the issuance of the notes will be complied with by all of the parties to the
transaction. Those terms include a requirement, which each investor agrees to by
virtue of acquiring ownership of any beneficial interest in a note, that the
trust and the investors in the notes treat the notes as indebtedness for federal
income tax purposes. The opinion of Stroock & Stroock & Lavan LLP does not
foreclose the possibility of a contrary determination by the Internal Revenue
Service or by a court or of a contrary position by the Internal Revenue Service
or Treasury Department in regulations or rulings issued in the future.
Although it is the opinion of Stroock & Stroock & Lavan LLP that the
trust will not be treated as an association or publicly traded partnership
taxable as a corporation and the notes will be characterized as indebtedness for
federal income tax purposes, no assurance can be given that this
characterization of the trust or the notes will prevail. If, contrary to the
opinion of Stroock & Stroock & Lavan LLP, the Internal Revenue Service
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. As a result, the trust might be classified as a publicly traded
partnership taxable as a corporation. If the trust were classified as a publicly
traded partnership taxable as a corporation, the trust would be subject to
United States federal income tax on its net income. An imposition of a
corporate-level income tax could materially reduce the amount of cash that would
be available to make payments of principal and interest on the notes.
Alternatively, if the trust were classified as a partnership, other than a
publicly traded partnership taxable as a corporation, the trust itself would not
be subject to United States federal income tax. Instead, holders of notes that
were determined to be equity interests in the partnership would be required to
take into account their allocable share of the trust's income and deductions.
This treatment may have adverse federal income tax consequences for some
noteholders. For example:
(1) income to some tax-exempt entities, including pension funds,
may constitute "UNRELATED BUSINESS TAXABLE INCOME,"
(2) income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements,
(3) individual holders might be subject to certain limitations on
their ability to deduct their share of trust expenses, and
(4) income from the trust's assets would be taxable to
noteholders without regard to whether cash distributions are actually
made by the trust or any particular noteholder's method of tax
accounting.
The discussion that follows assumes that the notes will be treated as
indebtedness for federal income tax purposes.
GENERAL TAX TREATMENT OF NOTEHOLDERS
PAYMENTS OF INTEREST. An investor will be taxed on the amount of
payments of interest on a note as ordinary interest income at the time it
accrues or is received in accordance with the investor's regular method of
accounting for United States federal income tax purposes.
SALE OR OTHER DISPOSITION OF A NOTE. An investor who disposes of a
note, whether by sale, exchange for other property, or payment by the trust,
will recognize taxable gain or loss equal to the difference between the amount
realized on the sale or other disposition, not including any amount attributable
to accrued but unpaid interest, and the investor's adjusted tax basis in the
note. In general, an investor's adjusted tax basis in a note will be equal to
the initial purchase price. Any gain or loss recognized upon the sale or other
disposition of a note will be capital gain or loss. For non-corporate investors,
capital gain recognized on the sale or other disposition of a note held by the
investor for more than one year will be taxed at a maximum rate of 20%. Capital
gain for a note held for one year or less is taxed at the rates applicable to
ordinary income, i.e., up to 39.6%. Taxpayers must aggregate capital gains and
losses for each taxable year. In the event a taxpayer realizes a net capital
loss for any year there are limits on the amount of these capital losses which
can be deducted.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The trust or an agent
acting on its behalf will be required to report annually to the Internal Revenue
Service, and to each non-corporate noteholder, the amount of interest paid on
the notes for each calendar year. Each non-corporate noteholder, other than
noteholders who are not subject to the reporting requirements, will be required
to provide, under penalties of perjury, a certificate, Form W-9, containing the
noteholder's:
o name,
o address,
o correct federal taxpayer identification number, and
o a statement that the noteholder is not subject to backup
withholding.
Should a non-exempt noteholder fail to provide the required certification, the
trust will be required to withhold or cause to be withheld 31% of the interest
otherwise payable to the noteholder and remit the withheld amounts to the
Internal Revenue Service as a credit against the noteholder's federal income tax
liability.
SPECIAL TAX RULES
SPECIAL TYPES OF INVESTORS. The reference to United States citizens or
residents in the description of "GENERAL TAX TREATMENT OF NOTEHOLDERS" set forth
above applies not only to individuals but also to any investor who is:
(1) a corporation or partnership created or organized in or under
the laws of the United States or of any political subdivision of the
United States,
(2) an estate the income of which is subject to United States
federal income taxation regardless of its source, or
(3) a trust if a court within the United States is able to
exercise primary jurisdiction over the administration of the trust and
one or more United States fiduciaries have the authority to control
all substantial decisions of the trust.
Any investor which is not a United States citizen or resident should
review the summary below for investment in notes by foreign persons. Also,
neither the description of "GENERAL TAX TREATMENT OF NOTEHOLDERS" above nor this
discussion of "SPECIAL TAX RULES" describes tax consequences to special classes
of investors, including investors who are:
o dealers in securities or currencies,
o persons holding notes as a part of a hedging transaction,
o certain financial institutions, or
o insurance companies.
Those particular types of investors are subject to specific federal income tax
treatment which is not generally applicable to other investors. This summary of
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" does not describe tax consequences
for those types of investors.
PURCHASE AT A DISCOUNT. An investor who purchases a note as part of
the initial offering by the trust for an issue price that is less than its
"stated redemption price at maturity" will generally be considered to have
purchased the note at an original issue discount for United States federal
income tax purposes. In general, the stated redemption price at maturity for a
note is equal to the principal amount. If a note is acquired with original issue
discount the investor will be required to include in income each year, taxable
as ordinary income in the same manner as cash interest payments, a portion of
the original issue discount. For cash basis investors, such as individuals, the
requirement that original issue discount be accrued as income each year means
the investor recognizes taxable income even though the investor does not receive
cash corresponding to that income. The amount of original issue discount accrued
as income each year is based upon a formula which looks at the constant yield on
the notes and the term to maturity so as to annually allocate a proportionate
share of original issue discount. Under these rules, investors generally will be
required to include in income increasingly greater amounts of original issue
discount in successive accrual periods.
In determining whether a note has original issue discount, the issue
price of the note may not necessarily equal the investor's purchase price,
although they generally should be the same. The issue price of a note will equal
the initial offering price to the public, not including bond houses, brokers or
similar persons or organizations acting in the capacity of underwriters or
wholesalers, at which price a substantial amount of the notes is sold.
If an investor acquires a note in a secondary market transaction for a
purchase price which is less than the principal amount or other amount payable
at maturity of the note, the difference is referred to for tax purposes as
market discount. Similarly to original issue discount, an investor must accrue a
portion of the market discount each year. The amount of market discount which
accrues annually will be calculated on a straight-line basis over the remaining
term to maturity of the note unless the investor elects to accrue market
discount using the constant yield method, i.e., the original issue discount
method. Unlike original issue discount, however, an investor does not include
accrued market discount in ordinary income each year. Rather, the aggregate
amount of accrued market discount is included in income when an investor sells
or otherwise disposes of the note. At that time, the portion of the amount
realized by the investor on the sale or other disposition of the note equal to
accrued market discount is taxed as ordinary income, which has a maximum tax
rate of 39.6%, rather than long term capital gain maximum tax rate of 20%.
If an investor would prefer to be taxed on the annual accrual of
market discount each year rather than being taxed on the aggregate amount of all
accrued market discount when the note is sold or otherwise disposed of, the
investor can file an election to do so. This election would apply to all of the
investor's debt investments acquired in or after the taxable year in which the
notes are acquired and not just to the notes.
Limitations imposed by the federal tax law which are intended to match
deductions with the taxation of income may defer deductions for interest paid by
an investor on indebtedness incurred or continued, or short sale expenses
incurred, to purchase or carry a note with market discount. A noteholder who
elects to include market discount in gross income as it accrues is exempt from
this rule.
Whenever an investor accrues and includes in income an amount of
original issue discount or market discount, the investor's adjusted basis in the
corresponding note is increased by that same amount. As a result, the investor
would recognize a lower capital gain or greater capital loss on the sale or
other disposition of the note.
In general, if the amount of original issue discount or market
discount would be less than 1/4th of one percent of the note's principal or
other stated redemption price at maturity, the investor can disregard the
original issue discount or market discount rules.
PURCHASE AT A PREMIUM. If an investor purchases a note for a price
that exceeds the principal amount or other amount payable at maturity, the
investor will be considered to have an amortizable bond premium. An investor can
elect to accrue a portion of the premium each year as a deduction to offset
interest income on the corresponding note. The amount of premium which can be
amortized and deducted each year is calculated using a constant yield method
over the remaining term to maturity of the note. The deduction is available only
to offset interest income on the corresponding note; it cannot be used as a
deduction to the extent it exceeds taxable note interest. The adjusted tax basis
which an investor has in a note must be reduced by the amount of premium for
which a deduction is claimed. Because the basis is reduced, the investor would
recognize a larger taxable capital gain, or a smaller capital loss, on the sale
or other disposition of the note. If an investor elects to amortize and deduct
premium, the election will apply to all of the investor's debt investments and
not just to the notes.
If an investor purchases in a secondary market transaction a note
which was originally issued with original issue discount for an amount which is
less than the sum of all amounts payable on the note after the purchase date
other than payments of qualified stated interest but in excess of its adjusted
issue price, I.E., the original issue price plus any accrued original issue
discount as those terms are described above, the excess is referred to for tax
purposes as "acquisition premium." The investor would be permitted to reduce the
daily portions of original issue discount the investor would otherwise include
in income by an amount corresponding to the ratio of (1) the excess of the
investor's purchase price for the note over the adjusted issue price of the note
as of the purchase date to (2) the excess of all amounts payable on the note
after the purchase date, other than payments of qualified stated interest, over
the note's adjusted issue price.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. An investor
may elect to include in gross income all interest that accrues on a note using
the constant-yield method described above under the heading "PURCHASE AT A
DISCOUNT" with modifications described below. For purposes of this election,
interest includes:
o qualified stated interest,
o original issue discount,
o DE MINIMIS original issue discount,
o market discount,
o DE MINIMIS market discount, and
o unstated interest,
as adjusted by any amortizable bond premium or acquisition premium.
In applying the constant-yield method to a note with respect to which
this election has been made, the issue price of the note will equal the electing
investor's adjusted basis in the note immediately after its acquisition. The
issue date of the note will be the date of its acquisition by the electing
investor, and no payments on the note will be treated as payments of qualified
stated interest. This election, if made, may not be revoked without the consent
of the Internal Revenue Service. Investors should consult with their own tax
advisors as to the effect in their circumstances of making this election.
FOREIGN INVESTORS. Special tax rules apply to the purchase of notes by
foreign persons. For U.S. tax purposes, foreign investors include any person who
is not
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision of
the United States,
(3) an estate the income of which is includible in gross income
for U.S. federal income tax purposes, regardless of its source, or
(4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and
one or more United States fiduciaries have the authority to control
all substantial decisions of the trust.
Interest paid or accrued to a foreign investor that is not effectively
connected with the conduct of a trade or business within the United States by
the investor will generally be considered 'portfolio interest' and generally
will not be subject to United States federal income tax or withholding tax as
long as the foreign investor is not actually or constructively a 10 percent
shareholder of the trust or a controlled foreign corporation related to the
trust through stock ownership. Additionally, the foreign investor must provide
or have a financial institution provide on its behalf to the trust or paying
agent an appropriate statement Form W-8, that is signed under penalties of
perjury, certifying that the beneficial owner of the note is a foreign person
and providing that foreign person's name and address. If the information
provided in this statement changes, the foreign investor must provide a new Form
W-8 within 30 days. The Form W-8 is generally effective for three years. If the
foreign investor fails to satisfy these requirements so that interest on the
investor's Notes was not portfolio interest, interest payments would be subject
to United States federal income and withholding tax at a rate of 30% unless
reduced or eliminated under an applicable income tax treaty. To qualify for any
reduction as the result of an income tax treaty, the foreign investor must
provide the paying agent with Form 1001. This form is also effective for three
years.
The realization of any capital gain on the sale or other taxable
disposition of a note by a foreign investor will be exempt from United States
federal income and withholding tax, provided that
(1) the gain is not effectively connected with the conduct of a
trade or business in the United States by the investor and
(2) in the case of an individual foreign investor, the investor
is not present in the United States for 183 days or more during the
taxable year. If an individual foreign investor is present in the U.S.
for 183 days or more during the taxable year, the gain on the sale or
other disposition of the Notes could be subject to a 30% withholding
tax unless reduced by treaty.
If the interest, gain or income on a note held by a foreign investor is
effectively connected with the conduct of a trade or business in the United
States by the investor, the noteholder will be subject to United States federal
income tax on the interest, gain or income at regular federal income tax rates.
At the same time, the noteholder may be exempt from withholding tax if a Form
4224 is furnished to the paying agent. Form 4224 is effective for only one
calendar year. In addition, if the foreign investor is a foreign corporation, it
may be subject to a branch profits tax equal to 30% of its "EFFECTIVELY
CONNECTED EARNINGS AND PROFITS" for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty.
Regardless of when a foreign investor acquired a note, Treasury
Regulations which will become effective for note payments made after December
31, 2000 may change reporting requirements for certain withholding agents.
If a foreign investor fails to provide necessary documentation to the
trust or its paying agent regarding the investor's taxpayer identification
number or certification of exempt status, a 31% backup withholding tax may be
applied to note payments to that investor. Any amounts withheld under the backup
withholding rules will be allowed as a refund or a credit against the foreign
investor's U.S. federal income tax liability provided the required information
is furnished to the Internal Revenue Service.
STATE AND LOCAL TAX CONSEQUENCES
Because of the differences in state and local tax laws and their
applicability to different investors, it is not possible to summarize the
potential state and local tax consequences of purchasing, holding or disposing
of the notes and no opinions of counsel have been obtained regarding state tax
matters. ACCORDINGLY, THE SPONSOR RECOMMENDS THAT YOU CONSULT YOUR OWN TAX
ADVISORS REGARDING THE STATE AND LOCAL TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF NOTES.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended,
imposes specific requirements on employee benefit plans subject to ERISA and
prohibits some transactions between ERISA-regulated plans and persons who are
"PARTIES IN INTEREST," as defined under ERISA, with respect to assets of these
plans. Section 4975 of the Internal Revenue Code prohibits a similar set of
transactions between specified plans or individual retirement accounts and
persons who are "DISQUALIFIED PERSONS," as defined in the Internal Revenue Code,
with respect to Internal Revenue Code-regulated plans. Some employee benefit
plans, such as governmental plans and church plans, if no election has been made
under Section 410(d) of the Internal Revenue Code, are not subject to the
requirements of ERISA or Section 4975 of the Internal Revenue Code and assets of
the plans may be invested in the notes, subject to the provisions of other
applicable federal and state law, including Section 503 of the Internal Revenue
Code.
Investments by ERISA-regulated plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that investments comply with the terms of
the documents governing the ERISA-regulated plan. Before investing in the notes,
an ERISA- regulated plan fiduciary should consider, among other factors, whether
to do so is appropriate in view of the overall investment policy and liquidity
needs of the ERISA plan.
PROHIBITED TRANSACTIONS
In addition, Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit parties in interest and disqualified persons with respect
to plans subject to those sections from engaging in some transactions involving
the plans or plan assets of the plans, unless a statutory or administrative
exemption applies to the transaction. Section 4975 of the Internal Revenue Code
of 1986, as amended and Sections 502(i) and 502(1) of ERISA provide for the
imposition of excise taxes and civil penalties on persons that engage or
participate in prohibited transactions. The
o originators,
o sponsor,
o depositor,
o underwriters,
o servicer,
o indenture trustee or
o owner trustee,
or their affiliates may be considered or may become parties in interest or
disqualified persons with respect to a plan. If so, the acquisition or holding
of the notes by, on behalf of or with plan assets of the plan may be considered
to give rise to a prohibited transaction within the meaning of ERISA and/or
Section 4975 of the Internal Revenue Code, unless an administrative exemption
described below or some other exemption is available.
The notes may not be purchased with the assets of a plan if the
originators, sponsor, the depositor, the underwriters, the servicer, the
indenture trustee, or the owner trustee or any of their affiliates either;
(a) has discretionary authority or control with respect to the
investment or management of the assets: or
(b) has authority or responsibility to give, or regularly gives,
investment advice with respect to the assets under an
agreement or understanding that the advice will serve as a
primary basis for investment decisions with respect to the
assets and that the advice will be based on the particular
needs of the plan; or
(c) is an employer of employees covered under the plan unless
the investment is made through an insurance company general
or pooled separate account or a bank collective investment
fund and an exemption is available.
Depending on the relevant facts and circumstances, some prohibited
transaction exemptions may apply to the purchase or holding of the notes -- for
example,
o Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts transactions effected on behalf of a plan by an
in-house asset manager;
o PTCE 95-60, which exempts transactions between bank
collective investment funds and parties in interest;
o PTCE 91-38, which exempts transactions between bank
collective investment funds and parties in interest;
o PTCE 90-1, which exempts transactions between insurance
company pooled separate accounts and parties in interest; or
o PTCE 84-14, which exempts transactions effected on behalf of
a plan by a qualified professional asset manager.
There can be no assurance that any of these exemptions will apply with respect
to any plan's investment in the notes or, even if an exemption were deemed to
apply, that any exemption would apply to all prohibited transactions that may
occur in connection with that investment.
Due to the complexity of these rules and the penalties imposed, any
fiduciary or other plan investor who proposes to invest assets of a plan in the
notes should consult with its counsel with respect to the potential consequences
under ERISA and Section 4975 of the Internal Revenue Code of doing so.
RATINGS OF THE NOTES
The owner trust will not sell notes of a series unless one or more
nationally recognized rating agencies rate the notes of that series in a rating
category that signifies investment grade. Any rating that is made may be lowered
or withdrawn by the assigning rating agency at any time if, in its judgment,
circumstances so warrant. If a rating or ratings of notes is qualified, reduced
or withdrawn, no person or entity will be obligated to provide any additional
credit enhancement with respect to the notes so qualified, reduced or withdrawn.
The rating of the notes should be evaluated independently from similar
ratings on other types of securities. A rating is not a recommendation to buy,
sell or hold notes, inasmuch as a rating does not comment as to market price or
suitability for a particular investor. The ratings of the notes do not address
the likelihood of payment of principal on any class of notes prior to the stated
maturity date of the notes, or the possibility of the imposition of United
States withholding tax with respect to non-United States persons.
USE OF PROCEEDS
The proceeds from the sale of the notes of each series, after funding a
portion of the cash collateral account or other form of credit enhancement for
the series and paying the expenses of the sponsor, will be used to pay the
purchase price due to the depositor.
PLAN OF DISTRIBUTION
The sponsor or the owner trust may sell notes to or through
underwriters at the prices set forth in your prospectus supplement or in
negotiated transactions at varying prices, and also may sell notes directly to
other purchasers or through agents. The sponsor intends to offer the notes
through these various methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of a
particular series of notes may be made through a combination of these methods.
The underwriters will be obligated to purchase all of the notes
described in your prospectus supplement if any such notes are purchased. The
place and time of delivery for your notes will be set forth in your prospectus
supplement.
The sponsor, the originators, the depositor and certain of its
affiliates may agree to indemnify the underwriters and agents who participate in
the distribution of the notes against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or contribute to payments the
underwritten may be required to make.
Funds in cash collateral accounts and the trust accounts may, from time
to time, be invested in certain investments acquired from the underwriters.
If and to the extent required by applicable law or regulation, this
prospectus and your prospectus supplement will also be used by the underwriters
after the completion of the offering for market-making transactions in the
notes. Sales will be made at negotiated prices determined at the time of sales.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the notes in which the underwriter acts as
principal. The underwriter may also act as agent in these transactions. Sales
will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP or other counsel specified in your
prospectus supplement, will provide a legal opinion relating to the notes in its
capacity as special counsel to the sponsor and the underwriters. Other legal
matters for underwriters will be passed upon by counsel to underwriters.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with
the Securities and Exchange Commission, including annual, quarterly and special
reports, proxy statements and other information. You can read and copy these
documents at the public reference facility maintained by the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. You can also read and copy the reports, proxy statements
and other information at the following regional offices of the Securities and
Exchange Commission:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, IL 60661
Please call the Securities and Exchange Commission at 1-800-SEC-0330
for more information about the public reference rooms or visit the Securities
and Exchange Commission's web site at http://www.sec.gov to access available
filings.
The Securities and Exchange Commission allows offerors of securities
to incorporate by reference some of the information they file with it. This
means that offerors can disclose important information to you by referring you
to those documents. The information that the sponsor incorporates by reference
is considered to be part of this prospectus, and later information that the
sponsor files with the Securities and Exchange Commission will automatically
update and supersede this information.
All documents filed by the servicer, on behalf of a respective owner
trust, under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, after the date of this prospectus and prior to the termination of the
offering of the notes will be incorporated by reference into this prospectus.
If you are a beneficial owner of the notes to whom a prospectus has
been delivered, the sponsor will, on request, send you a copy of the information
that has been incorporated by reference in this prospectus. The sponsor will
provide this information at no cost to you. Please address requests to: ACE
Securities Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina
28211, Telephone No. (704) 365-0569.
<PAGE>
INDEX OF TERMS
Collection Account.............................................35
Distribution Account...........................................35
DTC............................................................36
ERISA..........................................................64
excluded residual investment...................................24
guaranteed residual investment.................................24
Material modification..........................................32
PTCE...........................................................65
Qualified institution..........................................35
true lease......................................................9
Trust Account..................................................35
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS SUPPLEMENT (to prospectus date [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
STUDENT LOAN TRUST [ ]-[ ]
FLOATING RATE ASSET-BACKED SENIOR NOTES
[ ]
SELLER
The trust will issue the following notes:
-------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The notes will represent interests in the trust fund only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS
ORIGINAL INSURANCE TO THE
PRINCIPAL RATE MATURITY PRICE TO UNDERWRITING DEPOSITOR
AMOUNT (PER ANNUM) DATE(1) PUBLIC DISCOUNT (2)
<S> <C> <C> <C> <C> <C> <C>
Per $[ ] Three-Month [ ] [ ]% [ ]% [ ]%
Class LIBOR
A-1 Note plus
----%
annually,
subject
to an
interest
rate cap
Per $[ ] Three-Month [ ] [ ]% [ ]% [ ]%
Class LIBOR
A-2 Note plus
----%
annually,
subject
to an
interest
rate cap
Total $[ ] $[ ] $[ ] $[ ] $[ ] $[ ]
(1) The quarterly payment date of [ ] and [ ], as applicable.
(2) Plus accrued interest, if any, from the date of initial issuance.
</TABLE>
The sources for payment of the senior notes are a pool of education loans
originated under the Federal Family Education Loan Program to students and
parents of students, substantially all of which are guaranteed by [ ] , held by
the trust, cash, held by the trust and an interest rate swap.
The senior notes will be delivered in book-entry form only through The
Depository Trust Company, Clearstream, Luxembourg, societe anonyme and the
Euroclear System on or about [ ] against payment in immediately available funds.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
--------------------------------
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the notes and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
--------------------------------
We include cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials where you can find further related
discussions. The following table of contents and the table of contents included
in the accompanying prospectus provide the pages on which these captions are
located.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary of terms.....................................
Risk Factors.........................................
Formation of the Trust...............................
The Seller and the Servicer..........................
The Financed Student Loan Pool.......................
Description of the Notes.............................
Description of the Transfer and Servicing Agreements.
Federal Family Education Loan Program................
Certain Federal Income Tax and State Tax Consequences
ERISA Considerations.................................
Underwriting.........................................
Legal Matters........................................
Reports to Securityholders...........................
Forward Looking Statements...........................
Annex I..............................................
Index of Principal Terms.............................
Exhibit A...........................................
PROSPECTUS
Risk Factors.........................................
Formation of the Trusts..............................
The Depositor........................................
Use of Proceeds......................................
the Seller and the Servicer..........................
The Student Loan Pools...............................
The Student Loan Financing Business..................
Weighted Average Life of the Securities..............
Pool Factors and Trading Information.................
Description of the Notes.............................
Description of the Certificates......................
Certain Information Regarding the
Securities......................................
Description of the Transfer and
Servicing Agreements............................
Certain Legal Aspects of the Student
Loans...........................................
Certain Federal Income Tax
Consequences....................................
Certain State Tax Consequences.......................
ERISA Considerations.................................
Plan of Distribution.................................
Legal Matters........................................
Available Information................................
Incorporation of Certain Documents by
Reference.......................................
Index of Principal Terms.............................
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
PRINCIPAL PARTIES
THE TRUST
o ACE Securities Corp. Student Loan Trust [ ]-[ ]
THE DEPOSITOR
o ACE Securities Corp.
THE SELLER AND ADMINISTRATOR
o [ ]
THE SERVICER
o [ ]
THE ELIGIBLE LENDER TRUSTEE
o [ ]
THE INDENTURE TRUSTEE
o [ ]
THE SWAP COUNTERPARTY
o [ ]
DATES
QUARTERLY PAYMENT DATES
Payments on the senior notes will be made to you on the 28th day of each
January, April, July and October. If the 28th is not a business day, payments
will be made to you on the next business day. The first quarterly payment date
is [ ].
CUTOFF DATE
[ ]. The trust will receive payments made on the related student loans on and
after this date.
CLOSING DATE
On or about [ ].
DESCRIPTION OF THE SECURITIES
The Trust is offering the following student loan floating rate asset-backed
senior notes pursuant to this prospectus:
o Class A-1 Notes in the aggregate principal amount of $[ ]; and
o Class A-2 Notes in the aggregate principal amount of $[ ].
The trust is also issuing $[ ] aggregate principal amount of floating rate
asset-backed subordinate notes. The trust is not offering the subordinate notes
pursuant to this prospectus.
The trust will issue the senior notes in book-entry form in minimum
denominations of $1,000 and in multiples of $1,000 in excess of $1,000.
You may hold your senior notes through The Depository Trust Company,
Clearstream, Luxembourg or the Euroclear System.
INTEREST PAYMENTS
The note rate for each class of senior notes is specified on the cover page of
this prospectus supplement. The interest rate on a class of senior notes is
subject to an interest rate cap. Interest with respect to the senior notes will
be calculated on the basis of the actual number of days elapsed in the related
quarterly interest period and a 360-day year.
The first step in computing the interest rate cap for any quarterly interest
period is to determine the percent equivalent of (1) the sum of expected
interest collections and any net trust swap receipt less any net trust swap
payment, the administration fee and the servicing fee divided by (2) the
aggregate principal amount of the notes as of the last day of this quarterly
interest period. The servicer determines the interest rate cap by multiplying
the percent obtained in the preceding sentence by 365 (or 366 in the case of a
leap year) and then dividing it by the number of days in the related quarterly
interest period.
Expected interest collections equal the sum of:
o the amount of interest accrued on the student loans, net of any
monthly rebate fees and other amounts required to be remitted to the
Department of Education;
o all interest subsidy payments and special allowance payments accrued;
and
o specified investment earnings.
Since your senior notes are subject to an interest rate cap, you may not receive
interest on your senior notes at the applicable note rate. The difference
between interest payable at the note rate and interest actually paid to you on a
quarterly payment date may be paid to you on a future quarterly payment date.
The ratings of the notes do not address the likelihood of the payment to you of
any these amounts.
PRINCIPAL PAYMENTS
No principal will be paid to you prior to the end of the revolving period. The
revolving period will begin on the date the senior notes are issued and will end
[ ] (or earlier as described in this prospectus supplement). Following the end
of the revolving period, principal will be paid on the senior notes on each
quarterly payment date in an amount generally equal to the principal collections
with respect to the related student loans for the preceding quarterly period
until the senior notes have been paid in full.
Principal payments on the senior notes generally will be made to the holders of
the senior notes sequentially. No principal will be paid on the Class A-2 Notes
until the Class A-1 Notes have been paid in full. No principal will be paid on
the subordinate notes until the senior notes have been paid in full.
An exception to this rule is that following a default under the indenture and
the acceleration of the notes, principal will be paid first on a pro rata basis,
to each class of senior notes until they have been paid in full, and second, to
the subordinate notes until they have been paid in full.
PRIORITY OF PAYMENTS
On each quarterly payment date, the indenture trustee will make the following
distributions to the extent of available funds:
o to the servicer and administrator, specified fees;
o pro rata, to the senior noteholders, interest and to the swap
counterparty, any net swap payment;
o to the subordinate noteholders, interest;
o following the termination of the revolving period to the senior
noteholders, principal; and
o to the reserve account, remaining funds.
Any shortfalls in funds available to make interest and principal distributions
required to be made on the notes on a quarterly payment date may be paid on
future quarterly payment dates.
FINAL MATURITY DATES
To the extent not previously paid prior to these dates, the unpaid principal
amount of each class of senior notes will be payable in full on the final
maturity date listed on the cover page of this prospectus supplement.
AUCTION SALE
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the [ ] quarterly payment date will be offered for sale.
The proceeds of any sale will be used to redeem your senior notes. The auction
price must at least equal the unpaid principal amount of the notes, plus accrued
and unpaid interest thereon.
OPTIONAL REDEMPTION
Any notes that remain outstanding on any quarterly payment date on which [ ], or
an assignee of [ ], exercises its option to purchase all of the assets of the
trust will be prepaid in whole at the applicable redemption price on this
quarterly payment date. The redemption price for any class of notes will equal
the unpaid principal amount of that class, plus accrued and unpaid interest
thereon. The redemption price may not include payment of all interest that you
did not receive as a result of the interest rate cap. Neither [ ] nor its
assignee may exercise this option until the unpaid principal amount of the
senior notes and the subordinate notes is less than or equal to 20% of the
initial unpaid principal amount of the senior notes plus the subordinate notes.
TRUST PROPERTY
The primary property of the trust will include:
o the student loans;
o all amounts collected on the student loans on or after the cutoff
date; (net of interest accrued prior to the cutoff date);
o amounts on deposit in the accounts of the trust; and
o the interest rate swap.
THE INITIAL FINANCED STUDENT LOANS
The student loans consist of specified guaranteed education loans to students
and parents of students made under the Federal Family Education Loan Program.
All of the student loans are reinsured by the Department of Education. The
student loans to be transferred by [ ] to the trust on the closing date have the
following characteristics as of [ ]:
o Aggregate principal amount: $[ ]
o Weighted average original term: [ ] mths
o Weighted average remaining term: [ ] mths
o Stafford Loans (%): [ ]%
o Federal Consolidation Loans (%): [ ]%
o PLUS Loans (%): [ ]%
o SLS Loans (%): [ ]%
o Percent guaranteed by [ ]: [ ]%
ADDITIONAL STUDENT LOANS; REVOLVING PERIOD
From time to time after the closing date and before the earlier of the
occurrence of an early amortization event and [ ], the trust will acquire
additional student loans. The trust will purchase additional student loans from
collections received on the student loans owned by the trust that are not used
to cover specified fees and expenses of the trust, distributions on the notes,
deposits to the reserve account and payments due to the swap counterparty.
ADDITIONAL STUDENT LOANS; SERIAL LOANS
Following the earlier of the occurrence of an early amortization event and [ ],
the trust may acquire additional student loans relating to borrowers with
student loans already owned by the trust. The trust will purchase additional
student loans from collections received on the student loans owned by the trust
that are not used to cover specified fees and expenses of the trust,
distributions on the notes, deposits to the reserve account and payments due to
the swap counterparty.
THE COLLECTION ACCOUNT
On the closing date, the depositor will make an initial deposit of $[ ] into the
collection account.
CREDIT ENHANCEMENT
The credit enhancement for the senior notes will consist primarily of the
following:
o reserve account; and
o subordination of the subordinate notes.
THE RESERVE ACCOUNT
The depositor will establish a reserve account with the indenture trustee. Funds
on deposit in the reserve account on each quarterly payment date will be
available to cover shortfalls in distributions of interest and principal on the
senior notes to the extent described in this prospectus supplement. The reserve
account will be funded as follows:
o On the closing date, the depositor will make an initial deposit of $[
] into the reserve account.
o On each quarterly payment date, any available funds remaining after
making all prior distributions required to be made, will be deposited
into the reserve account.
Amounts in the reserve account on any quarterly payment date (after giving
effect to all distributions to be made on this date) in excess of the specified
reserve account balance will be released to [ ] or an affiliate. The specified
reserve account balance for any quarterly payment date will be the greater of
(1) [ ]% of the outstanding principal balance of the notes and (2) $[ ].
SUBORDINATION OF THE SUBORDINATE NOTES
The subordination of the subordinate notes to the senior notes as described in
this prospectus supplement will provide additional credit enhancement for the
senior notes. Any losses on the student loans not covered by other forms of
credit enhancement will be allocated to the subordinate notes before being
allocated to the senior notes.
INTEREST RATE SWAP
The trust and the swap counterparty have entered into an interest rate swap.
Unless terminated earlier, the interest rate swap will terminate on the [ ]
quarterly payment date. The trust will owe the swap counterparty a net swap
payment when (1) the weighted average discount rate per annum for direct
obligations of the United States with a maturity of 13 weeks plus a specified
percentage is greater than (2) the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months. The swap counterparty will owe
the trust a net swap receipt when the calculation described in the immediately
preceding sentence is negative.
The amount of a net swap payment or a net swap receipt is the product of the
difference in the rates described in clause (1) and clause (2) above and the
interest rate swap's scheduled notional amount.
The scheduled notional amount for any quarterly payment date will be the lesser
of (1) the outstanding principal balance of the notes and (2) the amounts set
forth in Exhibit A to this prospectus supplement. The depositor expects the
scheduled notional amount for any quarterly payment date to initially equal
approximately [ ]% of the then outstanding principal balance of the senior notes
and the subordinate notes. However, following the closing date, the depositor
may agree with the swap counterparty to cause the scheduled notional amount to
equal the outstanding principal balance of the notes.
While the interest rate swap is in effect, it will reduce, but not eliminate,
the risk that a note rate will be determined by the interest rate cap.
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal income tax counsel to the
depositor, is of the opinion that (1) the trust will not be treated as an
association or a publicly traded partnership taxable as a corporation and (2)
the senior notes will be characterized as indebtedness for federal income tax
purposes. Each noteholder, by accepting a senior note, will agree to treat the
senior notes as indebtedness.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations," the senior
notes are eligible for purchase by employee benefit plans.
RATINGS
At least two nationally recognized rating agencies must each rate the senior
notes in the highest long-term rating category.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION,W HICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE NOTES.
YOU MAY HAVE DIFFICULTY SELLING
YOUR NOTES.......................... The senior notes will not be listed on
any securities exchange. As a result, if
you want to sell your senior notes you
must locate a purchaser that is willing
to purchase those notes. The
underwriters intend to make a secondary
market for the senior notes. The
underwriters will do so by offering to
buy the senior notes from investors that
wish to sell. However, the underwriters
will not be obligated to make offers to
buy the senior notes and may stop making
offers at any time. In addition, the
prices offered, if any, may not reflect
prices that other potential purchasers
would be willing to pay, were they to be
given the opportunity. There have been
times in the past where there have been
very few buyers of asset backed
securities (i.e., there has been a lack
of liquidity), and there may be these
times in the future. As a result, you
may not be able to sell your senior
notes when you want to do so or you may
not be able to obtain the price that you
wish to receive.
THE TRUST HAS LIMITED ASSETS TO
MAKE PAYMENTS ON
YOUR NOTES.......................... The trust does not have, nor is it
permitted or expected to have, any
significant assets or sources of funds
other than the student loans (and the
related guarantee agreements), the
reserve account and the interest rate
swap. The notes represent obligations
solely of the trust and will not be
insured or guaranteed by any entity.
Consequently, you must rely for
repayment upon payments with respect to
the student loans and amounts on deposit
in the reserve account. Monies to be
deposited in the reserve account are
limited in amount and will be reduced,
subject to a specified minimum, as the
aggregate principal amount of the notes
is reduced. If the reserve account is
exhausted, the trust will depend solely
on payments with respect to the student
loans to make payments on the notes and
you could suffer a loss. You will have
no claim to any amounts properly
distributed to the depositor, the
seller, [ ] or the servicer from time to
time. Neither Deutsche Banc Alex. Brown
nor any of its affiliates has
guaranteed, will guarantee or is or will
be otherwise obligated with respect to
any notes.
YOU MAY EXPERIENCE LOSSES ON YOUR
INVESTMENT RESULTING FROM
PRINCIPAL BALANCE OF NOTES
EXCEEDING POOL BALANCE.............. As of the closing date, the aggregate
principal amount of the senior notes and
subordinate notes will be equal to
approximately [ ]% of the sum of the
outstanding principal balance of the
student loans as of the cutoff date and
the amount deposited by the depositor in
the reserve account and the collection
account on the closing date. During the
revolving period, any collections on the
student loans that are not used to cover
specified fees and expenses of the
trust, distributions on the notes,
deposits to the reserve account or
payments to the swap counterparty will
be deposited in the collateral
reinvestment account. The trust will
apply amounts in the collateral
reinvestment account to increase the
outstanding principal balance of the
student loans. If the outstanding
principal balance of the student loans
at the end of the revolving period does
not equal the aggregate principal amount
of the senior notes and subordinate
notes, amounts in the collateral
reinvestment account will be used to pay
principal on the notes.
You may experience losses to the extent
that excess interest collections are
insufficient to cause the outstanding
principal balance of the student loans
to equal the aggregate principal amount
of the senior notes and subordinate
notes. The occurrence of any of the
following will increase the likelihood
of an insufficiency:
o A high rate of prepayments;
o An increase in the weighted average
discount rate per annum for direct
obligations of the United States
with a maturity of 13 weeks; or
o An increase in the London interbank
offered rate for deposits in U.S.
dollars having a maturity of three
months.
RISK OF CHANGE IN CHARACTERISTICS
OF THE STUDENT LOANS ............... Following the transfer of additional
student loans to the trust after the
closing date, the characteristics of the
student loans may differ significantly
from the information presented in this
prospectus supplement. The
characteristics that may differ include
the composition of the student loans and
of the borrowers of the student loans,
the related guarantors (which may
include additional guarantors whose
ability to fulfill their insurance
obligations may vary from that of the
initial guarantor), the distribution by
loan type, the distribution by interest
rate, the distribution by principal
balance and the distribution by
remaining term to scheduled maturity.
You should consider potential variances
when making your investment decision
concerning the senior notes.
THE RETURN ON YOUR INVESTMENT
WILL CHANGE OVER TIME............... Your pre-tax return on your investment
will change from time to time for a
number of reasons including the
following:
o THE RATE OF RETURN OF PRINCIPAL IS
UNCERTAIN. The amount of
distributions of principal on the
senior notes and the time when you
receive those distributions depends
on the amount and the times at
which borrowers make principal
payments on the student loans.
Those principal payments may be
regularly scheduled payments or
unscheduled payments resulting from
prepayments, defaults or
consolidations of the student
loans. In addition, if the trust is
not able to purchase sufficient
additional student loan principal
balances during the revolving
period, the noteholders will
receive a principal prepayment
immediately following the end of
the revolving period.
o The revolving period may terminate
earlier than [ ] if
o the student loans fail
specified performance tests,
o the amount of excess interest
for two successive quarterly
payment dates is below a
specified level,
o an event of default occurs
under the indenture or other
transaction documents or
o specified other events occur.
o YOU BEAR REINVESTMENT RISK. Asset
backed securities, like the senior
notes, usually produce more returns
of principal to investors when
market interest rates fall below
the interest rates on the student
loans and produce less returns of
principal when market interest
rates are above the interest rates
on the student loans. As a result,
you are likely to receive more
money to reinvest at a time when
other investments generally are
producing a lower yield than that
on the notes, and are likely to
receive less money to reinvest when
other investments generally are
producing a higher yield than that
on the notes. You will bear the
risk that the timing and amount of
distributions on your senior notes
will prevent you from attaining
your desired yield.
o AN EARLY TERMINATION MAY AFFECT THE
YIELD. Your investment in the
senior notes may end before you
desire if (1) the indenture trustee
successfully conducts an auction
sale or (2) [ ] exercises its
option to purchase all of the
assets of the trust. You will bear
reinvestment risk following an
early termination.
CHANGES IN LEGISLATION MAY
ADVERSELY AFFECT STUDENT LOANS
AND FEDERAL GUARANTORS.............. The Higher Education Act or other
relevant federal or state laws, rules
and regulations may be amended or
modified in the future in a manner that
will adversely affect the federal
student loan programs described in this
prospectus supplement and the
prospectus, the student loans made
thereunder or the financial condition of
the federal guarantors.
In addition, if the direct student loan
program expands, the servicers may
experience increased costs due to
reduced economies of scale or other
adverse effects on their business to the
extent the volume of loans serviced by
the servicers is reduced. These cost
increases could reduce the ability of
the servicers to satisfy their
obligations to service the student loans
or to purchase student loans in the
event of specified breaches of its
covenants.
RISKS ASSOCIATED WITH SEQUENTIAL
PAYMENT OF PRINCIPAL ON THE
NOTES .............................. Since the Class A-2 Notes will generally
not be paid any principal distributions
until the principal balance of the Class
A-1 Notes has been reduced to zero, the
Class A-1 noteholders would be most
affected by a high rate of principal
prepayment or an early termination of
the revolving period. In addition, as a
result of this sequential payment of
principal, it is likely that at any time
the Class A-2 Notes will have a greater
percent of their initial principal
balance outstanding than the Class A-1
Notes at any time. Consequently, the
Class A-2 Notes will be allocated more
losses than the Class A-1 Notes
following a default under the indenture
as a relative percentage of their
respective initial principal balances.
BASIS RISK............................ You may not be paid interest at the
related note rate as a result of an
interest rate cap. Any interest not paid
as a result of the interest rate cap may
subsequently be paid to you on a
subordinated basis. The interest rate
cap may be triggered as a result of:
o The student loans generally bear
interest based on the rate per
annum for direct obligations of the
United States with a maturity of 13
weeks while the note rate for each
class of senior notes is based on
the London interbank offered rate
for deposits in U.S. dollars having
a maturity of three months.
o The principal balance of the
student loans will initially be
less than the aggregate principal
amount of the senior notes and the
subordinate notes. Consequently,
the aggregate principal balances of
the student loans on which interest
will be collected will be less than
the principal amount of the senior
notes and the subordinate notes.
o The interest rate cap will be
reduced as a result of the trust's
obligation to pay specified fees to
the Department of Education.
If the note rate is limited by the
interest rate cap, the market value and
liquidity of your senior notes may
decline.
BORROWER DEFAULT RISK ON CERTAIN
FEDERAL LOANS....................... The student loans are generally 98%
insured by a federal guarantor. As a
result, to the extent a borrower of a
student loan defaults, the trust will
experience a loss of generally 2% of the
outstanding principal and accrued
interest on each student loan. The trust
will assign a defaulted student loan to
the applicable federal guarantor in
exchange for a guarantee payment on the
98% guaranteed portion. The trust may
not have any right to pursue the
borrower for the remaining 2%
unguaranteed portion. If the credit
enhancement described in this prospectus
supplement is not sufficient, you may
suffer a loss.
RISK OF DEPENDENCE ON GUARANTORS
AS SECURITY FOR STUDENT LOANS....... All of the student loans are unsecured.
As a result, the only security for
payment of the student loans are the
guarantees provided under the guarantee
agreements between the eligible lender
trustee and the guarantors.
Substantially all of the student loans
which will be conveyed to the trust on
the date of issuance of the notes are
guaranteed by [ ] The financial
condition of a guarantor may be
adversely affected by a number of
factors including:
o the amount of claims made against
the guarantor as result of borrower
defaults;
o the amount of claims reimbursed to
the guarantor from the Department
of Education (which range from 75%
to 100% depending on the date the
student loan was made and the
performance of the guarantor); and
o changes in legislation that may
reduce expenditures from the
Department of Education that
support federal guarantors or that
may require federal guarantors to
pay more of their reserves to the
Department of Education.
If the financial status of the
guarantors, and particularly [ ],
deteriorates, the guarantors may fail to
make guarantee payments to the eligible
lender trustee. In this event, you may
suffer delays in the payment of
principal and interest on your senior
notes.
RISK OF LOSS OF GUARANTOR AND
DEPARTMENT OF EDUCATION
PAYMENTS FOR FAILURE TO COMPLY
WITH LOAN ORIGINATION AND
SERVICING PROCEDURES................ The Higher Education Act requires
lenders and their assignees making and
servicing student loans that are
reinsured by the Department of Education
and guarantors guaranteeing federal
loans to follow specified procedures, to
ensure that the federal loans are
properly made and repaid. If the
servicer fails to follow these
procedures or if the originator of the
loan failed to follow procedures
relating to the origination of any
loans, the Department of Education may
refuse to make reinsurance payments to
the guarantors or to make interest
subsidy payments and special allowance
payments to the eligible lender trustee.
In addition, under these circumstances
the guarantors may refuse to make
guarantee payments to the trust. The
failure of the Department of Education
to provide reinsurance payments to the
guarantors could adversely affect the
guarantors' ability or legal obligation
to make payments under the guarantee
agreements. Loss of any these guarantee
payments, interest subsidy payments or
special allowance payments could
adversely affect the trust's ability to
pay you timely interest and principal.
In this event, you may suffer a loss on
your investment.
RISK ASSOCIATED WITH THE INTEREST
RATE SWAP........................... The depositor expects the scheduled
notional amount of the interest rate
swap for each quarterly payment date to
be less than the outstanding principal
balance of the notes. As a result, the
interest rate swap would not give you
full protection against a gap between
(1) the rate per annum for direct
obligations of the United States with a
maturity of 13 weeks and (2) the London
interbank offered rate for deposits in
U.S. dollars having a maturity of three
months. However, following the closing
date, the depositor may agree with the
swap counterparty to cause the scheduled
notional amount to equal the outstanding
principal balance of the notes.
In addition, the interest rate swap will
terminate prior to the final maturity
date for each class of the notes. If the
interest rate swap is terminated early,
the trust or the swap counterparty may
be liable to pay to the other a
termination payment. Any termination
payment payable by the trust could be
substantial and could reduce amounts
otherwise payable to noteholders,
thereby resulting in shortfalls to you.
THE NOTES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS....... The senior notes are not a suitable
investment if you require a regular or
predictable schedule of payments or
payment on any specific date. The senior
notes are complex investments that
should be considered only by investors
who, either alone or with their
financial, tax and legal advisors, have
the expertise to analyze the prepayment,
reinvestment, default and market risk,
the tax consequences of an investment,
and the interaction of these factors.
WITHDRAWAL OR DOWNGRADING OF
INITIAL RATINGS WILL AFFECT THE
PRICES FOR NOTES.................... A security rating is not a
recommendation to buy, sell or hold
securities. Similar ratings on different
types of securities do not necessarily
mean the same thing. You are encouraged
to analyze the significance of each
rating independently from any other
rating. Any rating agency may change its
rating of the senior notes after the
senior notes are issued if that rating
agency believes that circumstances have
changed. Any subsequent change in rating
will likely affect the price that a
subsequent purchaser will be willing to
pay for the senior notes. The ratings do
not address the likelihood of (1) an
early termination of the revolving
period or (2) the ultimate payment to
you of any interest not paid as a result
of the interest rate cap.
<PAGE>
FORMATION OF THE TRUST
THE TRUST
ACE Securities Corp. Student Loan Trust [ ]- [ ] (the "Trust") will be
a trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this prospectus supplement and in
the prospectus. The Trust will not engage in any activity other than:
o acquiring, holding and managing the Student Loans (the "Initial
Financed Student Loans") sold to the Trust on [ ] (the "Closing
Date"), the additional Student Loans acquired by the Trust after
the Closing Date (the "Additional Student Loans" and, together
with the Initial Financed Student Loans, the "Financed Student
Loans") and the other assets of the Trust and proceeds therefrom,
o issuing the Notes,
o making payments thereon,
o originating Federal Consolidation Loans during the Revolving
Period,
o entering into the Interest Rate Swap, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto
or connected therewith.
The proceeds from the sale of the Notes will be used by [ ] (the
"Eligible Lender Trustee") to purchase on behalf of the Trust the Initial
Financed Student Loans from [ ], as Seller pursuant to the Loan Sale Agreement,
to fund the initial deposit into the Reserve Account on the Closing Date of cash
or Eligible Investments equal to $[ ] (the "Reserve Account Initial Deposit"),
to fund the deposit into the Collection Account on the Closing Date of cash or
Eligible Investments equal to $[ ] and to fund the costs of issuance. Upon the
consummation of the transactions, the property of the Trust will consist of
o a pool of guaranteed education loans to students and parents of
students (the "Student Loans") made under the Federal Family
Education Loan Program ("FFELP"), legal title to which is held by
the Eligible Lender Trustee on behalf of the Trust,
o all funds collected in respect of the student loans on or after
the Cutoff Date, net of interest accrued thereon prior to the
Cutoff Date and not to be capitalized,
o all monies and investments on deposit in the Collection Account,
the Collateral Reinvestment Account and the Reserve Account and
o the Interest Rate Swap.
The Notes will be collateralized by the assets of the Trust as
described in this prospectus supplement. The Collection Account, the Reserve
Account, the Collateral Reinvestment Account and the Interest Rate Swap will be
maintained in the name of the Indenture Trustee for the benefit of the
Noteholders. To facilitate servicing and to minimize administrative burden and
expense, the Servicer will be appointed by the Eligible Lender Trustee as
custodian of the promissory notes representing the Financed Student Loans.
On behalf of the Trust, the Eligible Lender Trustee will use funds on
deposit in the Collateral Reinvestment Account during the Revolving Period to
make Additional Fundings, including to make or acquire Additional Student Loans
which will constitute property of the Trust. See "Description of the Transfer
and Servicing Agreements--Revolving Period and Additional Fundings" in this
prospectus supplement. In addition, after the Revolving Period, Additional
Student Loans will be added to the Trust to the extent that:
o the Eligible Lender Trustee on behalf of the Trust purchases
Serial Loans from the Seller,
o the Trust owns Financed Student Loans which are exchanged for
Serial Loans owned by the Seller as described in this prospectus
supplement or
o for 210 days after the end of the Revolving Period, Add-on
Consolidation Loans are added to Federal Consolidation Loans
owned by the Trust.
Any origination or conveyance during or after the Revolving Period of Additional
Student Loans is conditioned on compliance with the procedures described in the
Loan Sale Agreement. The Depositor expects that the amount of Additional
Fundings during the Revolving Period will approximately equal the amount
expected to be deposited during the Revolving Period into the Collateral
Reinvestment Account and that the timing of the Additional Fundings will be
sufficient so as not to cause a build-up of funds in the Collateral Reinvestment
Account that would cause an Early Amortization Event to occur prior to the
scheduled end of the Revolving Period on the last day of the Collection Period
preceding the [ ] Quarterly Payment Date. The Depositor's expectations in this
regard, based on current facts and circumstances, but relating to future events,
are inherently forward-looking. These expectations are based primarily upon
current market conditions, including conditions in the secondary market for
Student Loans, and current expectations as to when Additional Fundings will need
to be made (based, in part, on expectations as to the rate at which the Initial
Financed Student Loans will repay). There is a risk that market conditions will
change or that the actual repayment experience on the Initial Financed Student
Loans will be other than as expected. See Risk Factors--The Return on Your
Investment Will Change Over Time" in this prospectus supplement and "--Maturity
and Prepayment Experience" in the prospectus. In addition, a material adverse
change in the operations or business or financial condition of the Seller could
affect the amount or timing of Additional Fundings of New Loans or Serial Loans
during the Revolving Period. See "Federal Family Education Loan Program--Recent
Developments--Changes in Formulas for Determining Certain Interest Rates and
Special Allowance Payments" in this prospectus supplement. Accordingly, there
can be no assurance as to the amount or timing of Additional Fundings during the
Revolving Period. Upon an Early Amortization Event or in any event if the amount
on deposit in the Collateral Reinvestment Account has not been reduced to zero
by the end of the Revolving Period, any amounts remaining on deposit in the
Collateral Reinvestment Account will be paid on the Quarterly Payment Date
immediately following the end of the Revolving Period as a payment of principal
first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in
full, then to the Class A-2 Noteholders until the Class A-2 Notes have been paid
in full and then to the Subordinate Noteholders. There can also be no assurance
as to the amount of Additional Fundings that will occur after the Revolving
Period. See "Description of the Transfer and Servicing Agreements--Revolving
Period and Additional Fundings" in this prospectus supplement.
The Trust's principal offices are in [ ] in care of [ ] as Eligible
Lender Trustee, at the address listed below.
ELIGIBLE LENDER TRUSTEE
[ ] is the Eligible Lender Trustee for the Trust under the Trust
Agreement to be dated as of [ ] (as amended and supplemented from time to time,
the "Trust Agreement") among the Depositoe, the Seller, [ ] (the "Company"), a [
] which is an affiliate of the Seller, and the Eligible Lender Trustee. [ ] is a
[ ] whose principal offices are located at [ ] and whose New York offices are
located at [ ]. The Eligible Lender Trustee will acquire on behalf of the Trust
legal title to all the Financed Student Loans acquired from time to time
pursuant to the Loan Sale Agreement. The Eligible Lender Trustee on behalf of
the Trust will enter into a Guarantee Agreement with each of the Guarantors with
respect to the Financed Student Loans. The Eligible Lender Trustee qualifies as
an eligible lender and owner of all Financed Student Loans for all purposes
under the Higher Education Act and the Guarantee Agreements. Failure of the
Financed Student Loans to be owned by an eligible lender would result in the
loss of any Guarantee Payments from any Guarantor and any Federal Assistance
with respect to the Financed Student Loans. See "The Student Loan Pools" in the
prospectus. The Eligible Lender Trustee's liability in connection with the
issuance and sale of the Notes is limited solely to the express obligations of
the Eligible Lender Trustee set forth in the Trust Agreement, the Loan Sale
Agreement and the Servicing Agreement. See "Description of the Notes" in this
prospectus supplement and "Description of the Transfer and Servicing Agreements"
in this prospectus supplement and in the prospectus. The Seller and its
affiliates may maintain normal commercial banking relations with the Eligible
Lender Trustee.
THE SELLER AND THE SERVICER
[ ] (the "Seller" and the "Servicer") is a [ ].
[TO BE INSERTED]
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Initial Financed
Student Loans to be purchased by the Eligible Lender Trustee on behalf of the
Trust as of the Cutoff Date and any Additional Student Loans made or acquired by
the Eligible Lender Trustee on behalf of the Trust after the Closing Date.
No Initial Financed Student Loan as of the Cutoff Date consists of a
Student Loan that was subject to the Seller's prior obligation to sell the loan
to a third party.
Following the Closing Date and prior to the end of the Revolving
Period, the Trust will be obligated from time to time to purchase from the
Seller, and the Seller, subject to the availability of New Loans, will be
obligated to tender to the Trust, New Loans owned by the Seller each of which
will have been made to a borrower who is not a borrower under any Financed
Student Loan. In addition, following the Closing Date, and both during and after
the Revolving Period, the Trust will be obligated from time to time to purchase
from the Seller, subject to the availability of Serial Loans, Serial Loans owned
by the Seller. During the Revolving Period, the purchase of New Loans and Serial
Loans for the Loan Purchase Amount for the loan, will be funded by means of a
transfer of amounts on deposit in the Collateral Reinvestment Account as
described in this prospectus supplement. Following the end of the Revolving
Period, the purchase of Serial Loans will be funded by amounts representing
distributions of principal on the outstanding Financed Student Loans which would
otherwise have been part of the Available Funds or, alternatively, at the
Seller's option, the Eligible Lender Trustee will be obligated to exchange with
the Seller existing Financed Student Loans owned by the Trust for the Serial
Loans, provided that the Serial Loans and eligible Financed Student Loans meet
specified criteria described in this prospectus supplement. Any Purchase Premium
Amounts for Serial Loans purchased by the Trust after the Revolving Period will
be funded on the Quarterly Payment Date next succeeding the end of the
Collection Period during which the Serial Loan has been acquired by the Trust
from amounts, if any, then on deposit in the Reserve Account in excess of the
Specified Reserve Account Balance. No Purchase Premium Amounts will be payable
for Serial Loans exchanged for by the Trust.
In addition, following the Closing Date and prior to the end of the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will seek
to originate Federal Consolidation Loans to borrowers under Financed Student
Loans who are also borrowers under one or more Student Loans (whether or not all
the loans are in the Trust) under the Federal Consolidation Loan Program
described in the prospectus under "Federal Family Education Loan
Program--Federal Consolidation Loan Program" and under "Federal Family Education
Loan Program" in this prospectus supplement. Any of these originations by the
Eligible Lender Trustee on behalf of the Trust will be funded by means of a
transfer from the Collateral Reinvestment Account of the amount required to
repay any Student Loans that are being discharged in the consolidation process,
which amount will be paid by the Trust to the holder or holders of the Student
Loans to prepay the loans. The Eligible Lender Trustee will not be permitted to
originate Federal Consolidation Loans (including the addition of any Add-on
Consolidation Loans) on behalf of the Trust during the Revolving Period in an
aggregate principal amount in excess of [$35,000,000]; additionally, no Federal
Consolidation Loan may be originated by the Trust having a scheduled maturity
date after [October 28, 2030] if at the time of the origination the aggregate
principal balances of all Federal Consolidation Loans held by the Trust that
have a scheduled maturity date after [October 28, 2030], exceed or, after giving
effect to the origination, would exceed [$15,000,000]; provided, however, that
the Eligible Lender Trustee will be permitted to fund the addition of Add-on
Consolidation Loans in excess of the amounts if required to do so by the Act.
After the Revolving Period the Eligible Lender Trustee on behalf of the Trust
will cease to make Federal Consolidation Loans and Additional Student Loans will
consist solely of Serial Loans acquired in the manner specified above; provided,
however, that for a maximum period of 210 days following the end of the
Revolving Period, the Eligible Lender Trustee may be required to increase the
principal balance of Federal Consolidation Loans in the Trust by the amount of
any related Add-on Consolidation Loans as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the prospectus and under "Federal Family
Education Loan Program" in this prospectus supplement, borrowers may consolidate
additional loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in specified
cases, have a different interest rate and a different final payment date. Add-on
Consolidation Loans added to a Federal Consolidation Loan in the Trust during
the Revolving Period will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
that are being discharged in the consolidation process, which amount will be
paid by the Eligible Lender Trustee on behalf of the Trust to the holder or
holders of the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), these amounts will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which would otherwise have been part of the Available Funds as
described under "Description of the Transfer and Servicing
Agreements--Distributions" in this prospectus supplement.
No selection procedures believed by the Depositor to be adverse to the
Noteholders were used or will be used in selecting the Financed Student Loans.
However, except for the criteria described in the preceding paragraphs and under
"Description of the Transfer and Servicing Agreements--Revolving Period and
Additional Fundings" in this prospectus supplement or contained in the Loan Sale
Agreement, there will be no required characteristics of the Additional Student
Loans. Therefore, following the transfer of Additional Student Loans to the
Eligible Lender Trustee on behalf of the Trust, the aggregate characteristics of
the entire pool of Financed Student Loans, including the composition of the
Financed Student Loans and of the related borrowers, the related Guarantors, the
distribution by loan type, the distribution by interest rate, the distribution
by principal balance and the distribution by remaining term to scheduled
maturity described in the following tables, may vary significantly from those of
the Initial Financed Student Loans as of the Cutoff Date. In addition, the
distribution by weighted average interest rate applicable to the Financed
Student Loans on any date following the Cutoff Date may vary significantly from
that set forth in the following tables as a result of variations in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information described below with respect to the original term to maturity
and remaining term of maturity of the Initial Financed Student Loans as of the
Cutoff Date may vary significantly from the actual term to maturity of any of
the Financed Student Loans as a result of the granting of deferral and
forbearance periods with respect thereto.
Set forth below in the following tables is a description of specified
characteristics of the Initial Financed Student Loans as of [ ] (the "Cutoff
Date"). The percentages set forth in the tables below may not always add to 100%
due to rounding.
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS
AS OF THE CUTOFF DATE
Aggregate Outstanding Principal Balance (1)..................... $[ ]
Number of Billing Accounts...................................... [ ]
Average Outstanding Principal Balance per Billing Account....... $[ ]
Number of Loans................................................. [ ]
Average Outstanding Principal Balance per Loan.................. $[ ]
Weighted Average Original Term to Maturity (2).................. [ ] months
Weighted Average Remaining Term to Maturity (2)................. [ ] months
Weighted Average Annual Interest Rate (3)....................... [ ]%
-----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
(2) Determined from the date of origination or the Cutoff Date, as the case may
be, to the stated maturity date of the applicable Initial Financed Student
Loans, assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any deferral or forbearance periods that may be granted in the
future. See "Federal Family Education Loan Program" in this prospectus
supplement and in the prospectus.
(3) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the Initial
Financed Student Loans effectively bear interest generally at a variable
rate per annum to the borrower, there can be no assurance that the
foregoing percentage will remain applicable to the Initial Financed Student
Loans at any time after the Cutoff Date. See "Federal Family Education Loan
Program" in this prospectus supplement and in the prospectus.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
LOAN TYPE LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
<S> <C> <C> <C>
Stafford Loans (2)........................................ $ %
Federal Consolidation Loans...............................
PLUS Loans................................................
SLS Loans.................................................
Total.................................................. $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having aggregate outstanding principal
balances as of the Cutoff Date of $[ ].
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
RANGE OF INTEREST NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
RATES (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
<S> <C> <C> <C>
Less than 6.50%....................................... $ %
6.50% to 7.49%........................................
7.50% to 7.99%........................................
8.00% to 8.49%........................................
8.50% to 8.99%........................................
9.00% to 9.49%........................................
9.50% and above.......................................
Total........................................ $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the Initial
Financed Student Loans effectively bear interest at a variable rate per
annum to the borrower, there can be no assurance that the foregoing
information will remain applicable to the Initial Financed Student Loans at
any time after the Cutoff Date. See "Federal Family Education Loan Program"
in this prospectus supplement and in the prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
RANGE OF OUTSTANDING NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
PRINCIPAL BALANCE LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
<S> <C> <C> <C>
Less than $2,000..................................... $ %
$ 2,000 to $ 3,999...................................
$ 4,000 to $ 5,999...................................
$ 6,000 to $ 7,999...................................
$ 8,000 to $ 9,999...................................
$10,000 to $11,999...................................
$12,000 to $13,999...................................
$14,000 to $15,999...................................
$16,000 to $17,999...................................
$18,000 to $19,999...................................
$20,000 to $21,999...................................
$22,000 to $23,999...................................
$24,000 to $25,999...................................
$26,000 to $27,999...................................
$28,000 and above ...................................
Total....................................... $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF MONTHS REMAINING TO NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
SCHEDULED MATURITY(1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
<S> <C> <C> <C>
Less than 24......................................... $ %
24 to 35.............................................
36 to 47.............................................
48 to 59.............................................
60 to 71.............................................
72 to 83.............................................
84 to 95.............................................
96 to 107 ...........................................
108 to 119...........................................
120 to 131...........................................
132 to 143...........................................
144 to 155...........................................
156 to 167...........................................
168 to 179...........................................
180 to 191...........................................
192 and above........................................
Total....................................... $ %
Total....................................... $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Initial Financed Student Loans, assuming repayment commences
promptly upon expiration of the typical grace period following the expected
graduation date and without giving effect to any deferral or forbearance
periods that may be granted in the future. See "Federal Family Education
Loan Program" in this prospectus supplement and in the prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
BORROWER PAYMENT STATUS(1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
<S> <C> <C> <C>
Deferral............................................. $ %
Forbearance..........................................
Grace................................................
In-School............................................
Repayment............................................
Total....................................... $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Refers to the status of the borrower of each Initial Financed Student Loan
as of the Cutoff Date: the borrower may still be attending school
("In-School"), may be in a grace period prior to repayment commencing
("Grace"), may be repaying the loan ("Repayment") or may have temporarily
ceased repaying the loan through a deferral ("Deferral") or a forbearance
("Forbearance") period. See "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus. For purposes of this table,
"In-School" excludes, and "Deferral" includes, all SLS or PLUS Loans of
borrowers still attending school.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCIAL STUDENT LOANS
BY LOCATION AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
LOCATION (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
<S> <C> <C> <C>
Alabama.............................................. $ %
Alaska...............................................
Arizona .............................................
Arkansas.............................................
California...........................................
Colorado.............................................
Connecticut..........................................
Delaware.............................................
Florida..............................................
Georgia..............................................
Hawaii...............................................
Idaho................................................
Illinois.............................................
Indiana..............................................
Iowa.................................................
Kansas...............................................
Kentucky.............................................
Louisiana............................................
Maine................................................
Maryland.............................................
Massachusetts........................................
Michigan.............................................
Minnesota............................................
Mississippi..........................................
Missouri.............................................
Montana..............................................
Nebraska.............................................
Nevada...............................................
New Hampshire........................................
New Jersey...........................................
New Mexico...........................................
New York.............................................
North Carolina.......................................
North Dakota.........................................
Ohio.................................................
Oklahoma.............................................
Oregon...............................................
Pennsylvania.........................................
Puerto Rico..........................................
Rhode Island.........................................
South Carolina.......................................
South Dakota.........................................
Tennessee............................................
Texas................................................
Utah.................................................
Vermont..............................................
Virginia.............................................
Washington...........................................
Washington DC........................................
West Virginia........................................
Wisconsin............................................
Wyoming..............................................
Other................................................
Total....................................... $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans shown on the Servicer's records as of the Cutoff
Date.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
</TABLE>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
BORROWER PAYMENT STATUS (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
<S> <C> <C> <C>
Pre-October 1, 1993.................................. $ %
On or After October 1, 1993 and
Prior to October 1, 1998...........................
October 1, 1998 and thereafter.......................
Total....................................... $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Initial Financed Student Loans disbursed prior to October 1, 1993 are 100%
guaranteed by the Initial Guarantors and reinsured against default by the
Department up to a maximum of 100% of the Guarantee Payments. Initial
Financed Student Loans disbursed on or after October 1, 1993 and prior to
October 1, 1998 are 98% guaranteed by the Initial Guarantors and reinsured
against default by the Department up to a maximum of 98% of the Guarantee
Payments. Initial Financial Student Loans disbursed on or after October 1,
1998 are 98% guaranteed by the Initial Guarantors and reinsured against
default by the Department up to a maximum of 95% of the Guarantee Payments.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
</TABLE>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
DAYS DELINQUENT LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
<S> <C> <C> <C>
0 - 30............................................... $ %
31 - 60..............................................
61 - 90..............................................
91 - 120.............................................
121 and above........................................
Total....................................... $ %
------------ ------------------- -----------------
============ =================== =================
----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $[ ] as of the Cutoff Date to be capitalized upon
commencement of repayment.
</TABLE>
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of the Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of the Financed Student Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a regular
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods or Forbearance
Periods, the borrower pays a regular installment until the final scheduled
payment date, at which time the amount of the final installment is increased or
decreased as necessary to repay the then outstanding principal balance of the
Financed Student Loan.
GUARANTEE OF FINANCED STUDENT LOANS
By the Closing Date, the Eligible Lender Trustee will have entered
into a Guarantee Agreement with the Initial Guarantors pursuant to which [ ], a
[ ] ("[ ]") and specified other Federal Guarantors (together, the "Initial
Guarantors") have agreed to serve as Guarantors for the Initial Financed Student
Loans. As of the Cutoff Date, [ ]% of the Initial Financed Student Loans are
guaranteed by [ ].
During the Revolving Period, the Trust may acquire Additional Student
Loans guaranteed by a Federal Guarantor other than the Initial Guarantors (each,
an "Additional Guarantor" and, together with the Initial Guarantors, the
"Guarantors") and enter into a Guarantee Agreement with the Eligible Lender
Trustee. In the aggregate no more than 20% of the Financed Student Loans (by
principal balance) may, following any addition, have guarantees from Additional
Guarantors and no more than 5% of the Financed Student Loans (by principal
balance) may, following any addition, have guarantees from any one Additional
Guarantor (unless and to the extent that either limitation is exceeded solely
though the origination on behalf of the Trust of Federal Consolidation Loans or
the purchase by the Trust of Serial Loans, in either case, that are made with
respect to Financed Student Loans guaranteed by an Additional Guarantor).
Pursuant to its Guarantee Agreement, each of the Guarantors guarantees
payment of 100% of the principal (including any interest capitalized from time
to time) and accrued interest for the Financed Student Loans as to which any one
of the following events has occurred:
o failure by the borrower under a Financed Student Loan to make
monthly principal or interest payments when due, provided the
failure continues for a statutorily determined period of time of
at least 180 days for Student Loans for which the first day of
delinquency occurs prior to October 7, 1998 or 270 days for
Student Loans for which the first day of delinquency occurs on or
after October 7, 1998 (except that the guarantee against the
failures will be 98% of unpaid principal plus accrued and unpaid
interest in the case of Financed Student Loans first disbursed on
or after October 1, 1993);
o any filing by or against the borrower under a Financed Student
Loan of a petition in bankruptcy pursuant to any chapter of the
Federal Bankruptcy Code, as amended;
o the death of the borrower under a Financed Student Loan;
o the total and permanent disability of the borrower under a
Financed Student Loan to work and earn money or attend school, as
certified by a qualified physician;
o the school closed thereby preventing the borrower from completing
his/her program of study; or
o the loan application was falsely certified.
When these conditions are satisfied, the Act requires the Federal
Guarantor generally to pay the claim within 90 days after its submission by the
lender. The obligations of each Guarantor pursuant to its Guarantee Agreement
are obligations solely of the Guarantor and are not supported by the full faith
and credit of the federal or any state government. However, the Act provides
that if the Secretary of Education (the "Secretary") determines that a Federal
Guarantor is unable to meet its insurance obligations, the Secretary shall
assume responsibility for all functions of the guarantor under the loan
insurance program of the guarantor. The Secretary is authorized, among other
things, to take those actions necessary to ensure the continued availability of
Student Loans to residents of the state or states in which the guarantor did
business, the full honoring of all guarantees issued by the guarantor prior to
the assumption by the Secretary of the functions of the guarantor, and the
proper servicing of Student Loans guaranteed by the guarantor prior to the
Secretary's assumption of the functions of the guarantor. For a further
discussion of the Secretary's authority in the event that a Federal Guarantor is
unable to meet its insurance obligations, See "Federal Family Education Loan
Program--Federal Guarantors" and "--Federal Insurance and Reinsurance of Federal
Guarantors" in the prospectus and "Federal Family Education Loan Program" in
this prospectus supplement.
Each Guarantor's guarantee obligations with respect to any Financed
Student Loan guaranteed by it are conditioned upon the satisfaction of all the
conditions set forth in the applicable Guarantee Agreement. These conditions
generally include, but are not limited to, the following:
o the origination and servicing of the Financed Student Loan being
performed in accordance with the Act and other applicable
requirements,
o the timely payment to the Guarantor of the guarantee fee payable
with respect to the Financed Student Loan,
o the timely submission to the Guarantor of all required pre-claim
delinquency status notifications and of the claim with respect to
the Financed Student Loan, and
o the transfer and endorsement of the promissory note evidencing
the Financed Student Loan to the Guarantor upon and in connection
with making a claim for Guarantee Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of the Guarantor to honor its Guarantee
Agreement with respect to the Financed Student Loan, in the denial of guarantee
coverage with respect to specified accrued interest amounts with respect thereto
or in the loss of specified Interest Subsidy Payments and Special Allowance
Payments with respect thereto. Under the Servicing Agreement and the Loan Sale
Agreement, the failure to comply would constitute a breach of the Servicer's
covenants or the Seller's representations and warranties, as the case may be,
and would create an obligation of the Servicer (subject to the limitations
described under "Risk Factors--The Return on Your Investment Will Change Over
Time" in this prospectus supplement) or the Seller, as the case may be, to
purchase or repurchase the Financed Student Loan or, in the case of a breach by
the Seller, to substitute for the loan and to reimburse the Trust for the
non-guaranteed interest amounts or the lost Interest Subsidy Payments and
Special Allowance Payments with respect thereto. The Servicer will not, however,
have any similar obligation to reimburse the Trust for non-guaranteed interest
amounts or lost Interest Subsidy Payments or Special Allowance Payments which
result from a breach of its covenants with respect to the Financed Student
Loans. See "Description of the Transfer and Servicing Agreement--Sale of Student
Loans; Representations and Warranties" and "Servicer Covenants" in the
prospectus.
Set forth below is current and historical information with respect to
[ ] in its capacity as a Guarantor of all education loans guaranteed by it:
[TO BE INSERTED]
DESCRIPTION OF THE NOTES
The Class A-1 Floating Rate Asset Backed Senior Notes (the "Class A-1
Notes"), the Class A-2 Floating Rate Asset Backed Senior Notes (the "Class A-2
Notes" and together with the Class A-1 Notes, the "Senior Notes") and the
Floating Rate Asset Backed Subordinate Notes (the "Subordinate Notes" and
together with the Senior Notes, the "Notes") will be issued pursuant to the
terms of the Indenture to be dated as of [ ], (as amended and supplemented from
time to time, the "Indenture"), between the Trust and [ ], a [ ] (the "Indenture
Trustee"), substantially in the form filed as an exhibit to the Registration
Statement. The following summary describes some terms of the Notes, the
Indenture and the Trust Agreement pursuant to which the Trust will be formed.
The summary does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Notes, the Indenture and the Trust Agreement.
The following summary supplements, and to the extent inconsistent therewith,
replaces the description of the general terms and provisions of the Notes, the
Indenture and the Trust Agreement set forth in the prospectus, to which
description reference is hereby made.
PAYMENTS OF INTEREST
Interest on the Notes will be payable quarterly on or about each
January 28, April 28, July 28 and October 28 of each year (or, if the 28th day
is not a business day, on the next succeeding business day), commencing [ ]
(each, a "Quarterly Payment Date") to holders of record of the Notes on the
related Record Date. "Record Date" means, with respect to any Quarterly Payment
Date, the 27th day of the month in which the Quarterly Payment Date occurs
(whether or not the date is a business day). Interest on the outstanding
principal amount of each class of Notes will accrue from and including the
Closing Date (in the case of the first Quarterly Payment Date), or from and
including the most recent Quarterly Payment Date on which interest thereon has
been paid, to but excluding the current Quarterly Payment Date (each, a
"Quarterly Interest Period"). Interest accrued as of any Quarterly Payment Date
but not paid on the Quarterly Payment Date will be due on the next Quarterly
Payment Date, together with an amount equal to interest on this amount at the
applicable rate per annum described below. Interest payments on the Notes will
generally be funded from the Available Funds on deposit in the Collection
Account and from amounts on deposit in the Reserve Account remaining after the
distribution of the Servicing Fee and all overdue Servicing Fees, the
Administration Fee and all overdue Administration Fees for the Quarterly Payment
Date. See "Description of the Transfer and Servicing Agreement--Distributions"
and "--Credit Enhancement" in this prospectus supplement.
The "Class A-1 Note Rate", the "Class A-2 Note Rate", and the
"Subordinate Note Rate" for each Quarterly Interest Period will equal the lesser
of (a) the Class A-1 Note LIBOR Rate, the Class A-2 Note LIBOR Rate or the
Subordinate Note LIBOR Rate, as applicable, and (b) the Adjusted Student Loan
Rate for the Quarterly Interest Period. The "Class A-1 Note LIBOR Rate", the
"Class A-2 Note LIBOR Rate" and the "Subordinate Note LIBOR Rate" shall be equal
to Three-Month LIBOR for the related LIBOR Reset Period (determined as described
in this prospectus supplement) plus [ ]%, [ ]% and [ ]%, respectively.
Interest on the Notes will be calculated on the basis of the actual
number of days elapsed in each Quarterly Interest Period divided by 360. In the
case of the initial Quarterly Interest Period, interest will accrue for the
period from the Closing Date to but excluding [ ] based on Three-Month LIBOR as
determined on the initial LIBOR Determination Date and for the period from [ ]
to but excluding [ ] based on Three-Month LIBOR as determined on the LIBOR
Determination Date in [ ]. See "--Calculation of Three-Month LIBOR."
The "Adjusted Student Loan Rate" for any Quarterly Interest Period
will equal the product of
(a) the quotient obtained by dividing
(1) 365 (or 366 in the case of a leap year) by
(2) the actual number of days elapsed in the Quarterly Interest
Period and
(b) the percentage equivalent of a fraction
(1) the numerator of which is equal to the sum of the Expected
Interest Collections and, if the Interest Rate Swap is still
in effect, the Net Trust Swap Receipt, if any, for the
Quarterly Interest Period less the sum of the Servicing Fee,
the Administration Fee, and, if the Interest Rate Swap is
still in effect, the Net Trust Swap Payment, if any, with
respect to the Quarterly Interest Period and
(2) the denominator of which is the aggregate principal amount
of the Notes as of the last day of the Quarterly Interest
Period.
"Expected Interest Collections" means, with respect to any Quarterly
Interest Period, the sum of
o the amount of interest accrued, net of any accrued Monthly Rebate
Fees and other amounts required by the Act to be paid to the
Department (as described under "Federal Family Education Loan
Program" in this prospectus supplement and in the prospectus)
with respect to the Financed Student Loans for the Collection
Period preceding the applicable Quarterly Payment Date (the
"Student Loan Rate Accrual Period") (whether or not the interest
is actually paid),
o all Interest Subsidy Payments and Special Allowance Payments
estimated to have accrued for the Student Loan Rate Accrual
Period whether or not actually received (taking into account any
expected deduction therefrom of the Federal Origination Fees
described under "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus) and
o Investment Earnings (as defined in "Description of the Transfer
and Servicing Agreement--Accounts" in the prospectus) for the
Student Loan Rate Accrual Period.
Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover and Subordinate Noteholders' Interest
Basis Carryover may be incurred on any Quarterly Payment Date (after the first
Quarterly Payment Date). Any Class A-1 Noteholders' Interest Basis Carryover,
Class A-2 Noteholders' Interest Basis Carryover, and Subordinate Noteholders'
Interest Basis Carryover so incurred prior to the Parity Date will, however, not
be payable until on or after the Parity Date. On each Quarterly Payment Date
from and after the Parity Date, any Class A-1 Noteholders' Interest Basis
Carryover, Class A-2 Noteholders' Interest Basis Carryover and Subordinate
Noteholders' Interest Basis Carryover incurred and unpaid to and including the
Quarterly Payment Date will be payable on the Quarterly Payment Date but only
out of any Reserve Account Excess remaining after payment out of the excess of
o if the Revolving Period has terminated, any Purchase Premiums due
the Seller for Serial Loans purchased by the Trust prior to the
end of the related Collection Period,
o on the Parity Date (if the Parity Date occurs after the end of
the Revolving Period), any amount necessary to reduce to zero the
remaining amount by which the aggregate principal amount of the
Notes exceeds the Pool Balance and
o in the case of the Subordinate Noteholders' Interest Basis
Carryover, payment of the Class A-1 Noteholders' Interest Basis
Carryover and the Class A-2 Noteholders' Interest Basis
Carryover.
The "Parity Date" is the first Quarterly Payment Date on which the
aggregate principal amount of the Notes, after giving effect to all
distributions on the date, is no longer in excess of the Pool Balance as of the
last day of the related Collection Period.
The "Pool Balance" at any time equals the aggregate principal balances
of the Financed Student Loans at the end of the preceding Collection Period
(including accrued interest thereon through the end of the Collection Period to
the extent the interest will be capitalized upon commencement of repayment),
after giving effect to the following, without duplication:
o all payments received by the Trust during the Collection Period
from or on behalf of borrowers, the Guarantors and, with respect
to specified payments on specified Financed Student Loans, the
Department (collectively, the "Obligors"),
o all Purchase Amounts received by the Trust for the Collection
Period from the Seller or the Servicer,
o all Additional Fundings made with respect to the Collection
Period and
o all losses realized on Financed Student Loans liquidated during
the Collection Period.
"Purchase Amount" with respect to a Financed Student Loan means the
unpaid balance owed by the applicable borrower plus accrued interest thereon to
the date of purchase. See "Description of the Transfer and Servicing
Agreements--Termination" in this prospectus supplement.
DISTRIBUTIONS OF PRINCIPAL
No principal payments will be made on the Notes during the Revolving
Period. Commencing with the end of the Revolving Period, principal payments will
be made to the Noteholders, sequentially, in the order of priority set forth in
the second succeeding paragraph on each Quarterly Payment Date in an amount
generally equal to the Principal Distribution Amount for the Quarterly Payment
Date, until the aggregate principal amount of the Notes is reduced to zero.
Payments of the Principal Distribution Amount will generally be derived from the
Available Funds remaining after the distribution of
o the Servicing Fee and all overdue Servicing Fees,
o the Administration Fee and all overdue Administration Fees,
o the Senior Noteholders' Interest Distribution Amount and the
Trust Swap Payment Amount, if any, and
o the Subordinate Noteholders' Interest Distribution Amount;
and, if the Available Funds are insufficient, from amounts on deposit in the
Reserve Account. See "Description of the Transfer and Servicing
Agreements--Distributions" and"--Credit Enhancement" in this prospectus
supplement. If the Available Funds and the amounts on deposit in the Reserve
Account are insufficient to pay the Senior Noteholders' Principal Distribution
Amount or, after the Senior Notes have been paid in full, the Subordinate
Noteholders' Principal Distribution, for a Quarterly Payment Date, the shortfall
will be added to the principal payable to the Senior Noteholders or the
Subordinate Noteholders, respectively, on subsequent Quarterly Payment Dates.
In addition, on each Quarterly Payment Date commencing with (1) the
end of the Revolving Period, for so long as the aggregate principal amount of
the Notes outstanding on this date is greater than the Pool Balance as of the
close of business on the last day of the related Collection Period and (2) the [
] Quarterly Payment Date, any Reserve Account Excess for the Quarterly Payment
Date will, after payment to the Seller of any unpaid Purchase Premium Amounts
for any Serial Loans purchased by the Trust prior to the end of the related
Collection Period, be applied to pay the principal of the Notes in the order of
priority set forth below. Amounts, if any, available to be distributed as set
forth in the preceding sentence will not be part of the Principal Distribution
Amount for the Quarterly Payment Date and the Noteholders will have no
entitlement thereto except to the extent of any excess in the Reserve Account of
which there can be no assurance. See "Description of the Transfer and Servicing
Agreements--Credit Enhancement--Reserve Account" in this prospectus supplement.
On each Quarterly Payment Date on which principal payments are made to
the holders (the "Senior Noteholders") of the Senior Notes (whether in respect
of the Senior Noteholders' Principal Distribution Amount, amounts on deposit in
the Reserve Account constituting Reserve Account Excess (as described in the
preceding paragraph) or amounts in respect of a mandatory redemption, as
described below, or otherwise), all payments of principal will be applied to pay
principal to the holders (the "Class A-1 Noteholders") of the Class A-1 Notes
until the aggregate principal amount of the Class A-1 Notes has been reduced to
zero, and then to the holders (the "Class A-2 Noteholders") of the Class A-2
Notes until the aggregate principal amount of the Class A-2 Notes has been
reduced to zero. In addition, on each Quarterly Payment Date on which principal
payments are made on the Notes (whether in respect of the Principal Distribution
Amount, amounts on deposit in the Reserve Account constituting Reserve Account
Excess (as described in the preceding paragraph) or amounts in respect of a
mandatory redemption, as described below, or otherwise), all payments of
principal will be applied to pay principal to the Senior Noteholders until the
aggregate principal amount of the Senior Notes has been paid in full, and then
to pay principal to the holders (the "Subordinate Noteholders" and, together
with the Senior Noteholders, the "Noteholders") of the Subordinate Notes until
the Subordinate Notes have been paid in full.
The aggregate outstanding principal amount, if any, of the Class A-1
Notes will be payable in full on the [ ] Quarterly Payment Date (the "Class A-1
Note Final Maturity Date"), of the Class A-2 Notes will be payable in full on
the [ ] Quarterly Payment Due Date (the "Class A-2 Note Final Maturity Date")
and of the Subordinate Notes on the[ ] Quarterly Payment Date (the "Subordinate
Note Final Maturity Date"). However, the actual maturity of any class of the
Senior Notes or of the Subordinate Notes could occur other than on these dates
as a result of a variety of factors including those described under "Risk
Factors--The Return on Your Investment Will Change Over Time" in this prospectus
supplement.
MANDATORY REDEMPTION
If any amount remains on deposit in the Collateral Reinvestment
Account on the last day of the Revolving Period after giving effect to all
Additional Fundings on or prior to this date, the entire amount remaining on
deposit in the Collateral Reinvestment Account will be used on the Quarterly
Payment Date on or immediately following this date first to pay the Swap
Counterparty any prior unpaid Net Trust Swap Payment Carryover Shortfalls and
then to redeem the Notes in the order of priority set forth in the third
preceding paragraph. The aggregate principal amount of Notes to be redeemed will
be an amount equal to the amount then on deposit in the Collateral Reinvestment
Account after giving effect to the payment to the Swap Counterparty of any prior
Net Trust Swap Payment Carryover Shortfalls on the last day of the Revolving
Period.
CALCULATION OF THREE-MONTH LIBOR
Pursuant to the Administration Agreement, the Administrator will
determine Three-Month LIBOR for purposes of calculating the Class A-1 Note LIBOR
Rate, the Class A-2 Note LIBOR Rate and the Subordinate Note LIBOR Rate for each
Quarterly Interest Period (x) on the second business day prior to the
commencement of the LIBOR Reset Period within the Quarterly Interest Period (or,
in the case of the initial LIBOR Reset Period, on the second business day prior
to the Closing Date) and (y) with respect to the initial Quarterly Interest
Period, as determined pursuant to clause (x) for the period from the Closing
Date to but excluding [ ] and as determined on the second business day prior to
[ ] for the period from [ ] to but excluding [ ] (each, a "LIBOR Determination
Date"). For purposes of calculating Three-Month LIBOR, a business day is any day
on which banks in The City of New York and the City of London are open for the
transaction of international business. Interest due for any Quarterly Interest
Period will be determined based on the actual number of days in the Quarterly
Interest Period over a 360-day year.
"Three-Month LIBOR" means, with respect to any LIBOR Reset Period, the
London interbank offered rate for deposits in U.S. dollars having a maturity of
three months commencing on the related LIBOR Determination Date (the "Index
Maturity") which appears on Telerate Page 3750 as of 11:00 a.m. London time, on
the LIBOR Determination Date. If the 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 U.S. dollars, having the Index Maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m. London
time, on the LIBOR Determination Date, to prime banks in the London interbank
market by the Reference Banks. The Administrator will request the principal
London office of each Reference Bank to provide a quotation of its rate. If at
least two quotations are provided, the rate for that day will be the arithmetic
mean of the quotations. If fewer than two quotations are provided, the rate for
that day will be the arithmetic mean of the rates quoted by major banks in The
City of New York, selected by the Administrator, at approximately 11:00 a.m. New
York time, on the LIBOR Determination Date, for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided, however, that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable LIBOR Reset Period will be Three-Month LIBOR
in effect for the previous LIBOR Reset Period.
"LIBOR Reset Period" means the three-month period commencing on the
28th day (or, if any 28th day is not a business day, on the next succeeding
business day) of each January, April, July and October and ending on the day
immediately preceding the following LIBOR Reset Period; provided, however, that
the initial LIBOR Reset Period will commence on the Closing Date.
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service (or another page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank
market selected by the Administrator.
BOOK-ENTRY REGISTRATION
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
the underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include some other organizations. Indirect access
to the DTC system also is available to others, including banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
Senior Noteholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Senior Notes may do so only through Participants and Indirect
Participants. In addition, Senior Noteholders will receive all distributions of
principal of and interest on the Senior Notes from the Indenture Trustee through
DTC and its Participants. Under a book-entry format, Senior Noteholders will
receive payments after the related Quarterly Payment Date because, while
payments are required to be forwarded to Cede, as nominee for DTC, on each
Quarterly Payment Date, DTC will forward the payments to its Participants which
thereafter will be required to forward them to Indirect Participants or Senior
Noteholders. It is anticipated that the only "Senior Noteholder" will be Cede,
as nominee for DTC and that Senior Noteholders will not be recognized by the
Indenture Trustee as "Noteholders", as the terms are used in the Indenture.
Senior Noteholders will be permitted to exercise the rights of Senior
Noteholders indirectly through DTC and its Participants (which in turn will
exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Senior Notes and is
required to receive and transmit distributions of principal of and interest on
the Senior Notes. Participants and Indirect Participants with which Senior
Noteholders have accounts with respect to the Senior Notes similarly are
required to make book-entry transfers and receive and transmit the payments on
behalf of their respective Senior Noteholders.
Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and specified banks, the ability of a Senior
Noteholder to pledge Senior Notes to persons or entities that do not participate
in the DTC system, or otherwise to take actions in respect of the Senior Notes,
may be limited due to the lack of a physical certificate for the Senior Notes.
Clearstream, Luxembourg ("Clearstream, Luxembourg") is incorporated
under the laws of Luxembourg as a professional depository. Clearstream,
Luxembourg holds securities for its participating organizations ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg Participants through
electronic book-entry changes in accounts of Clearstream, Luxembourg
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearsteam, Luxembourg in any of 28
currencies, including United States dollars. Clearstream, Luxembourg provides to
its Clearstream, Luxembourg Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg
interfaces with domestic markets in several countries. As a professional
depository, Clearstream, Luxembourg is subject to regulation by the Luxembourg
Monetary Institute. Clearstream, Luxembourg Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and specified
other organizations. Indirect access to Clearstream, Luxembourg is also
available to others, including, banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream Luxembourg
Participant, either directly or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for participants of Euroclear ("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 27
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. 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 the Euroclear, withdrawals of securities
and cash from the Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Senior Notes held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by its Depositary
(as defined below). These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Clearstream,
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Senior Noteholder under the Indenture on
behalf of a Clearstream, Luxembourg Participant or Euroclear Participant only in
accordance with the relevant rules and procedures and subject to the relevant
Depositary's ability to effect these actions on its behalf through DTC.
Senior Noteholders may hold their Senior Notes through DTC (in the
United States) or Clearstream, Luxembourg or Euroclear (in Europe) if they are
participants of these systems, or indirectly through organizations which are
participants in these systems.
The Senior Notes will initially be registered in the name of Cede &
Co., the nominee of DTC. Clearstream, Luxembourg and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream, Luxembourg's and Euroclear's names on the books of their
respective depositaries which in turn will hold positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A. ("Citibank") will act as depositary for Clearstream, Luxembourg and Morgan
Guaranty Trust Company of New York ("Morgan") will act as depositary for
Euroclear (in these capacities, individually, the "Depositary" and,
collectively, the "Depositaries").
Transfers between Participants will occur in accordance with DTC
Rules. Transfers between Clearstream, Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
Because of time-zone differences, credits of securities received in
Clearstream, Luxembourg 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. These credits or any
transactions in these securities settled during this processing will be reported
to the relevant Euroclear or Clearstream, Luxembourg Participants on the
business day following the DTC settlement date. Cash received in Clearstream,
Luxembourg or Euroclear as a result of sales of securities by or through a
Clearstream, Luxembourg Participant or Euroclear Participant to a Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures for the Senior Notes, see "Certain Federal Income Tax
Consequences--Trusts for Which a Partnership Election Is Made--Tax Consequences
to Holders of the Notes--FOREIGN HOLDERS" in the prospectus.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC Rules on behalf of the relevant European
international clearing system by its Depositary; however, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
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.
Clearstream, Luxembourg Participants and Euroclear Participants may not deliver
instructions to the Depositaries.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Senior Noteholder under the Indenture, only at the
direction of one or more Participants to whose accounts with DTC the Senior
Notes are credited.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of interests in the Senior
Notes among participants of DTC, Clearstream, Luxembourg and Euroclear, they are
under no obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
NONE OF THE TRUST, THE SELLER, THE SERVICER, THE COMPANY, THE
ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR THE
UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS,
CLEARSTREAM, LUXEMBOURG PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS
FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO
o THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CLEARSTREAM,
LUXEMBOURG OR EUROCLEAR OR ANY PARTICIPANT,
o THE PAYMENT BY DTC, CLEARSTREAM, LUXEMBOURG OR EUROCLEAR OR ANY
PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT
OF THE PRINCIPAL AMOUNT OR INTEREST ON THE SENIOR NOTES,
o THE DELIVERY BY ANY PARTICIPANT, CLEARSTREAM LUXEMBOURG
PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY
BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS
OF THE INDENTURE OR THE TRUST AGREEMENT TO BE GIVEN TO SENIOR
NOTEHOLDERS OR
o ANY OTHER ACTION TAKEN BY DTC AS THE SENIOR NOTEHOLDER.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following is a summary of some terms of the Loan Sale Agreement to
be dated as of [ ], (as amended and supplemented from time to time, the "Loan
Sale Agreement"), among the Depositor, the Seller, the Trust and the Eligible
Lender Trustee, pursuant to which the Eligible Lender Trustee on behalf of the
Trust will purchase the Financed Student Loans; the Servicing Agreement to be
dated as of [ ] (as amended and supplemented from time to time, the "Servicing
Agreement") among the Trust, [ ] (the "Servicer"), the Seller and the Eligible
Lender Trustee pursuant to which the Servicer will service the Financed Student
Loans; the Administration Agreement to be dated as of [ ],(as amended and
supplemented from time to time, the "Administration Agreement") among the Trust,
the Indenture Trustee and [ ], as administrator (the "Administrator") pursuant
to which the Administrator will undertake some other administrative duties and
functions with respect to the Trust and the Financed Student Loans; and the
Trust Agreement pursuant to which the Trust will be created (collectively, the
"Transfer and Servicing Agreements"). Forms of the Transfer and Servicing
Agreements have been filed as exhibits to the Registration Statement. A copy of
the Transfer and Servicing Agreements will be filed with the Securities and
Exchange Commission (the "Commission") following the issuance of the Notes. This
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, all the provisions of the Transfer and Servicing
Agreements. The following summary supplements, and to the extent inconsistent
therewith replaces, the description of the general terms and provisions of the
Transfer and Servicing Agreements set forth in the prospectus, to which
description reference is hereby made.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
Information with respect to the sale of the Initial Financed Student
Loans from the Seller to the Depositor and from the Depositor to the Eligible
Lender Trustee on behalf of the Trust on the Closing Date pursuant to the Loan
Sale Agreement and the representations and warranties made by the Seller in
connection therewith and in connection with the purchase of Student Loans by the
Trust pursuant to Additional Fundings is set forth under "Description of the
Transfer and Servicing Agreements" in the prospectus.
REVOLVING PERIOD AND ADDITIONAL FUNDINGS
During the period (the "Revolving Period") from the Closing Date until
the first to occur of (1) an Early Amortization Event as described below or (2)
the last day of the Collection Period preceding the [ ] Quarterly Payment Date,
the Eligible Lender Trustee on behalf of the Trust will be obligated from time
to time, subject to specified conditions described in this prospectus
supplement, to acquire additional Student Loans or increase the outstanding
principal balance of the Financed Student Loans ("Additional Fundings"). The
Eligible Lender Trustee on behalf of the Trust will be obligated from time to
time, subject to specified conditions described in this prospectus supplement,
to purchase from the Seller, and the Seller, subject to the availability of
Student Loans and to the availability of funds therefor in the Collateral
Reinvestment Account, will be obligated to tender to the Trust, Student Loans
which
o are made to a borrower who is not a borrower under any Financed
Student Loan,
o are made under loan programs which existed as of the Closing Date
and
o are guaranteed by a Guarantor (each, a "New Loan" and,
collectively, the "New Loans").
New Loans will be made or acquired by [ ] ("[ ]") or another eligible lender on
behalf of the Seller at the discretion and in accordance with usual practices of
the Seller. Each purchase of a New Loan will be made by the Eligible Lender
Trustee on behalf of the Trust pursuant to a transfer agreement (each, a
"Transfer Agreement") among the Seller, the Trust and the Eligible Lender
Trustee. During the Revolving Period, each purchase of a New Loan will be funded
by means of a transfer from the Collateral Reinvestment Account of an amount
equal to the sum of
o the principal balance owed by the related borrower plus accrued
interest thereon expected to be capitalized upon repayment (the
"Purchase Collateral Balance"),
o accrued interest on the principal balance owed by the related
borrower not expected to be capitalized upon repayment
("Noncapitalized Accrued Interest") and
o an additional amount not to exceed [ ]% of the Purchase
Collateral Balance (the "Purchase Premium Amount" and, together
with Noncapitalized Accrued Interest and the Purchase Collateral
Balance, the "Loan Purchase Amount").
Following the end of the Revolving Period, New Loans may not be purchased by the
Trust.
The term "Early Amortization Event" refers to any of the following
events:
o an Event of Default occurring under the Indenture, a Servicer
Default occurring under the Servicing Agreement or an
Administrator Default occurring under the Administration
Agreement;
o specified events of insolvency occurring with respect to the
Seller;
o the Trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as amended;
o as of the end of any Collection Period, the percentage (by
principal balance) of Financed Student Loans the borrowers of
which use the loans to attend schools identified by the related
Guarantor as proprietary or vocational exceeds [ ]% of the Pool
Balance;
o as of the end of any Collection Period, the percentage (by
principal balance) of Financed Student Loans which are not in
repayment and are not eligible for Interest Subsidy Payments
exceeds [ ]% of the Pool Balance;
o the Excess Spread, with respect to each of any two successive
Quarterly Payment Dates commencing with the Quarterly Payment
Date in [ ] is less than [ ]%; or
o the arithmetic average of the Delinquency Percentage as of the
end of each of two successive Collection Periods commencing with
the Quarterly Payment Date in [ ] exceeds [ ]%.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of (a)
four and (b) the difference between (x) the sum of (1) the Expected Interest
Collections for the Quarterly Payment Date and (2) the Trust Swap Receipt
Amount, if any, for the Quarterly Payment Date and (y) the sum of
o the Servicing Fee for the Quarterly Payment Date and all prior
unpaid Servicing Fees,
o the Administration Fee for the Quarterly Payment Date and all
prior unpaid Administration Fees,
o the Senior Noteholders' Interest Distribution Amount and the
Trust Swap Payment Amount, if any, for the Quarterly Payment Date
and
o the Subordinate Noteholders' Interest Distribution Amount for the
Quarterly Payment Date,
and the denominator of which is the average of the Pool Balance calculated as of
the first and the last day of the related Collection Period.
"Delinquency Percentage" means, as of any date of determination, the
percentage equivalent of a fraction the numerator of which is the aggregate
principal balances of the Financed Student Loans which are Repayment Loans that
either (a) are over 210 days delinquent or (b) have had claims filed with the
Department for which payment is still awaited, and the denominator of which is
the aggregate principal balances of the Financed Student Loans which are
Repayment Loans.
In addition, following the Closing Date and both during and subsequent
to the Revolving Period, the Eligible Lender Trustee on behalf of the Trust will
be obligated from time to time, subject to the conditions described below, to
purchase from the Seller Student Loans which
o are made to a borrower who is also a borrower under at least one
outstanding Financed Student Loan,
o are made under the same loan program as the Financed Student
Loan, and
o are guaranteed by the Guarantor that guaranteed the Financed
Student Loan (each, a "Serial Loan" and, collectively, the
"Serial Loans").
Serial Loans will be made or acquired by [ ] or another eligible lender on
behalf of the Seller at the discretion and in accordance with usual business
practices of the Seller.
During the Revolving Period, each purchase of a Serial Loan will be
funded by means of a transfer from the Collateral Reinvestment Account of an
amount equal to the Loan Purchase Amount of the Serial Loan. Following the end
of the Revolving Period, the Purchased Collateral Balance for purchases of
Serial Loans will be funded by amounts representing distributions of principal
on the outstanding Financed Student Loans which otherwise would have been part
of the Available Funds as described under "--Distributions" below, and Purchase
Premium Amounts for the purchases will be funded on the next succeeding
Quarterly Payment Date from any Reserve Account Excess for the Quarterly Payment
Date as described in this prospectus supplement under "Description of the
Transfer and Servicing Agreements--Credit Enhancement--RESERVE ACCOUNT".
Alternatively, at the Seller's option, following the end of the Revolving Period
the Eligible Lender Trustee will be obligated, in lieu of purchasing Serial
Loans as described above, to exchange with the Seller existing Financed Student
Loans owned by the Trust for Serial Loans owned by the Seller; PROVIDED,
HOWEVER, that each Financed Student Loan so exchanged (an "Exchanged Financed
Student Loan") meets specified criteria including that (1) the Exchanged
Financed Student Loan was originated under the same loan program and is
guaranteed by the same Guarantor as the Financed Student Loan and entitles the
holder to receive interest based on the same interest rate index as the Serial
Loan to be exchanged into the Trust (an "Exchanged Serial Loan") and (2) the
Exchanged Financed Student Loan will not, at any level of the interest rate
index, have an interest rate that is greater than that of the Exchanged Serial
Loan. In addition, if the outstanding principal balance of an Exchanged Financed
Student Loan is less than that of the related Exchanged Serial Loan, an
additional amount equal to the difference will be remitted to the Seller from
amounts which would otherwise have been part of the Available Funds as described
under "--Distributions" below. No Purchase Premium Amounts will be payable for
an Exchanged Serial Loan.
A purchase of Serial Loans or acquisition of Exchanged Serial Loans
will be prohibited at any time after (1) an Event of Default occurs under the
Indenture, a Servicer Default occurs under the Servicing Agreement or an
Administrator Default occurs under the Administration Agreement or (2) specified
events of insolvency occur with respect to the Seller.
Any purchase of New Loans or Serial Loans or exchange of Exchanged
Financed Student Loans for Exchanged Serial Loans will be made by the Trust on a
date designated by the Seller (each, a "Transfer Date") pursuant to one or more
Transfer Agreements. On the Transfer Date, the Seller will assign without
recourse (except as otherwise set forth in the Transfer and Servicing
Agreements) to the Eligible Lender Trustee on behalf of the Trust the Seller's
entire interest in the New Loans, Serial Loans or Exchanged Serial Loans being
transferred on the Transfer Date, in exchange for the related Loan Purchase
Amount or the Exchanged Financed Student Loans being exchanged therefor (with
the payment of any Purchase Premium Amount for Serial Loans acquired by the
Trust after the Revolving Period being deferred to the next succeeding Quarterly
Payment Date on which amounts in excess of the Specified Reserve Account Balance
are available in the Reserve Account as described above).
In addition, following the Closing Date and prior to the end of the
Revolving Period, in the event that a borrower under a Financed Student Loan who
is also a borrower under one or more Student Loans (whether or not all the loans
are part of the Trust) elects to consolidate the loans, the Eligible Lender
Trustee on behalf of the Trust will seek to originate a Federal Consolidation
Loan pursuant to the Federal Consolidation Loan Program described in the
prospectus under "Federal Family Education Loan Program--Federal Consolidation
Loan Program" and under "Federal Family Education Loan Program" in this
prospectus supplement. The origination will be funded by means of a transfer
from the Collateral Reinvestment Account of the amount required to repay in full
any Student Loans that are being discharged in the consolidation process, which
amount will be paid by the Trust to the holder or holders of the Student Loans
to prepay the loans. No assurance can be given that the Eligible Lender Trustee,
rather than another lender, will be the lender which makes the Federal
Consolidation Loan. In the event that another lender makes the Federal
Consolidation Loan, any Financed Student Loan which is being consolidated by the
Federal Consolidation Loan will be prepaid. The Eligible Lender Trustee will not
be permitted to originate Federal Consolidation Loans (including the addition of
any Add-on Consolidation Loans) on behalf of the Trust during the Revolving
Period in an aggregate principal amount in excess of [$35,000,000];
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after [October 28, 2030] if at the time of the
origination the aggregate principal balances of all Federal Consolidation Loans
held by the Trust that have a scheduled maturity date after [October 28, 2030]
exceed or, after giving effect to the origination, would exceed [$15,000,000];
provided, however, that the Eligible Lender Trustee will be permitted to fund
Add-on Consolidation Loans in excess of the amounts if required to do so by the
Act. After the Revolving Period the Eligible Lender Trustee on behalf of the
Trust will cease to originate Federal Consolidation Loans and any Federal
Consolidation Loan made with respect to a Financed Student Loan will be made by
another lender, thereby resulting in a prepayment of the Financed Student Loan;
PROVIDED, HOWEVER, that for a maximum period of 210 days following the end of
the Revolving Period, the Eligible Lender Trustee may be required to increase
the principal balance of any Federal Consolidation Loan by the amount of any
related Add-on Consolidation Loan, as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the prospectus and "Federal Family Education Loan
Program" in this prospectus supplement, borrowers may consolidate additional
Student Loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in some cases,
have a different interest rate and a different final payment date. Any Add-on
Consolidation Loan added during the Revolving Period to a Federal Consolidation
Loan in the Trust will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
that are being discharged in the consolidation process, which amount will be
paid by the Eligible Lender Trustee on behalf of the Trust to the holder or
holders of the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), the amounts will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which would otherwise have been part of the Available Funds as
described under "--Distributions" below.
As described under "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus, during specified qualifying
periods, interest on specified Financed Student Loans is not required to be paid
currently, but instead is added to the outstanding principal balance of the loan
at the end of the qualifying period. In order to minimize the possibility that
the failure to receive current interest payments on the loans during the
qualifying periods will result in a shortfall of the amount required to be
distributed on the Notes, amounts on deposit in the Collateral Reinvestment
Account will be applied during the Revolving Period to make interest payments to
the Noteholders in lieu of current collections of interest on the loans.
Following the end of the Revolving Period, the Collateral Reinvestment Account
will cease to be available as a source to fund the interest payments to the
Noteholders, and thereafter the payments will be funded through the application
of amounts which would otherwise have been distributable in respect of the
Principal Distribution Amount for the related Quarterly Payment Date as
described under "--Distributions" below.
ACCOUNTS
In addition to the collection account (the "Collection Account")
referred to in the prospectus under "Description of the Transfer and Servicing
Agreements--Accounts", the Administrator will establish and maintain a
collateral reinvestment account (the "Collateral Reinvestment Account") and a
reserve account (the "Reserve Account") in the name of the Indenture Trustee on
behalf of the Noteholders.
SERVICING COMPENSATION; ADMINISTRATION FEE
The Servicer will be entitled to receive from the Trust monthly, on
each Monthly Payment Date or Quarterly Payment Date, a monthly servicing fee
(the "Servicing Fee") in an amount equal to the lesser of (a) one-twelfth of [
]% or a larger percentage approved by the rating agencies rating the Notes, not
to exceed [ ]% (or of [ ]% if the Monthly Payment Date or Quarterly Payment Date
is on or after the [ ] Quarterly Payment Date) of the aggregate principal
balances of the Financed Student Loans as of the last day of the preceding
calendar month and (b) the sum of
1. one-twelfth of the In-School Percentage of the principal balance
of each billing account relating to a Financed Student Loan as of
the last day of the preceding calendar month which was an
In-School Student Loan (as defined in this prospectus supplement)
on the last day of the preceding calendar month or, if the
average principal balance of billing accounts relating to
In-School Student Loans as of the last day of the preceding
calendar month was $2,500 or less, $1.50 per billing account,
2. one-twelfth of the GRDF Percentage of the principal balance as of
the last day of the preceding calendar month of each billing
account relating to a Financed Student Loan which was a Grace,
Repayment, Deferral or Forbearance Student Loan (each, as defined
in this prospectus supplement) as of the last day of the
preceding calendar month or, if the average principal balance of
the billing accounts as of the last day of the preceding calendar
month was $3,000 or less, $3.00 per billing account,
3. a fee of $1.00 for each notification sent by the Servicer during
the preceding calendar month on behalf of the Trust to a borrower
providing information to the borrower with respect to Federal
Consolidation Loan programs,
4. a one-time fee of $75.00 for each Federal Consolidation Loan
originated by the Eligible Lender Trustee on behalf of the Trust
during the preceding calendar month,
5. a fee of $25.00 for each Financed Student Loan for which, during
the preceding calendar month, claim documentation was completed
and provided to the Guarantor or for which the Servicer performed
bankruptcy or ineligible billing account processing (that, in the
case of ineligible billing account processing, resulted in a
demand letter being sent to the borrower), in each case as
required by the claims-processing requirements of the related
Guarantor,
6. a fee of $0.05 per Financed Student Loan for storing and
warehousing the applicable loan documentation for each loan
during the preceding calendar month,
7. a one-time fee of $0.40 for each billing account transferred by
the Seller to the Trust during the preceding calendar month,
8. a fee equal to one-twelfth of the product of (A) the aggregate
principal balances of the Financed Student Loans outstanding as
of the last day of the preceding calendar month and (B) 0.05%,
which fee will be payable so long as specified servicing
regulations of the Department remain in effect, and
9. a fee of $70.00 per hour for system development requests made by
the Eligible Lender Trustee on behalf of the Trust and provided
by the Servicer during the preceding calendar month.
"Monthly Payment Date" means the twenty-eighth day of each month (or
if any twenty-eighth day is not a business day, the next succeeding business
day), commencing [ ].
For purposes of making the determinations set forth in clauses (1) and
(2) of the second preceding paragraph, the "In-School Percentage" and "GRDF
Percentage" shall each be determined based on the average principal balance of
the billing accounts relating to the In-School Student Loans and the billing
accounts relating to the Grace, Repayment, Deferral and Forbearance Student
Loans, respectively, as of the last day of the preceding calendar month, as
follows:
<TABLE>
<CAPTION>
AVERAGE PRINCIPAL IN-SCHOOL AVERAGE PRINCIPAL GRDF
BALANCE PERCENTAGE BALANCE PERCENTAGE
<S> <C> <C> <C>
$2,501 - $3,000................... 0.625% $ 3,001 - $ 3,400............... 1.100%
$3,001 - $3,500................... 0.525% $ 3,401 - $ 3,900............... 0.950%
$3,501 - $4,000................... 0.450% $ 3,901 - $ 4,400............... 0.830%
$4,001 - $4,750................... 0.375% $ 4,401 - $ 4,800............... 0.740%
$5,501 - $6,250................... 0.260% $ 5,401 - $ 6,000............... 0.575%
$6,251 and above.................. 0.230% $ 6,001 - $ 6,600............... 0.510%
$ 6,601 - $ 7,200............... 0.475%
$ 7,201 - $10,000................ 0.450%
$10,001 - $13,000................. 0.350%
$13,001 and above................. 0.300%
</TABLE>
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each Monthly
Payment Date and will be paid solely out of the Monthly Available Funds in the
case of each Monthly Payment Date that is not a Quarterly Payment Date (and out
of the Available Funds in the case of each Quarterly Payment Date) and amounts
on deposit in the Reserve Account on the Monthly Payment Date. To the extent
that, for any Monthly Payment Date, the Servicing Fee is the amount calculated
as described in clause (a) of the first paragraph under "--Servicing
Compensation; Administration Fee," then an amount (the "Servicing Fee
Shortfall") equal to the excess of the amount described in clause (b) of the
first paragraph under "--Servicing Compensation; Administration Fee," over the
amount described in clause (a) of the first paragraph under "--Servicing
Compensation; Administration Fee," shall be payable on the next succeeding
Monthly Payment Date (or if the Monthly Payment Date is also a Quarterly Payment
Date, on the Quarterly Payment Date) from any remaining amounts on deposit in
the Reserve Account that are in excess of the Specified Reserve Account Balance,
pursuant to the priorities described under "--Credit Enhancement--RESERVE
ACCOUNT" below. The Servicer will be obligated to perform its servicing
obligations whether or not it receives any amounts in respect of Servicing Fee
Shortfalls.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and as reimbursement for its expenses related
thereto, the Administrator will be entitled to receive monthly in arrears, on
each Monthly Payment Date that is not a Quarterly Payment Date and on each
Quarterly Payment Date, a monthly administration fee (the "Administration Fee")
in an amount equal to one-twelfth of the product of (1) [ ]% and (2) the Pool
Balance as of the close of business on the last day of the calendar month
immediately preceding the related Monthly Payment Date or Quarterly Payment
Date.
DISTRIBUTIONS
DEPOSITS TO THE COLLECTION ACCOUNT. On or about the third business day
prior to each Monthly Payment Date (the "Determination Date"), the Administrator
will provide the Indenture Trustee with specified information with respect to
the preceding Monthly Collection Period or, in the case of a Monthly Payment
Date that is also a Quarterly Payment Date, the preceding Collection Period,
including the amount of the Monthly Available Funds or the Available Funds, as
the case may be, received with respect to the Financed Student Loans and the
aggregate Purchase Amounts relating to the Financed Student Loans to be
repurchased by the Seller or to be purchased by the Servicer.
"Monthly Collection Period" means, with respect to any Monthly Payment
Date that is not a Quarterly Payment Date, the calendar month immediately
preceding the month of the Monthly Payment Date.
"Collection Period" means each period of three calendar months from
and including the date next following the end of the preceding Collection Period
(or with respect to the first Collection Period, the period beginning on the
Cutoff Date and ending on [ ]).
For purposes of this prospectus supplement, "Monthly Available Funds"
means, with respect to each Monthly Payment Date that is not a Quarterly Payment
Date, the sum of the following amounts with respect to the related Monthly
Collection Period:
1. all collections received by the Servicer on the Financed Student
Loans during the Collection Period (net, for the first Collection
Period, of interest accrued prior to the Cutoff Date and not to
be capitalized) and remitted to the Indenture Trustee (including
any Guarantee Payments received with respect to the Financed
Student Loans);
2. Interest Subsidy Payments and Special Allowance Payments received
by the Eligible Lender Trustee during the Monthly Collection
Period with respect to the Financed Student Loans;
3. all proceeds of the liquidation of defaulted Financed Student
Loans ("Liquidated Student Loans"), which became Liquidated
Student Loans during the Monthly Collection Period in accordance
with the Servicer's customary servicing procedures, net of
expenses incurred by the Servicer in connection with the
liquidation and any amounts required by law to be remitted to the
borrowers on the Liquidated Student Loans (the net proceeds,
"Liquidation Proceeds"), and all recoveries in respect of
Liquidated Student Loans which were written off in prior Monthly
Collection Periods and have been received by the Servicer during
the Monthly Collection Period and remitted to the Indenture
Trustee;
4. that portion of amounts released from the Collateral Reinvestment
Account with respect to Additional Fundings relating to interest
costs on the Financed Student Loans which are or will be
capitalized;
5. the aggregate amount received by the Indenture Trustee on the
Financed Student Loans repurchased by the Seller or purchased by
the Servicer under an obligation which arose during the related
Monthly Collection Period;
6. Investment Earnings for the Monthly Payment Date; and
7. with respect to each Monthly Payment Date other than a Quarterly
Payment Date and other than a Monthly Payment Date immediately
succeeding a Quarterly Payment Date,
the Monthly Available Funds remaining on deposit in the Collection Account from
the Monthly Collection Period relating to the preceding Monthly Payment Date
after giving effect to application of the Monthly Available Funds on the
preceding Monthly Payment Date; PROVIDED, HOWEVER, that if with respect to any
Monthly Payment Date there would not be sufficient funds, after application of
the Monthly Available Funds (as defined above) and amounts available in the
Reserve Account, to pay any of the items specified in clauses (1) and (2),
respectively, under the second paragraph of "--Distributions--DISTRIBUTIONS FROM
THE COLLECTION ACCOUNT" below, then the Monthly Available Funds for the Monthly
Payment Date will include, in addition to the Monthly Available Funds (as
defined above), amounts on deposit in the Collection Account on the
Determination Date relating to the Monthly Payment Date which would have
constituted part of the Monthly Available Funds for the Monthly Payment Date
succeeding the Monthly Payment Date up to the amount necessary to pay the items,
and the Monthly Available Funds for the succeeding Monthly Payment Date will be
adjusted accordingly; and PROVIDED, FURTHER, that the Monthly Available Funds
will exclude (A) all payments and proceeds (including Liquidation Proceeds) of
any Financed Student Loans the Purchase Amount of which was included in the
Monthly Available Funds for a prior Monthly Collection Period; (B) except as
expressly included in clause (4) above, amounts released from the Collateral
Reinvestment Account; (C) any Monthly Rebate Fees paid during the related
Monthly Collection Period by or on behalf of the Trust as described under
"Federal Family Education Loan Program--Fees Payable on Certain Financed Student
Loans" in this prospectus supplement; and (D) any collections in respect of
principal on the Financed Student Loans applied during the related Monthly
Collection Period by the Eligible Lender Trustee on behalf of the Trust prior to
the end of the Revolving Period to make deposits to the Collateral Reinvestment
Account, as described under "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" below
and, after the end of the Revolving Period, to fund the addition of any Add-on
Consolidation Loans, to purchase Serial Loans or to fund the acquisition of
Exchanged Serial Loans as described under "--Revolving Period and Additional
Fundings" above.
"Available Funds" means, with respect to any Quarterly Payment Date
and the related Collection Period, the sum of the amounts specified in clauses
(1) though (6) of the definition of Monthly Available Funds for each of the
three Monthly Collection Periods included in the Collection Period plus any
Trust Swap Receipt Amount received by the Trust with respect to the Quarterly
Payment Date; PROVIDED, HOWEVER, that if with respect to any Quarterly Payment
Date there would not be sufficient funds, after application of the Available
Funds (as defined above) and amounts available in the Reserve Account, to pay
any of the items specified in clauses (1) through (6), respectively, under the
third paragraph of "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" below, then the
Available Funds for the Quarterly Payment Date will include, in addition to the
Available Funds (as defined above), amounts on deposit in the Collection Account
on the Determination Date relating to the Quarterly Payment Date which would
have constituted part of the Available Funds for the Quarterly Payment Date
succeeding the Quarterly Payment Date up to the amount necessary to pay these
items, and the Available Funds for the succeeding Quarterly Payment Date will be
adjusted accordingly; and provided, further, that the Available Funds will
exclude
o all payments and proceeds (including Liquidation Proceeds) of any
Financed Student Loans the Purchase Amount of which was included
in the Monthly Available Funds for a prior Monthly Collection
Period;
o except as expressly included in clause (4) above, amounts
released from the Collateral Reinvestment Account;
o any Monthly Rebate Fees paid during the related Monthly
Collection Period by or on behalf of the Trust as described under
"Federal Family Education Loan Program--Fees Payable on Certain
Financed Student Loans" in this prospectus supplement; and
o any collections in respect of principal on the Financed Student
Loans applied during the related Monthly Collection Period by the
Eligible Lender Trustee on behalf of the Trust prior to the end
of the Revolving Period to make deposits to the Collateral
Reinvestment Account, as described under "--DISTRIBUTIONS FROM
THE COLLECTION ACCOUNT" below and, after the end of the Revolving
Period, to fund the addition of any Add-on Consolidation Loans,
to purchase Serial Loans or to fund the acquisition of Exchanged
Serial Loans as described under "--Revolving Period and
Additional Fundings" above.
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT. From time to time during
the Revolving Period, on any day tin this prospectus supplement, the
Administrator may instruct the Indenture Trustee to withdraw all collections in
respect of principal on the Financed Student Loans then on deposit in the
Collection Account and deposit these amounts in the Collateral Reinvestment
Account. In addition, from time to time during the Revolving Period, the
Administrator may instruct the Indenture Trustee to withdraw funds on deposit in
the Collateral Reinvestment Account to the extent the funds are not needed to
make Additional Fundings and redeposit the amounts in the Collection Account.
On each Monthly Payment Date that is not a Quarterly Payment Date, the
Administrator will instruct the Indenture Trustee to make the following
distributions to the extent of the Monthly Available Funds in the Collection
Account for the Monthly Payment Date, in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Monthly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee
Shortfall or prior unpaid Servicing Fee Shortfalls); and
(2) to the Administrator, the Administration Fee for the Monthly
Payment Date and all prior unpaid Administration Fees.
On each Quarterly Payment Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions to the extent
of the Available Funds for the Quarterly Payment Date in the Collection Account,
in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Quarterly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee
Shortfall or prior unpaid Servicing Fee Shortfalls);
(2) to the Administrator, the Administration Fee for the Quarterly
Payment Date and all prior unpaid Administration Fees;
(3) to the Class A-1 Noteholders, the Class A-1 Noteholders' Interest
Distribution Amount, to the Class A-2 Noteholders, the Class A-2
Noteholders' Interest Distribution Amount, and to the Swap
Counterparty, the Trust Swap Payment Amount, if any, for the
Quarterly Payment Date, PRO RATA, based on the ratio of each
amount to the total of the amounts;
(4) to the Subordinate Noteholders, the Subordinate Noteholders'
Interest Distribution Amount for the Quarterly Payment Date;
(5) if the Revolving Period has terminated, to the Senior
Noteholders, the Senior Noteholders' Principal Distribution
Amount for the Quarterly Payment Date (the amount to be allocated
among the Senior Noteholders as described in this prospectus
supplement under "Description of the Notes--Distributions of
Principal");
(6) after the Senior Notes have been paid in full, to the Subordinate
Noteholders, the Subordinate Noteholders' Principal Distribution
Amount for the Quarterly Payment Date; and
(7) to the Reserve Account, any remaining amounts after application
of clauses (1) through (6) above.
For purposes of this prospectus supplement, the following terms have
the following meanings:
The "Class A-1 Noteholders' Interest Basis Carryover" means, the sum
of (1) if the Class A-1 Note Rate for any Quarterly Payment Date is based on the
Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Class A-1 Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Class A-1 Note LIBOR
Rate over (b) the amount of interest on the Class A-1 Notes actually accrued in
respect of the Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (2) the unpaid portion of any excess from prior Quarterly Payment
Dates and interest accrued thereon at the Class A-1 Note Rate calculated based
on the Class A-1 Note LIBOR Rate.
The "Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-1
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-1
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-1 Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Class A-1 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the amount of interest
accrued at the Class A-1 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-1 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-1 Noteholders on on the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-1 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date; provided, however, that the Class A-1
Noteholders' Interest Distribution Amount will not include any Class A-1
Noteholders' Interest Basis Carryover.
The "Class A-2 Noteholders' Interest Basis Carryover" means, the sum
of (1) if the Class A-2 Note Rate for any Quarterly Payment Date is based on the
Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Class A-2 Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Class A-2 Note LIBOR
Rate over (b) the amount of interest on the Class A-2 Notes actually accrued in
respect of the Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (2) the unpaid portion of any excess from prior Quarterly Payment
Dates and interest accrued thereon at the Class A-2 Note Rate calculated based
on the Class A-2 Note LIBOR Rate.
The "Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-2
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-2
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-2 Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Class A-2 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the amount of interest
accrued at the Class A-2 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-2 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-2 Noteholders on on the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-2 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date; provided, however, that the Class A-2
Noteholders' Interest Distribution Amount will not include any Class A-2
Noteholders' Interest Basis Carryover.
The "Net Trust Swap Payment Carryover Shortfall" means, with respect
to any Quarterly Payment Date with respect to which there shall be an amount
owed by the Trust to the Swap Counterparty under the Interest Rate Swap, the
excess of (1) the Trust Swap Payment Amount on the preceding Quarterly Payment
Date over (2) the amount actually paid to the Swap Counterparty out of Available
Funds on the preceding Quarterly Payment Date, plus interest on the excess from
the preceding Quarterly Payment Date to the current Quarterly Payment Date at
the rate of Three Month LIBOR for the related Quarterly Interest Period.
The "Net Trust Swap Receipt Carryover Shortfall" means, with respect
to any Quarterly Payment Date with respect to which there shall be an amount
owed by the Swap Counterparty to the Trust under the Interest Rate Swap, the
excess of (1) the Trust Swap Receipt Amount on the preceding Quarterly Payment
Date over (2) the amount actually paid by the Swap Counterparty to the Trust on
the preceding Quarterly Payment Date, plus interest on the excess from the
preceding Quarterly Payment Date to the current Quarterly Payment Date at the
rate of Three Month LIBOR for the related Quarterly Interest Period.
The "Noteholders' Interest Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Subordinate Noteholders' Interest Distribution Amount for the Quarterly
Payment Date.
"Principal Distribution Adjustment" means, with respect to any
Quarterly Payment Date if the Revolving Period has terminated, the amount of the
Available Funds on the Quarterly Payment Date to be used to make additional
principal distributions to the Senior Noteholders (and, after the Senior Notes
have been paid in full, to the Subordinate Noteholders) to account for (1) the
amount of any insignificant balance remaining outstanding as of the Quarterly
Payment Date on a Financed Student Loan after receipt of a final payment from a
borrower or a Guarantor, when the insignificant balances are waived in the
ordinary course of business by the Servicer at the direction of the
Administrator in accordance with the Servicing Agreement, or (2) the amount of
principal collections erroneously treated as interest collections including,
without limitation, by reason of the failure by a borrower to capitalize
interest that had been expected to be capitalized; provided, however, that the
Principal Distribution Adjustment for any Quarterly Payment Date shall not
exceed the lesser of (x) $100,000 and (y) the amount of any Reserve Account
Excess remaining after giving effect to all distributions to be made therefrom
on the Quarterly Payment Date other than distributions to the Company out of the
excess.
"Principal Distribution Amount" means, with respect to any Quarterly
Payment Date (if the Revolving Period has terminated prior to the end of the
related Collection Period with respect to the Quarterly Payment Date), the sum
of the following amounts with respect to the related Collection Period:
1. that portion of all collections received by the Servicer on the
Financed Student Loans and remitted to the Indenture Trustee that
is allocable to principal (including the portion of any Guarantee
Payments received that is allocable to principal) of the Financed
Student Loans less the sum of
o any collections which are applied by the Trust during the
Collection Period to purchase Serial Loans,
o any collections which are applied by the Trust during the
Collection Period to fund the addition of any Add-on
Consolidation Loans and
o accrued and unpaid interest on the Financed Student Loans
for the Collection Period to the extent the interest is not
currently being paid but will be capitalized upon
commencement of repayment of the Financed Student Loans;
2. all Liquidation Proceeds attributable to the principal balances
of Financed Student Loans which became Liquidated Student Loans
during the Collection Period in accordance with the Servicer's
customary servicing procedures to the extent received the
Servicer during the related Collection Period and remitted to the
Indenture Trustee, together with all Realized Losses on the
Financed Student Loans;
3. to the extent attributable to principal, the amount received by
the Indenture Trustee with respect to each Financed Student Loan
repurchased by the Seller or purchased by the Servicer as a
result of a breach of a representation, warranty or covenant
under an obligation which arose during the related Collection
Period; and
4. the Principal Distribution Adjustment, if any;
provided, however, that the Principal Distribution Amount will exclude all
payments and proceeds (including Liquidation Proceeds) of any Financed Student
Loan the Purchase Amount of which was included in the Available Funds for a
prior Collection Period and, if the Revolving Period terminated during the
related Collection Period, will exclude all amounts representing collections in
respect of principal on the Financed Student Loans during the Collection Period
that were deposited in the Collateral Reinvestment Account.
"Realized Losses" means the excess of the aggregate principal balances
of the Liquidated Student Loans over the related Liquidation Proceeds to the
extent allocable to principal.
The "Senior Noteholders' Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Senior Noteholders' Principal Distribution Amount for the Quarterly Payment
Date.
The "Senior Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the Class A-1 Noteholders'
Interest Distribution Amount, and (2) the Class A-2 Noteholders' Interest
Distribution Amount, for the Quarterly Payment Date; provided, however, that the
Senior Noteholders' Interest Distribution Amount will not include any Class A-1
Noteholders' Interest Basis Carryover or Class A-2 Noteholders' Interest Basis
Carryover.
The "Senior Noteholders' Principal Carryover Shortfall" means, as of
the close of any Quarterly Payment Date, the excess of (1) the Senior
Noteholders' Principal Distribution Amount on the Quarterly Payment Date over
(2) the amount of principal actually distributed to the Senior Noteholders on
the Quarterly Payment Date.
The "Senior Noteholders' Principal Distribution Amount" means, with
respect to any Quarterly Payment Date (if the Revolving Period has terminated
prior to the end of the related Collection Period with respect to the Quarterly
Payments Date), the Principal Distribution Amount for the Quarterly Payment Date
plus the Senior Noteholders' Principal Carryover Shortfall as of the close of
the preceding Quarterly Payment Date; provided, however, that the Senior
Noteholders' Principal Distribution Amount will not exceed the aggregate
principal amount of the Senior Notes outstanding on the preceding Quarterly
Payment Date. In addition, (1) on the Class A-1 Note Final Maturity Date, the
principal required to be distributed to the Class A-1 Noteholders will include
the amount required to reduce the outstanding aggregate principal amount of the
Class A-1 Notes to zero and (2) on the Class A-2 Note Final Maturity Date, the
principal required to be distributed to the Class A-2 Noteholders will include
the amount required to reduce the outstanding aggregate principal amount of the
Class A-2 Notes to zero.
The "Subordinate Noteholders' Distribution Amount" means, with respect
to any Quarterly Payment Date, the Subordinate Noteholders' Interest
Distribution Amount for the Quarterly Payment Date plus, with respect to any
Quarterly Payment Date on and after which the Senior Notes have been paid in
full, the Subordinate Noteholders' Principal Distribution Amount for the
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Basis Carryover" means, the sum
of (1) if the Subordinate Note Rate for any Quarterly Payment Date is based on
the Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Subordinate Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Subordinate Note LIBOR
Rate over (b) the amount of interest on the Subordinate Notes actually accrued
in respect of the Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (2) the unpaid portion of any excess from prior Quarterly Payment
Dates and interest accrued thereon at the Subordinate Note Rate calculated based
on the Subordinate Note LIBOR Rate.
The "Subordinate Noteholders' Interest Carryover Shortfall" means,
with respect to any Quarterly Payment Date, the excess of (1) the Subordinate
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Subordinate
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the rate borne by the
Subordinate Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Distribution Amount" means,
with respect to any Quarterly Payment Date, the sum of (1) the amount of
interest accrued at the Subordinate Note Rate for the related Quarterly Interest
Period on the aggregate principal amount of the Subordinate Notes outstanding on
the immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Subordinate Noteholders on the Quarterly Payment
Date) or, in the case of the first Quarterly Payment Date, on the Closing Date
and (2) the Subordinate Noteholders' Interest Carryover Shortfall for the
Quarterly Payment Date; provided, however, that the Subordinate Noteholders'
Interest Distribution Amount will not include any Subordinate Noteholders'
Interest Basis Carryover.
The "Subordinate Noteholders' Principal Carryover Shortfall" means, as
of the close of any Quarterly Payment Date on or after which the Senior Notes
have been paid in full, the excess of (1) the Subordinate Noteholders' Principal
Distribution Amount on the Quarterly Payment Date over (2) the amount of
principal actually distributed to the Subordinate Noteholders on the Quarterly
Payment Date.
The "Subordinate Noteholders' Principal Distribution Amount" means,
with respect to each Quarterly Payment Date on and after which the aggregate
principal amount of the Senior Notes has been paid in full, the sum of (a) the
Principal Distribution Amount for the Quarterly Payment Date (or, in the case of
the Quarterly Payment Date on which the aggregate principal amount of the Senior
Notes is paid in full, any remaining Principal Distribution Amount not otherwise
distributed to Senior Noteholders on the Quarterly Payment Date) and (b) the
Subordinate Noteholders' Principal Carryover Shortfall as of the close of the
preceding Quarterly Payment Date; provided, however, that the Subordinate
Noteholders' Principal Distribution Amount will in no event exceed the aggregate
principal amount of the Subordinate Notes outstanding on the preceding Quarterly
Payment Date. In addition, on the Subordinate Note Final Maturity Date, the
principal required to be distributed to the Subordinate Noteholders will include
the amount required to reduce the outstanding principal amount of the
Subordinate Notes to zero.
The "Trust Swap Payment Amount" means, with respect to any Quarterly
Payment Date, the sum of (1) if the Interest Rate Swap is still in effect, the
Net Trust Swap Payment for the Quarterly Payment Date and (2) the Net Trust Swap
Payment Carryover Shortfall for the Quarterly Payment Date.
The "Trust Swap Receipt Amount" means, with respect to any Quarterly
Payment Date, the sum of (1) if the Interest Rate Swap is still in effect, the
Net Trust Swap Receipt for the Quarterly Payment Date and (2) the Net Trust Swap
Receipt Carryover Shortfall for the Quarterly Payment Date.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Pursuant to the Administration Agreement and the Loan
Sale Agreement, the Reserve Account will be created with an initial deposit by
the Depositor on the Closing Date of cash or Eligible Investments in an amount
equal to the Reserve Account Initial Deposit. The Reserve Account will be
augmented on each Quarterly Payment Date by the deposit tin this prospectus
supplement of the amount of the Available Funds remaining after payment of the
Servicing Fee and all overdue Servicing Fees, the Administration Fee and all
overdue Administration Fees, the Senior Noteholders' Interest Distribution
Amount and the Trust Swap Payment Amount, if any, the Subordinate Noteholders'
Interest Distribution Amount and, if the Revolving Period has terminated, the
Senior Noteholders' Principal Distribution Amount and the Subordinate
Noteholders' Principal Distribution Amount, all for the Quarterly Payment Date.
See "--Distributions" above. As described below, subject to some limitations,
amounts on deposit in the Reserve Account will be released to the Company to the
extent that the amount on deposit in the Reserve Account exceeds the Specified
Reserve Account Balance.
"Specified Reserve Account Balance" with respect to any Quarterly
Payment Date generally will be the greater of:
(a) [ ]% of the aggregate principal amount of the Notes outstanding on
the Quarterly Payment Date after taking into account the effect of distributions
on the Quarterly Payment Date, or
(b) $[ ];
provided, however, that the Specified Reserve Account Balance shall in no event
exceed the aggregate principal amount of the Notes outstanding on the Quarterly
Payment Date.
If the amount on deposit in the Reserve Account on any Quarterly
Payment Date (after giving effect to all distributions required to be made from
the Available Funds on the Quarterly Payment Date) is greater than the Specified
Reserve Account Balance for the Quarterly Payment Date, the Administrator will
instruct the Indenture Trustee to apply the amount of the excess (the "Reserve
Account Excess") (a) during the Revolving Period, for deposit to the Collateral
Reinvestment Account; provided, however, that if this date is on or after the
Parity Date, to the extent that the funds represent payments (other than
principal payments) with respect to the Financed Student Loans, the funds shall
be applied in the order of priority set forth in clauses (b)(3) through (6)
below, and (b) at and after the termination of the Revolving Period, to the
following (in the priority indicated):
1. to the Seller for any unpaid Purchase Premium Amounts for any
Serial Loans purchased by the Trust prior to the end of the
related Collection Period;
2. if the Quarterly Payment Date is on or prior to the Parity Date,
to the payment of the unpaid principal amount of the Senior Notes
(to be allocated between the Class A-1 Noteholders and the Class
A-2 Noteholders as described in this prospectus supplement under
"Description of the Notes--Distributions of Principal") or, if
the Senior Notes have been paid in full, of the Subordinate
Notes, until the aggregate principal amount of the Notes is equal
to the Pool Balance as of the close of business on the last day
of the related Collection Period;
3. if the Quarterly Payment Date is after the [ ] Quarterly Payment
Date, to the payment of the unpaid principal amount of the Senior
Notes (to be allocated between the Class A-1 Noteholders and the
Class A-2 Noteholders as described in this prospectus supplement
under "Description of the Notes--Distributions of Principal") or,
if the Senior Notes have been paid in full, of the Subordinate
Notes;
4. to the Class A-1 Noteholders and the Class A-2 Noteholders, PRO
RATA, the aggregate unpaid amount of any Class A-1 Noteholders'
Interest Basis Carryover and Class A-2 Noteholders' Interest
Basis Carryover based on the ratio of each amount to the total of
the amounts;
5. to the Subordinate Noteholders, the aggregate unpaid amount of
any Subordinate Noteholders' Interest Basis Carryover;
6. to the Servicer, the Servicing Fee Shortfall and all prior unpaid
Servicing Fee Shortfalls, if any; and
7. to the Company, any excess remaining after application of clauses
(1) through (6) above,
and, upon the payment to the Company or an affiliate, the Noteholders will not
have any rights in, or claims to, the amounts.
Subject to the limitation described in the preceding paragraph,
amounts held from time to time in the Reserve Account will continue to be held
for the benefit of the Trust. Funds will be withdrawn from the Reserve Account
(a) on each Monthly Payment Date that is not a Quarterly Payment Date, to the
extent that the Monthly Available Funds on the Monthly Payment Date is
insufficient to pay: (1) the Servicing Fee and all overdue Servicing Fees and
(2) the Administration Fee and all overdue Administration Fees, and (b) on any
Quarterly Payment Date to the extent that the amount of the Available Funds on
the Quarterly Payment Date is insufficient to pay any of the items specified in
clauses (1) through (7), respectively, of the third paragraph under
"--Distributions--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" above on the
Quarterly Payment Date. The funds will be paid from the Reserve Account to the
persons and in the order of priority specified for distribution from the
Collection Account on the Quarterly Payment Date. As a result of the
subordination of the Subordinate Notes to the Senior Notes described elsewhere
in this prospectus supplement, any amounts that the Subordinate Noteholders
would otherwise receive from the Reserve Account in respect of the Subordinate
Noteholders' Interest Distribution Amount on any Quarterly Payment Date will be
paid to the Senior Noteholders until the Senior Noteholders' Interest
Distribution Amount for the Quarterly Payment Date has been paid in full. In
addition, as a result of the subordination, Subordinate Noteholders will not
receive any amounts from the Reserve Account in respect of the Subordinate
Noteholders' Principal Distribution Amount until the Senior Notes have been paid
in full. See "--SUBORDINATION" below.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the Senior Noteholders and the Subordinate Noteholders of the full
amount of principal and interest due them and to decrease the likelihood that
the Senior Noteholders or the Subordinate Noteholders will experience losses. In
specified circumstances, however, the Reserve Account could be depleted. If the
amount required to be withdrawn from the Reserve Account to cover shortfalls in
the amount of the Available Funds (or the Monthly Available Funds) exceeds the
amount of cash in the Reserve Account, the Senior Noteholders or the Subordinate
Noteholders could incur losses or a temporary shortfall in the amount of
principal and interest distributed to the Senior Noteholders or the Subordinate
Noteholders, which result could, in turn, increase the average life of the
Senior Notes or the Subordinate Notes. Amounts on deposit in the Reserve Account
will not be available in any respect until the Parity Date to cover any
aggregate unpaid Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover or Subordinate Noteholders' Interest Basis
Carryover and after the Parity Date only amounts on deposit in the Reserve
Account that (after paying, for Quarterly Payment Dates occurring after the
Revolving Period, any unpaid Purchase Premium Amounts for any Serial Loans
purchased by the Trust prior to the end of the related Collection Period) are in
excess of the Specified Reserve Account Balance will be available therefor.
SUBORDINATION. While the Class A-1 Noteholders and the Class A-2
Noteholders will have equal priority to the payment of interest, on any
Quarterly Payment Date on which principal is due to be paid on the Senior Notes,
and the Class A-2 Noteholders will receive no payments of principal until the
Class A-1 Noteholders have received payments of principal in an amount
sufficient to reduce the aggregate principal amount of the Class A-1 Notes to
zero; provided, however, that from and after any acceleration of the Notes
following an Event of Default (as defined in the prospectus), principal will be
allocated pro rata between the Class A-1 Notes and the Class A-2 Notes, based on
the ratio of the aggregate principal amount of each class of Notes to the
aggregate principal amount of the Senior Notes, until the aggregate principal
amount of the Senior Notes has been reduced to zero. In addition, the rights of
the Subordinate Noteholders to receive payments of interest on any Quarterly
Payment Date out of the Available Funds or the Reserve Account are subordinated
to the rights of the Senior Noteholders to receive payments of interest on the
Quarterly Payment Date, and the rights of the Subordinate Noteholders to receive
payments of principal out of the Available Funds or the Reserve Account on any
Quarterly Payment Date are subordinated to the rights of the Senior Noteholders
to receive payments of interest and principal on the Quarterly Payment Date. The
Subordinate Noteholders will not be entitled to any payments of principal out of
the Available Funds or the Reserve Account until the Senior Notes are paid in
full.
INTEREST RATE SWAP
PAYMENTS UNDER THE SWAP AGREEMENT. On the Closing Date, the Trust will
enter into an interest rate swap agreement (the "Interest Rate Swap") with [ ]
(the "Swap Counterparty"). The Interest Rate Swap will be documented according
to a 1992 ISDA Master Agreement (Multicurrency-Cross Border) ("1992 Master
Agreement") modified to reflect the terms of the Notes, the Indenture and the
Interest Rate Swap. The Interest Rate Swap will terminate on the earliest to
occur of the [ ] Quarterly Payment Date (the "Scheduled Swap Termination Date"),
the date on which the Notes have been paid in full and the date on which the
Interest Rate Swap is terminated in accordance with its terms pursuant to an
early termination (the "Swap Termination Date").
In accordance with the terms of the Interest Rate Swap, the Swap
Counterparty will pay to the Trust, on each Quarterly Payment Date with respect
to which the Interest Rate Swap is still in effect, an amount equal to the
product of
o the Swap Rate for the related Quarterly Interest Period,
o the Scheduled Notional Swap Amount for the Quarterly Payment Date
and
o the quotient of the number of days in the related Quarterly
Interest Period divided by 360.
The "Swap Rate" for any Quarterly Interest Period will be a rate equal to
Three-Month LIBOR (determined as described in this prospectus supplement under
"Description of the Notes--Calculation of Three-Month LIBOR") for the Quarterly
Interest Period. The "Scheduled Notional Swap Amount" for any Quarterly Payment
Date will be the lesser of (1) the outstanding principal balance of the Notes
immediately preceding the Quarterly Payment Date and (2) the amount listed on
Exhibit A hereto for the Quarterly Payment Date. The Depositor expects that the
Scheduled Notional Swap Amount for each Quarterly Payment Date prior to the Swap
Termination Date will be equal to approximately [ ]% of the outstanding
principal amount of the Notes immediately preceding the Quarterly Payment Date.
However, following the Closing Date, the depositor may agree with the Swap
Counterparty to cause the Scheduled Notional Swap Amount to equal the
outstanding principal balance of the Notes.
In exchange for the payment, the Trust will pay to the Swap
Counterparty, on each Quarterly Payment Date with respect to which the Interest
Rate Swap is still in effect, an amount equal to the product of
o the T-Bill Rate (determined as described below) for the related
Quarterly Interest Period plus at least [ ]% but not more than [
],
o the Scheduled Notional Swap Amount for the Quarterly Payment Date
and
o the quotient of the actual number of days in the Quarterly
Interest Period divided by 365 (or 366 in the case of any amount
which is being calculated with respect to a Quarterly Payment
Date in a leap year).
With respect to each Quarterly Payment Date with respect to which the Interest
Rate Swap is still in effect (and without regard to any payments remaining
unpaid from a prior Quarterly Payment Date), any difference between the payment
by the Swap Counterparty to the Trust and the payment by the Trust to the Swap
Counterparty will be referred to as a "Net Trust Swap Receipt", if the
difference is a positive number, and a "Net Trust Swap Payment", if the
difference is a negative number. Any payments pursuant to the Interest Rate Swap
will be made solely on a net basis, as described above. The Trust Swap Receipt
Amount, if any, will be distributed as part of the Available Funds on the
Quarterly Payment Date and the Trust Swap Payment Amount, if any, will be paid
out of the Available Funds.
The "T-Bill Rate", with respect to any Quarterly Interest Period,
means the weighted average of the T-Bill Rates for each day within the Quarterly
Interest Period and, with respect to any date within a Quarterly Interest
Period, means the weighted average discount rate per annum (expressed on a bond
equivalent basis and applied on a daily basis) for direct obligations of the
United States with a maturity of 13 weeks ("91-day Treasury Bills") sold at the
most recent 91-day Treasury Bill auction prior to the date, as reported by the
U.S. Department of the Treasury. In the event that the results of the auctions
of 91-day Treasury Bills cease to be reported as provided above, or that no
auction is held in a particular week, then the T-Bill Rate in effect as a result
of the last publication or report will remain in effect until the time, if any,
as the results of auctions of 91-day Treasury Bills shall again be reported or
the auction is held, as the case may be. The T-Bill Rate will be subject to a
Lock-In Period of six business days.
"Lock-In Period" means the period of days preceding any Quarterly
Payment Date during which the T-Bill Rate in effect on the first day of the
period will remain in effect until the end of the Quarterly Interest Period
related to the Quarterly Payment Date.
MODIFICATION AND AMENDMENT OF THE SWAP AGREEMENT AND TRANSFER AND
SERVICING AGREEMENTS. The Trust Agreement and the Indenture will contain
provisions permitting the Eligible Lender Trustee, with the consent of the
Indenture Trustee, to enter into any amendment to the Swap Agreement requested
by the Swap Counterparty to cure any ambiguity in, or correct or supplement any
provision of, the Swap Agreement, so long as the Eligible Lender Trustee
determines, and the Indenture Trustee agrees in writing, that the amendment will
not adversely affect the interests of the Noteholders. The written consent of
the Swap Counterparty will be required before any amendment is made to the
Indenture or the Transfer and Servicing Agreements.
CONDITIONS PRECEDENT. The respective obligations of the Swap
Counterparty and the Trust to pay specified amounts due under the Swap Agreement
will be subject to the following conditions precedent: (1) no Swap Default (as
defined below) or event that with the giving of notice or lapse of time or both
would become a Swap Default shall have occurred and be continuing and (2) no
Termination Event (as defined below) has occurred or been effectively
designated; provided, however, that the Swap Counterparty's obligation to pay
these amounts will not be subject to these conditions unless principal of the
Notes has been accelerated following an Event of Default under the Indenture or
an early termination under the Swap Agreement has occurred or been designated.
DEFAULTS UNDER THE SWAP. "Events of Default" under the Swap Agreement
(each a "Swap Default") are limited to
o the failure of the Trust or the Swap Counterparty to pay any
amount when due under the Interest Rate Swap after giving effect
to the applicable grace period; provided, however, that, in the
case of the Trust, the Trust has funds available after all prior
obligations of the Trust to make this payment,
o the occurrence of specified events of insolvency or bankruptcy of
the Trust or the Swap Counterparty,
o an acceleration of the principal of the Notes following an Event
of Default under the Indenture, and
o the following other standard events of default under the 1992
Master Agreement:
o "Breach of Agreement" (not applicable to the Trust),
o "Credit Support Default" (not applicable to the Trust),
o "Misrepresentation" (not applicable to the Trust), and
o "Merger without Assumption" (not applicable to the Trust),
as described in Sections 5(a)(ii), 5(a)(iii), 5(a)(iv) and
5(a)(viii) of the 1992 Master Agreement.
TERMINATION EVENTS. "Termination Events" under the Swap Agreement
consist of the following standard events under the 1992 Master Agreement:
"Illegality" (which generally relates to changes in law causing it to become
unlawful for either party to perform its obligations under the Interest Rate
Swap) and "Tax Event" (which generally relates to either party to the Interest
Rate Swap receiving a payment under the Interest Rate Swap from which an amount
has been deducted or withheld for or on account of taxes), as described in
Sections 5(b)(i) and 5(b)(ii) of the 1992 Master Agreement.
EARLY TERMINATION OF THE SWAP. Upon the occurrence of any Swap Default
under the Swap Agreement, the non-defaulting party will have the right to
designate an Early Termination Date (as defined in the Swap Agreement) upon the
occurrence of the Swap Default. The Trust may not designate an Early Termination
Date without the consent of the Administrator. With respect to Termination
Events, an Early Termination Date may be designated by one of the parties (as
specified in the Swap Agreement) and will occur only upon notice and, in some
circumstances, after any Affected Party has used reasonable efforts to transfer
it rights and obligations under the Swap Agreement to a related entity within a
limited period after notice has been given of the Termination Event, all as set
forth in the Swap Agreement. The occurrence of an Early Termination Date under
the Swap Agreement will constitute a "Swap Early Termination".
Upon any Swap Early Termination of the Swap Agreement, the Trust or
the Swap Counterparty may be liable to make a termination payment to the other
(regardless, if applicable, of which of the parties has caused the termination).
The amount of the termination payment will be based on the value of the Interest
Rate Swap computed in accordance with the procedures set forth in the Interest
Rate Swap. Any payment could be substantial. In the event that the trust is
required to make a termination payment, the payment will be payable in the same
order of priority as any Trust Swap Payment Amount payable to the Swap
Counterparty (which is payable pari passu with the Class A-1 Noteholders'
Interest Distribution Amount and the Class A-2 Noteholders' Interest
Distribution Amount); PROVIDED, HOWEVER, that, in the event that a termination
payment is owed to the Swap Counterparty following a Swap Default resulting from
a default of the Swap Counterparty or a Termination Event, the termination
payment will be subordinate to the right of the Noteholders to receive full
payment of principal of and interest on the Notes. Accordingly, termination
payments, if required to be made by the Trust, could result in shortfalls to
Noteholders.
If, following an Early Termination Date, a Termination Payment is owed
by the Trust to the Swap Counterparty and the Trust receives a payment
("Assumption Payment") from a successor swap counterparty to assume the position
of the Swap Counterparty, the portion of the Assumption Payment that does not
exceed the amount of the Termination Payment owed by the Trust to the Swap
Counterparty will be paid by the Trust to the Swap Counterparty and will not be
available to make distributions to Noteholders. Following the payment, the
amount of the Termination Payment owed by the Trust to the Swap Counterparty
will be reduced by the amount of the payment.
RATING AGENCY DOWNGRADE. If the rating of the Swap Counterparty (or
any successor credit support provider) is withdrawn or reduced below [ ] or its
equivalent by any Swap Rating Agency (this withdrawal or reduction, a "Rating
Agency Downgrade"), the Swap Counterparty is required, no later than the 30th
day following the Rating Agency Downgrade, at the Swap Counterparty's expense,
either to (1) obtain a substitute Swap Counterparty that has a counterparty
rating of at least [ ] or its equivalent by the Swap Rating Agency or (2) enter
into arrangements reasonably satisfactory to the Trustee, including collateral
arrangements, guarantees or letters of credit, which arrangements in the view of
the Swap Rating Agency will result in the total negation of the effect or impact
of the Rating Agency Downgrade on the Noteholders and the Depositor.
THE SWAP COUNTERPARTY. [ ] is a [ ] company with its principal place
of business located at [ ]. As of the date of the prospectus supplement, the
Swap Counterparty's counterparty ratings were [ ].
THE INFORMATION SET OUT IN THE PRECEDING PARAGRAPH HAS BEEN PROVIDED
BY THE SWAP COUNTERPARTY AND IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS,
AND IS NOT TO BE CONSTRUED AS REPRESENTATIONS, BY THE DEPOSITOR OR THE
UNDERWRITERS. EXCEPT FOR THE FOREGOING PARAGRAPH, THE SWAP COUNTERPARTY AND ITS
AFFILIATES HAVE NOT BEEN INVOLVED IN THE PREPARATION OF, AND DO NOT ACCEPT
RESPONSIBILITY FOR, THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
COMPANY LIABILITY
Anything to the contrary in the prospectus notwithstanding, the
Company will not be liable to any person or entity for the amount of any losses,
claims, damages or liabilities arising out of or based on the Trust Agreement.
TERMINATION
Certain information regarding termination of the Trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
prospectus; PROVIDED, HOWEVER, that the information set forth under the heading
"Description of the Transfer and Servicing Agreements--Insolvency Event" is not
applicable in connection with the Trust.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the [ ] Quarterly Payment Date will be
offered for sale by the Indenture Trustee. The Seller, its affiliates and
unrelated third parties may offer bids to purchase the Financed Student Loans on
the Quarterly Payment Date. If at least two bids (one of which is from a bidder
other than the Seller and its affiliates) are received, the Indenture Trustee
will accept the highest bid equal to or in excess of the greater of (x) the
aggregate Purchase Amounts of the Financed Student Loans as of the end of the
Collection Period immediately preceding the Quarterly Payment Date and (y) an
amount that would be sufficient to
o reduce the outstanding principal amount of the Notes on the
Quarterly Payment Date to zero,
o pay to the Noteholders, the Noteholders' Interest Distribution
Amount payable on the Quarterly Payment Date plus any Class A-1
Noteholders' Interest Basis Carryover, Class A-2 Noteholders'
Interest Basis Carryover and Subordinate Noteholders' Interest
Basis Carryover and
o pay to the Swap Counterparty any prior unpaid Net Trust Swap
Payment Carryover Shortfalls and any other amounts owed by the
Trust to the Swap Counterparty under the Interest Rate Swap (the
greater amount, the "Minimum Purchase Price").
If at least two bids are not received or the highest bid is not equal to or in
excess of the Minimum Purchase Price, the Indenture Trustee will not consummate
the sale. The proceeds of any the sale will be used to redeem any Notes
outstanding on the Quarterly Payment Date. If the sale is not consummated in
accordance with the foregoing, the Indenture Trustee may, but shall not be under
any obligation to, solicit bids to purchase the Financed Student Loans on future
Quarterly Payment Dates upon terms similar to those described above. No
assurance can be given as to whether the Trustee will be successful in
soliciting acceptable bids to purchase the Financed Student Loans on either the[
] Quarterly Payment Date or any subsequent Quarterly Payment Date.
OPTIONAL REDEMPTION
The Company or an assignee of the Company, may at its option purchase
from the Eligible Lender Trustee, as of the end of any Collection Period
immediately preceding a Quarterly Payment Date on which the then outstanding
Pool Balance is 20% or less of the aggregate initial principal amount of the
Notes, all remaining Financed Student Loans at a price equal to the greater of
the aggregate Purchase Amounts as of the end of the Collection Period and the
Minimum Purchase Price, which amount will be used to retire the Notes
concurrently therewith. The Minimum Purchase Price for a purchase occurring
prior to the [ ] Quarterly Payment shall include any termination payment due to
the Swap Counterparty. Upon termination of the Trust, all right, title and
interest in the Financed Student Loans and other funds of the Trust, after
giving effect to any final distributions to the Noteholders therefrom, will be
conveyed and transferred to the Company or the assignee.
FEDERAL FAMILY EDUCATION LOAN PROGRAM
A description of the Federal Family Education Loan Program is provided
in the prospectus under "Federal Family Education Loan Program." The information
provided below sets forth recent developments and additional information with
respect the Federal Family Education Loan Program.
RECENT DEVELOPMENTS-EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997.
On November 13, 1997, President Clinton signed into law the Emergency Student
Loan Consolidation Act of 1997, which made significant changes to the Federal
Consolidation Loan program. These changes include:
o providing that federal direct student loans are eligible to be
included in a Federal Consolidation Loan;
o changing the borrower interest rate on new Federal Consolidation
Loans (previously a fixed rate based on the weighted average of
the loans consolidated, rounded up to the nearest whole percent)
to the annually variable rate applicable to Stafford Loans (i.e.,
the bond equivalent rate at the last auction in May of 91-day
Treasury Bills plus 3.10%, not to exceed 8.25% per annum);
o providing that the portion of a Federal Consolidated Loan that is
comprised of Subsidized Stafford Loans retains its subsidy
benefits during periods of deferment; and
o establishing prohibitions against various forms of discrimination
in the making of Consolidation Loans.
Except for the last of the above changes, all these provisions expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
RECENT DEVELOPMENTS--FY 1998 BUDGET. In the 1997 Budget Reconciliation
Act (P.L. 105-33), several changes were made to the Act impacting the FFELP.
These provisions include, among other things, requiring Federal Guarantors to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002
(to be paid in annual installments), greater restrictions on use of reserves by
Federal Guarantors and a continuation of the Administrative Cost Allowance
payable to Federal Guarantors (which is a fee paid to Guarantors equal to 0.85%
of new loans guaranteed).
RECENT DEVELOPMENTS--1998 AMENDMENTS. On May 22, 1998, Congress
passed, and on June 9, 1998, the President signed into law, a temporary measure
relating to the Higher Education Act and FFELP loans as part of the Intermodal
Surface Transportation Efficiency Act of 1998 (the "1998 Amendments") that
revised interest rate changes under the FFELP that were scheduled to become
effective on July 1, 1998. For loans made during the period July 1, 1998 through
September 30, 1998, the borrower interest rate for Stafford Loans and
Unsubsidized Stafford Loans is reduced to a rate of 91-day Treasury Bill Rate
plus 2.30% (1.70% during school, grace and deferment), subject to a maximum rate
of 8.25%. As described below, the formula for Special Allowance Payments on
Stafford Loans and Unsubsidized Stafford Loans is calculated to produce a yield
to the loan holder of 91-day Treasury Bill Rate plus 2.80% (2.20% during school,
grace and deferment). The 1998 Amendments also adjusted the interest rate on
PLUS Loans disbursed on or after July 1, 1998 and before October 1, 1998 to a
rate of 91-day T-bill plus 3.10%, subject to a maximum rate of 9%, but did not
affect the rate change on Federal Consolidation Loans during the same period
which is fixed at the rate of 91-day T-bill established at the final auction
held prior to June 1, 1998 plus 3.10% subject to a maximum rate of 8.25%. The
formula for Special Allowance Payments for PLUS Loans continues to provide that
no Special Allowance Payments will be paid unless the interest rate formula
described in the preceding sentence produces a rate which exceeds 9%.
RECENT DEVELOPMENTS--1998 REAUTHORIZATION BILL. On October 7, 1998,
President Clinton signed into law the Higher Education Amendments of 1998 (the
"1998 Reauthorization Bill"), which enacted significant reforms in the FFELP.
The major provisions of the 1998 Reauthorization Bill include the following:
o All references to a "transition" to full implementation of the
Federal Direct Loan Program were deleted from the FFELP statute.
o Guarantor reserve funds were restructured so that Federal
Guarantors are provided with additional flexibility in choosing
how to spend specified funds they receive.
o The minimum Federal Guarantor reserve level requirement is
reduced from 0.50% of the total attributable amount of all
outstanding loans guaranteed to 0.25% of the total attributable
amount of all outstanding loans guaranteed.
o Additional recall of reserve funds by the Secretary were
mandated, amounting to $85 million in fiscal year 2002, $82.5
million in fiscal year 2006, and $82.5 million in fiscal year
2007. However, specified minimum reserve levels are protected
from recall.
o The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to 65
basis points (40 basis points for loans made on or after October
1, 1993) paid at the time a loan is guaranteed, and an account
maintenance fee of 12 basis points (10 basis points for fiscal
years 2001-2003) paid annually on outstanding guaranteed Student
Loans.
o The percentage of collections on defaulted Student Loans a
Guarantor is permitted to retain is reduced from 27% to 24% (23%
beginning on October 1, 2003) plus the complement of the
reinsurance percentage applicable at the time a claim was paid to
the lender on the Student Loan.
o Federal reinsurance provided to Federal Guarantors is reduced
from 98% to 95% for Student Loans first disbursed on or after
October 1, 1998.
o The delinquency period required for a loan to be declared in
default is increased from 180 days to 270 days for loans on which
the first day of delinquency occurs on or after the date of
enactment of the 1998 Reauthorization Bill.
o Interest rates charged to borrowers on Stafford Loans, and the
yield for Stafford Loan holders established by the 1998
Amendments, were made permanent.
o Federal Consolidation Loan interest rates were revised to equal
the weighted average of the loans consolidated rounded up to the
nearest one-eighth of 1%, capped at 8.25%. When the 91-day
Treasury Bill Rate plus 3.1% exceeds the borrower's interest
rate, Special Allowance Payments are made to make up the
difference.
o The lender-paid offset fee on Federal Consolidation Loans of
1.05% is reduced to .62% for Loans made pursuant to applications
received on or after October 1, 1998 and on or before January 31,
1999.
o The Direct Consolidation Loan interest rate calculation was
revised to reflect the rate for Federal Consolidation Loans, and
will be effective for loans on which applications are received on
or after February 1, 1999.
o Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill
who accumulate after the date outstanding loans under FFELP
totaling more than $30,000, under which schedules the repayment
period may extend up to 25 years subject to specified minimum
repayment amounts.
o The Secretary is authorized to enter into six (6) voluntary
flexible agreements with Federal Guarantors under which various
statutory and regulatory provisions can be waived.
o Federal Consolidation Loan lending restrictions are revised to
allow lenders who do not hold one of the borrower's underlying
federal loans to issue a Federal Consolidation Loan to a borrower
whose underlying Federal Loans are held by multiple holders.
o Inducement restrictions were revised to permit Federal Guarantors
and lenders to provide assistance to schools comparable to that
provided to schools by the Secretary under the federal direct
student loan program.
o The Secretary is now required to pay off Student Loan amounts
owed by borrowers due to failure of the borrower's school to make
a tuition refund allocable to the Student Loan.
o Discharge of FFELP and specified other Student Loans in
bankruptcy is now limited to cases of undue hardship regardless
of whether the Student Loan has been in repayment for seven (7)
years prior to the bankruptcy filing.
o All of the Federal Guarantors will be subject to the new recall
of reserves and reduced reinsurance provisions for Federal
Guarantors. The new recall of reserves and reduced reinsurance
for Federal Guarantors increases the risk that resources
available to the Federal Guarantors to meet their guarantee
obligations will be significantly reduced.
CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS WITH OTHER
TRUSTS. Due to a recent change in Department policy limiting the granting of new
lender identification numbers, the Eligible Lender Trustee is allowed under the
Trust Agreement to permit the Trust, and other trusts established by or with
respect to the Seller to securitize Student Loans, to use a common Department
lender identification number. The billings submitted to the Department for
Interest Subsidy Payments and Special Allowance Payments on the Financed Student
Loans will be consolidated with the billings for the payments for Student Loans
in the other trusts using the same lender identification number and payments on
the billings will be made by the Department in lump sum form. The lump sum
payments will then be allocated among the various trusts using the lender
identification number.
In addition, the sharing of the lender identification number by the
Trust with other trusts may result in the receipt of claim payments by Federal
Guarantors in lump sum form. In that event, the payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy Payments and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party
primarily responsible to the Department for any liabilities owed to the
Department or Federal Guarantors resulting from the Eligible Lender Trustee's
activities in the FFELP. As a result, if the Department or a Federal Guarantor
were to determine that the Eligible Lender Trustee owes a liability to the
Department or a Federal Guarantor on any Student Loan for which the Eligible
Lender Trustee is or was legal titleholder, including loans held in the Trust or
other trusts, the Department or the Federal Guarantor may seek to collect that
liability by offset against payments due the Eligible Lender Trustee under the
Trust. In the event that the Department or a Federal Guarantor determines a
liability exists in connection with a trust using the shared lender
identification number, the Department or the Federal Guarantor would be likely
to collect that liability by offset against amounts due the Eligible Lender
Trustee under the shared lender identification number, including amounts owed in
connection with the Trust.
In addition, other trusts using the shared lender identification
number may in a given quarter incur Federal Origination Fees that exceed the
Interest Subsidy Payments and Special Allowance Payments payable by the
Department on the loans in the other trusts, resulting in the consolidated
payment from the Department received by the Eligible Lender Trustee under the
lender identification number for that quarter being less than the amount owed by
the Department on the loans in the Trust for that quarter.
The Servicing Agreement for the Trust and the servicing agreements for
other trusts established by or with respect to the Seller which share the lender
identification number to be used by the Trust (the Trust and the other trusts,
collectively, the "Seller Trusts") will require the Eligible Lender Trustee or
the Servicer for each Seller Trust to allocate to the proper Seller Trust a
shortfall or an offset by the Department or a Federal Guarantor arising from the
Student Loans held by the Eligible Lender Trustee on the Seller Trust's behalf.
FEES PAYABLE ON CERTAIN FINANCED STUDENT LOANS. Under the Federal
Consolidation Program, the Trust will be obligated to pay to the Department a
monthly rebate fee (the "Monthly Rebate Fee") at an annualized rate of 1.05%
(0.62% for applications received between October 1, 1998 and January 31, 1999)
of the outstanding principal balance on the last day of each month plus accrued
interest thereon of each Federal Consolidation Loan which is a part of the
Trust, which rebate will be payable prior to distributions to the Noteholders
and which rebate will reduce the amount of funds which would otherwise be
available to make distributions on the Notes and will reduce the Adjusted
Student Loan Rate. In addition, the Trust must pay to the Department a 0.50%
origination fee (the "Federal Origination Fee") on the initial principal balance
of each Financed Student Loan which is originated on its behalf by the Eligible
Lender Trustee (i.e., each Federal Consolidation Loan originated on its behalf
by the Eligible Lender Trustee during the Revolving Period and each Add-on
Consolidation Loan added to a Federal Consolidation Loan in the Trust), which
fee will be deducted by the Department out of Interest Subsidy Payments and
Special Allowance Payments. If sufficient Interest Subsidy Payments and Special
Allowance Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of the Federal Origination Fee may be deferred by
the Department until sufficient Interest Subsidy Payments and Special Allowance
Payments accrue to cover the fee or may be required to be paid immediately. If
the amounts never accrue, the Trust would be obligated to pay any remaining fee
from other assets of the Trust prior to making distributions to the Noteholders.
The offset of Interest Subsidy Payments and Special Allowance Payments, and the
payment of any remaining fee from other Trust assets will further reduce the
amount of the Available Funds from which payments to the Noteholders may be
made. Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Adjusted Student Loan Rate.
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP (the "Special Federal Tax Counsel") is
of the opinion that the Senior Notes will properly be characterized as
indebtedness for federal income tax purposes and that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion is not binding on the Internal Revenue
Service (the "IRS") and thus no assurance can be given that the characterization
would prevail if it were challenged. If the IRS were to contend successfully
that the Subordinate Notes and the Senior Notes were not debt for federal income
tax purposes, the arrangement among Noteholders and the Depositor might be
classified for federal income tax purposes as a publicly traded partnership
taxable as a corporation.
If the arrangement created by the Indenture were treated as a publicly
traded partnership taxable as a corporation, the resulting entity would be
subject to federal income taxes at corporate tax rates on its taxable income
generated with respect to the Financed Student Loans. Moreover, distributions by
the entity to all or some of the classes of Notes would probably not be
deductible in computing the entity's taxable income and all or part of the
distributions to holders of the Notes would probably be treated as dividends.
This entity-level tax could result in reduced distributions to the Noteholders
and the Noteholders could be liable for a share of the tax.
Because the Depositor will treat the Notes as indebtedness for federal
income tax purposes, the Trustee will not comply with the tax reporting
requirements that would apply under the foregoing alternative characterizations
of the Notes.
The Senior Notes provide for stated interest at a floating rate based
upon Three-Month LIBOR, but are subject to specified restrictions on the maximum
level of the floating rate. Under Treasury regulations governing "original issue
discount" ("OID"), stated interest payable at a variable rate is not taxed as
OID or contingent interest if the variable rate is a qualified floating rate.
The tax treatment of interest that is not based on a qualified floating rate is
not specified and the regulations do not address the tax treatment of debt
instruments bearing contingent interest except in circumstances not relevant to
this discussion. While (because of the imposition of an interest rate cap and
the allowance of the Class A-1 Noteholders' Interest Basis Carryover and the
Class A-2 Noteholders' Interest Basis Carryover) the tax treatment of interest
on the Senior Notes, is not entirely clear under the regulations, the Trust
intends to treat the stated interest as a "qualified floating rate" for OID
purposes and thus the interest should not be taxable to the Senior Noteholders
as OID or as contingent interest.
Prospective purchasers should read "Certain Federal Income Tax
Consequences" and "Certain State Tax Consequences" in the prospectus for a
discussion of the application of specified federal income tax laws and specified
state tax laws to the Trust and the Notes.
ERISA CONSIDERATIONS
Subject to the applicable provisions of ERISA and the Code, the Senior
Notes may be purchased by an employee benefit plan or an individual retirement
account or other arrangement described in Section 3(3) of ERISA or Section
4975(e)(1) of the Code (a "Plan"). Fiduciaries of a Plan subject to ERISA must
first determine that the Plan's acquisition of a Senior Note is consistent with
their fiduciary duties under ERISA, including the requirements of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. Plan fiduciaries must
also determine that the acquisition will not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code.
Employee benefit plans which are governmental plans (as defined in Section 3(32)
of ERISA) or specified church plans (as defined in Section 3(33) of ERISA) are
not subject to the fiduciary responsibility or prohibited transaction provisions
of ERISA or the Code. However, any plan which is qualified under Section 401(a)
of the Code and exempt from tax under Section 501(a) of the Code is subject to
the exclusive benefit rule under Section 401(a)(2) of ERISA and the prohibited
transaction rules set forth in Section 503 of the Code. See "ERISA
Considerations" in the prospectus.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement relating to the Senior Notes, the Depositor has agreed to cause the
Trust to sell to each of the underwriters named below for which Deutsche Banc
Alex. Brown is acting as representative and each of the underwriters has
severally agreed to purchase, the principal amount of Senior Notes set forth
opposite its name below.
PRINCIPAL AMOUNT
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES
[ ]....................... $ $
[ ]....................... $ $
-- -
Total.................... $ $
========== ===========
The underwriting agreement provides that the underwriters are
obligated to purchase all of the Senior Notes if any are purchased. The
underwriting agreement provides that if an underwriter defaults the purchase
commitments of non-defaulting underwriters may be increased or the offering of
Senior Notes may be terminated.
The underwriters propose to offer the Senior Notes initially at the
public offering prices on the cover page of this prospectus supplement, and to
selling group members at those prices less a concession of [ ]% per Class A-1
Note and [ ]% per Class A-2 Note. The underwriters and the selling group members
may allow a discount of [ ]% per Class A-1 Note and [ ]% per Class A-2 Note on
sales to specified other broker dealers. After the initial public offering, the
public offering prices and the concessions and discounts to dealers may be
changed by the representative.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Senior Notes in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the representative
to reclaim a selling concession from a syndicate member when the Senior Notes
originally sold by the syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. These stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Senior Notes to be higher than it would otherwise be in the absence of the
transactions. These transactions, if commenced, may be discontinued at any time.
We estimate that our out of pocket expenses for this offering will be
approximately $[ ].
The Senior Notes are a new issue of securities with no established
trading market. One or more of the underwriters intend to make a secondary
market for the Senior Notes. However, they are not obligated to do so and may
discontinue making a secondary market for the Senior Notes at any time without
notice. No assurance can be given as to how liquid the trading market for the
Senior Notes will be.
The Depositor has agreed to indemnify the underwriters against
specified liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make.
The Trust may, from time to time, invest the funds in the Collection
Account, the Collateral Reinvestment Account and the Reserve Account in Eligible
Investments acquired from the Underwriters.
LEGAL MATTERS
Certain legal matters relating to the Senior Notes will be passed upon
for the Trust, the Depositor, the Seller, the Servicer, the Administrator and
for the underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
Certain federal income tax matters will be passed upon for the Trust by Stroock
& Stroock & Lavan LLP.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by the Administrator and sent on behalf of the Trust only to
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Senior Notes, and will not be sent to the beneficial
owners of the Senior Notes. Beneficial owners of Senior Notes will, however, be
able to obtain the reports by requesting them from the Indenture Trustee. The
reports will contain the information described under "Description of the
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust" in
the prospectus. The reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. See "Certain
Information Regarding the Securities--Book-Entry Registration" and "Reports to
Securityholders" in the prospectus. The Trust will file with the Commission the
periodic reports required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Commission
thereunder. These reports and other information may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains an internet site that
will obtain reports and other information regarding the Trust. The address of
that site is http://www.sec.gov.
FORWARD LOOKING STATEMENTS
Information under the heading "Formation of the Trust" and "Federal
Family Education Loan Program" contains various "forward looking statements",
which represent the Depositor's expectations or beliefs concerning future
events. The Depositor cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in specified limited circumstances, the globally offered Senior
Notes of ACE Securities Corp. Student Loan Trust [ ]- [ ] (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold Global Securities through any of DTC, Clearstream,
Luxembourg or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlements
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (I.E., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities issues.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC Participants holding Global Securities will be effected on a
delivery-against-payment basis through the applicable Depositaries of
Clearstream, Luxembourg and Euroclear (in this capacity) and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet specified requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of CEDE & CO. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold the positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional asset-backed
securities. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Global
Securities will be credited to the securities custody accounts on the settlement
date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and the
seller's accounts are located to ensure that settlement can be made on the
desired value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear, as the case may be, will instruct the
applicable Depositary to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of a
calendar year consisting of twelve 30-day calendar months. Payment will then be
made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Clearstream,
Luxembourg Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debit will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Clearstream, Luxembourg or Euroclear cash debit will be valued
instead as of the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has
extended a line of credit to them, Clearstream, Luxembourg Participants or
Euroclear Participants may elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Clearstream,
Luxembourg Participants or Euroclear Participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many cases
the investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants may employ their usual procedures for sending Global Securities
to the applicable Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently from a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through Euroclear Participants, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or a Euroclear
Participant at least one business day prior to settlement. In these cases,
Clearstream, Luxembourg or Euroclear will instruct Euroclear Participants, to
deliver the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date, on the
basis of a calendar year consisting of twelve 30-day calendar months. The
payment will then be reflected in the account of the Clearstream, Luxembourg
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Clearstream, Luxembourg Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream, Luxembourg
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream, Luxembourg Participants or Euroclear Participants should note that
these trades will automatically fail on the sale side unless affirmative action
is taken. At least three techniques should be readily available to eliminate
this potential problem:
(1) borrowing through Clearstream, Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their Clearstream,
Luxembourg or Euroclear accounts) in accordance with the clearing system's
customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream, Luxembourg or
Euroclear account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream, Luxembourg
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to 30% U.S. withholding tax that
generally applies to payments of interest on registered debt issued by U.S.
Persons, unless (1) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between the beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(2) the beneficial owner takes one of the following steps to obtain an exemption
or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the beneficial owner or
his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payee's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Securities
holder, or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he holds (e.g., the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities
or with the application of tax documentation requirements that are generally
effective with respect to payments made after December 31, 2000. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of these Global Securities.
U.S. PERSON. As used in this prospectus supplement the term "U.S.
Person" means a beneficial owner of a Senior Note that is for United States
federal income tax purposes
o a citizen or resident of the United States,
o a corporation or partnership created or organized in or under the
laws of the United States or of any political subdivision of a
corporation or partnership,
o an estate the income of which is subject to United States federal
income taxation regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
As used in this prospectus supplement, the term "Non-U.S. Person"
means a beneficial owner of a Senior Note that is not a U.S. Person.
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this prospectus
supplement and the pages on which the definitions of the terms may be found in
this prospectus supplement.
1992 Master Agreement.....................................................S-44
1998 Amendments...........................................................S-48
1998 Reauthorization Bill.................................................S-48
91-day Treasury Bills.....................................................S-45
Additional Fundings.......................................................S-31
Additional Guarantor......................................................S-22
Additional Student Loans..................................................S-13
Add-on Consolidation Loans................................................S-15
Adjusted Student Loan Rate................................................S-24
Administration Agreement..................................................S-30
Administration Fee........................................................S-36
Administrator.............................................................S-30
Assumption Payment........................................................S-46
Available Funds...........................................................S-37
Cede......................................................................S-54
Citibank..................................................................S-29
Class A-1 Note Final Maturity Date........................................S-26
Class A-1 Note LIBOR Rate.................................................S-24
Class A-1 Note Rate.......................................................S-24
Class A-1 Noteholders.....................................................S-26
Class A-1 Noteholders' Interest Basis Carryover...........................S-38
Class A-1 Noteholders' Interest Carryover Shortfall.......................S-38
Class A-1 Noteholders' Interest Distribution Amount.......................S-39
Class A-1 Notes...........................................................S-23
Class A-2 Note Final Maturity Date........................................S-26
Class A-2 Note LIBOR Rate.................................................S-24
Class A-2 Note Rate.......................................................S-24
Class A-2 Noteholders.....................................................S-26
Class A-2 Noteholders' Interest Basis Carryover...........................S-39
Class A-2 Noteholders' Interest Carryover Shortfall.......................S-39
Class A-2 Noteholders' Interest Distribution Amount.......................S-39
Class A-2 Notes...........................................................S-23
Clearstream, Luxembourg...................................................S-28
Clearstream, Luxembourg Participants......................................S-28
Closing Date..............................................................S-13
Collateral Reinvestment Account...........................................S-34
Collection Account........................................................S-34
Collection Period.........................................................S-36
Commission................................................................S-30
Company...................................................................S-14
Cooperative...............................................................S-28
Cutoff Date...............................................................S-16
Deferral..................................................................S-19
Delinquency Percentage....................................................S-32
Depositaries..............................................................S-29
Depositary................................................................S-29
Determination Date........................................................S-36
DTC.......................................................................S-54
Early Amortization Event..................................................S-31
Eligible Lender Trustee...................................................S-13
Euroclear.................................................................S-28
Euroclear Operator........................................................S-28
Euroclear Participants....................................................S-28
Events of Default.........................................................S-45
Excess Spread.............................................................S-32
Exchange Act..............................................................S-54
Exchanged Financed Student Loan...........................................S-33
Exchanged Serial Loan.....................................................S-33
Expected Interest Collections.............................................S-24
Federal Origination Fee...................................................S-50
FFELP.....................................................................S-13
Financed Student Loans....................................................S-13
Forbearance...............................................................S-19
Global Securities.........................................................S-55
Grace.....................................................................S-19
GRDF Percentage...........................................................S-35
Guarantors................................................................S-22
Illegality................................................................S-45
Indenture.................................................................S-23
Indenture Trustee.........................................................S-23
Index Maturity............................................................S-27
Indirect Participants.....................................................S-27
Initial Financed Student Loans............................................S-13
Initial Guarantors........................................................S-22
In-School.................................................................S-19
In-School Percentage......................................................S-35
Interest Rate Swap........................................................S-44
IRS.......................................................................S-51
LIBOR Determination Date..................................................S-27
LIBOR Reset Period........................................................S-27
Liquidated Student Loans..................................................S-36
Liquidation Proceeds......................................................S-36
Loan Purchase Amount......................................................S-31
Loan Sale Agreement.......................................................S-30
Lock-In Period............................................................S-45
Minimum Purchase Price....................................................S-47
Monthly Available Funds...................................................S-36
Monthly Collection Period.................................................S-36
Monthly Payment Date......................................................S-35
Monthly Rebate Fee........................................................S-50
Morgan....................................................................S-29
Net Trust Swap Payment....................................................S-44
Net Trust Swap Payment Carryover Shortfall................................S-39
Net Trust Swap Receipt....................................................S-44
Net Trust Swap Receipt Carryover Shortfall................................S-39
New Loan..................................................................S-31
New Loans.................................................................S-31
Noncapitalized Accrued Interest...........................................S-31
Non-U.S. Person...........................................................S-58
Noteholders...............................................................S-26
Noteholders' Interest Distribution Amount.................................S-39
Notes.....................................................................S-23
Obligors..................................................................S-25
OID.......................................................................S-51
Parity Date...............................................................S-25
Participants..............................................................S-27
Plan......................................................................S-51
Pool Balance..............................................................S-25
Principal Distribution Adjustment.........................................S-39
Principal Distribution Amount.............................................S-40
Purchase Amount...........................................................S-25
Purchase Collateral Balance...............................................S-31
Purchase Premium Amount...................................................S-31
Quarterly Interest Period.................................................S-24
Quarterly Payment Date....................................................S-24
Rating Agency Downgrade...................................................S-46
Realized Losses...........................................................S-40
Record Date...............................................................S-24
Reference Banks...........................................................S-27
Repayment.................................................................S-19
Reserve Account...........................................................S-34
Reserve Account Excess....................................................S-42
Reserve Account Initial Deposit...........................................S-13
Revolving Period..........................................................S-31
Scheduled Notional Swap Amount............................................S-44
Scheduled Swap Termination Date...........................................S-44
Secretary.................................................................S-22
Seller....................................................................S-14
Seller Trusts.............................................................S-50
Senior Noteholders........................................................S-26
Senior Noteholders' Distribution Amount...................................S-40
Senior Noteholders' Interest Distribution Amount..........................S-40
Senior Noteholders' Principal Carryover Shortfall.........................S-41
Senior Noteholders' Principal Distribution Amount.........................S-41
Senior Notes..............................................................S-23
Serial Loan...............................................................S-32
Serial Loans..............................................................S-32
Servicer..............................................................S-14, 30
Servicing Agreement.......................................................S-30
Servicing Fee.............................................................S-34
Servicing Fee Shortfall...................................................S-35
Special Federal Tax Counsel...............................................S-51
Specified Reserve Account Balance.........................................S-42
Student Loan Rate Accrual Period..........................................S-24
Student Loans.............................................................S-13
Subordinate Note Final Maturity Date......................................S-26
Subordinate Note LIBOR Rate...............................................S-24
Subordinate Note Rate.....................................................S-24
Subordinate Noteholders...................................................S-26
Subordinate Noteholders' Distribution Amount..............................S-41
Subordinate Noteholders' Interest Basis Carryover.........................S-41
Subordinate Noteholders' Interest Carryover Shortfall.....................S-41
Subordinate Noteholders' Interest Distribution Amount.....................S-41
Subordinate Noteholders' Principal Carryover Shortfall....................S-41
Subordinate Noteholders' Principal Distribution Amount....................S-41
Subordinate Notes.........................................................S-23
Swap Counterparty.........................................................S-44
Swap Default..............................................................S-45
Swap Early Termination....................................................S-46
Swap Rate.................................................................S-44
Swap Termination Date.....................................................S-44
Tax Event.................................................................S-45
T-Bill Rate...............................................................S-45
Telerate Page 3750........................................................S-27
Termination Events........................................................S-45
Terms and Conditions......................................................S-29
Three-Month LIBOR.........................................................S-27
Transfer Agreement........................................................S-31
Transfer and Servicing Agreements.........................................S-30
Transfer Date.............................................................S-33
Trust.....................................................................S-13
Trust Agreement...........................................................S-14
Trust Swap Payment Amount.................................................S-42
Trust Swap Receipt Amount.................................................S-42
U.S. Person...............................................................S-58
USA Funds.................................................................S-22
<PAGE>
SUBJECT TO COMPLETION, [ ], 2000
PROSPECTUS
STUDENT LOAN ASSET-BACKED NOTES AND ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUSTS:
A trust will issue the asset backed notes and the asset backed
certificates described in this prospectus in one or more series with one or more
classes. A supplement to this prospectus will set forth the amounts and prices
for the notes and certificates. The source for payment of the notes and
certificates will be collections on a pool of education loans to students and
parents of students.
The notes and certificates will represent interests in the trust and
will be paid only from the assets of the trust. The notes and certificates will
be rated in one of the four highest rating categories by at least one nationally
recognized rating organization. The notes and certificates may have one or more
forms of enhancement.
The assets in your trust are specified in the prospectus supplement
for that particular trust, while the types of assets that may be included in a
trust, whether or not in your trust, are described in greater detail in this
prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. MAKING ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is [ ]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
CREDIT ENHANCEMENT MAY NOT PROTECT YOU
FROM ALL LOSSES An investment in the securities involves
a risk that you may lose all or part of
your investment. Although every trust
will include some form of credit
enhancement, that credit enhancement may
not cover every class of securities
issued by a trust. In addition, every
form of credit enhancement will have
limitations on, and exclusions from
coverage. As a result, there is always a
risk that you may not recover the full
amount of your investment.
GUARANTEES OF STUDENT LOANS MAY NOT
PREVENT LOSSES A significant number of the student
loans in a trust will be guaranteed by
either a federal or a private guarantor.
However, those guarantees may not
protect you against all losses for
several reasons, including:
o federal guarantees are generally
limited to 98% of the principal
amount of the student loan;
o if the servicer fails to follow
prescribed servicing procedures or
if the originator of the loans
fails to follow procedures relating
to the origination of any student
loans, the applicable guarantors
may refuse to make guarantee
payments to the applicable trust
and, if the loans are federally
insured, the Department of
Education may refuse to make
reinsurance payments to the federal
guarantors or to make interest
subsidy payments and special
allowance payments to the eligible
lender trustee; and
o private guarantors are not
reinsured by or entitled to any
assistance from the Department of
Education. If the loan loss
reserves of a private guarantor are
not sufficient, that private
guarantor may not be able to honor
its obligations to make guarantee
payments.
DEFAULTS ON STUDENT LOANS WITHOUT
GUARANTEES MAY RESULT IN LOSSES A trust may include student loans that
are not guaranteed by any federal or
private guarantor, or by any other party
or governmental agency. Since all
student loans, whether guaranteed or
not, are unsecured, if a borrower under
one of these student loans defaults, the
applicable trust may suffer a loss.
THE FINANCIAL CONDITION OF A FEDERAL
GUARANTOR MAY BE ADVERSELY AFFECTED
BY A NUMBER OF FACTORS The financial condition of a federal
guarantor may be adversely affected by a
number of factors including:
o the amount of claims made against
the federal guarantor as result of
borrower defaults;
o the amount of claims reimbursed to
the federal guarantor from the
Department of Education;
o changes in legislation that may
reduce expenditures from the
Department of Education that
support federal guarantors or that
may require federal guarantors to
pay more of their reserves to the
Department of Education;
o loss of reinsurance benefits due to
the master servicer's or a
sub-servicer's failure to follow
required servicing procedures; and
o expansion of the federal direct
student loan program.
If the financial status of the federal
guarantors deteriorates, the federal
guarantors may fail to make guarantee
payments to the eligible lender trustee.
In this event, you may suffer delays in
the payment of principal and interest on
your securities.
RISK OF DEPARTMENT OF EDUCATION'S
FAILURE TO PAY GUARANTEE PAYMENTS If a federal guarantor is unable to meet
its insurance obligations, the related
trust may submit claims directly to the
Department of Education for payment. The
Department of Education's obligation to
pay guarantee claims directly to the
related trust is dependent upon the
Department of Education's determining
that the federal guarantor is unable to
meet its insurance obligations. If the
Department of Education delays in making
the determination, you may suffer a
delay in the payment of principal and
interest on your securities. In
addition, if the Department of Education
determines that the federal guarantor is
able to meet its insurance obligations,
the Department of Education will not
make guarantee payments to the related
trust. If the credit enhancement
described in the related prospectus
supplement is not sufficient to cover
the federal guarantor's obligations to
the related trust, you may suffer a loss
on your investment.
RISK OF SELLER OR SERVICER NOT
PERFORMING ON PURCHASE OBLIGATIONS The seller or the servicer will be
obligated to purchase from the
applicable trust student loans with
respect to which it materially breaches
representations, warranties or
covenants. You can not be sure, however,
that the seller or the servicer will
have the financial resources to purchase
student loans. The failure to so
purchase a student loan would not
constitute an event of default under the
related indenture or permit the exercise
of remedies thereunder. However, the
breach of these representations,
warranties or covenants may cause you to
suffer a loss on your investment.
CHANGES IN LEGISLATION MAY ADVERSELY
AFFECT STUDENT LOANS, FEDERAL
GUARANTORS, THE SELLER OR
THE SERVICER You can not be positive that the Higher
Education Act or other relevant federal
or state laws, rules and regulations
will not be amended or modified in the
future in a manner that will adversely
affect the federal student loan programs
described in this prospectus, the
student loans made thereunder or the
financial condition of the federal
guarantors, the seller or the servicer.
In addition, if the direct student loan
programs described in this prospectus
expand, the servicers may experience
increased costs due to reduced economies
of scale or other adverse effects on
their business to the extent the volume
of loans serviced by the servicer is
reduced. These cost increases could
reduce the ability of the servicer to
satisfy its obligations to service the
student loans or to purchase student
loans in the event of specified breaches
of its covenants.
FEES PAYABLE ON CERTAIN STUDENT LOANS
MAY REDUCE AMOUNTS PAYABLE TO YOU Each trust will be obligated to pay to
the Department of Education a monthly
rebate at an annualized rate of
generally 1.05% (or 0.62% for loans for
which the application was received
between October 1, 1998 and January 31,
1999) of the outstanding principal
balance on each federal consolidation
loan which is a part of the related
trust. This rebate will be payable prior
to distributions made to you. In
addition, the trust must pay to the
Department of Education a 0.50%
origination fee on the initial principal
balance of each student loan which is
originated on its behalf by the eligible
lender trustee subsequent to the
applicable closing date. This fee will
be deducted by the Department of
Education out of interest subsidy
payments and special allowance payments
otherwise payable to the trust(s). In
this event the amount available to be
distributed to you will be reduced.
Under specified circumstances, the
related trust is obligated to pay any
portion of the unpaid fee from other
assets of the related trust prior to
making distributions to you. As a
result, the payment of the rebate fee
and origination fee to the Department of
Education will affect the amount and
timing of payments to you. Moreover, if
the origination fee is deducted from
interest subsidy payments and special
allowance payments the interest rate
payable on your securities may be capped
at a lower rate. In this event, the
value of your investment may be
impaired.
RISK OF CONSOLIDATION OF FEDERAL
BENEFIT BILLINGS AND RECEIPTS WITH
OTHER TRUSTS Due to a Department of Education policy
limiting the granting of new lender
identification numbers, all of the
trusts established by or for a seller to
securitize federal student loans may use
a common Department of Education lender
identification number. The Department of
Education regards the eligible lender
trustee as the party primarily
responsible to the Department of
Education for any liabilities owed to
the Department of Education or federal
guarantors resulting from the eligible
lender trustee's activities in the
federal family education loan program.
In the event that the Department of
Education or a federal guarantor
determines a liability exists in
connection with a trust using the shared
lender identification number, the
Department of Education or the federal
guarantor may collect that liability or
offset the liability from amounts due
the eligible lender trustee under the
shared lender identification number. As
a result, a trust may suffer a liability
as the result of another trust.
If any trust shares a lender
identification number with another
trust, the eligible lender trustee or
the servicer will allocate to the proper
trust shortfalls or an offset by the
Department of Education or a federal
guarantor arising from the student loans
held by the eligible lender trustee on
each trust's behalf. In the event the
amount available for indemnification by
one trust to another trust is
insufficient, you may suffer a loss on
your investment as a result of the
performance of another trust.
FAILURE TO COMPLY WITH THIRD-PARTY
SERVICER REGULATIONS MAY ADVERSELY
AFFECT LOAN SERVICING The Department of Education regulates
each servicer of federal student loans.
Under these regulations, a third-party
servicer, including the servicer, is
jointly and severally liable with its
client lenders for liabilities to the
Department of Education arising from the
servicer's violation of applicable
requirements. In addition, if the
servicer fails to meet standards of
financial responsibility or
administrative capability included in
the regulations, or violates other
requirements, the Department of
Education may fine the servicer and/or
limit, suspend, or terminate the
servicer's eligibility to contract to
service federal student loans. If a
servicer were so fined or held liable,
or its eligibility were limited,
suspended, or terminated, its ability to
properly service the student loans and
to satisfy its obligation to purchase
student loans with respect to which it
breaches its representations, warranties
or covenants could be adversely
affected. Moreover, if the Department of
Education terminates a servicer's
eligibility, a servicing transfer will
take place and there will be delays in
collections and temporary disruptions in
servicing. Any servicing transfer will
at least temporarily adversely affect
payments to you.
CUSTODIAL RISK OF SERVICER The servicer as custodian on behalf of a
trust, with respect to the student loans
it services, will have custody of the
promissory notes evidencing the student
loans following the sale of the student
loans to the related eligible lender
trustee. Although the accounts of the
seller will be marked to indicate the
sale and although the seller will cause
UCC financing statements to be filed
with the appropriate authorities, the
student loans will not be physically
segregated, stamped or otherwise marked
to indicate that the student loans have
been sold to the eligible lender
trustee. If, through inadvertence or
otherwise, any of the student loans were
sold to another party, or a security
interest in the student loans were
granted to another party that purchased
(or took the security interest in) any
of the student loans in the ordinary
course of its business and took
possession of the student loans, then
the purchaser (or secured party) might
acquire an interest in the student loans
superior to the interest of the eligible
lender trustee, if the purchaser (or
secured party) acquired the student
loans for new value and without
knowledge of the eligible lender
trustee's interest.
INSOLVENCY RISK OF SERVICER,
ADMINISTRATOR OR SELLER In the event of a default by the
servicer or an administrator resulting
solely from specified events of
insolvency or bankruptcy, a court,
conservator, receiver or liquidator may
have the power to prevent either the
indenture trustee or the noteholders
from appointing a successor servicer or
administrator, as the case may be, and
delays in collections in respect of the
student loans may occur. Any delay in
the collections of student loans may
delay payments to you.
If the seller or the depositor becomes
subject to bankruptcy proceedings, you
could experience losses or delays in the
payments on your securities. The seller
will cause the sale of the student loans
to the depositor and the depositor will
cause the sale of the student loans to a
trust. However, if the seller or the
depositor becomes subject to a
bankruptcy proceeding, the court in the
bankruptcy proceeding could conclude
that the seller or the depositor
effectively still owns the student loans
by concluding that the sale to the trust
was not a "true sale" or that the trust
should be consolidated with the seller
or the depositor for bankruptcy
purposes. If the court were to reach
this conclusion, you could experience
losses or delays in payments on your
securities.
The seller and the depositor have taken
and will take steps in structuring the
transactions described in this
prospectus and in the related prospectus
supplement to minimize the risk that a
court would consolidate the seller or
the depositor with the trust for
bankruptcy purposes or conclude that the
sale of the student loans to the
depositor and the trust was not a "true
sale."
THE INVESTMENT RETURN ON THE
SECURITIES IS UNCERTAIN The return on your investment in the
securities of any series will depend on
o the price paid by you for your
securities,
o the rate at which interest accrues
on your securities and
o the rate at which you receive a
return of the principal.
Consequently, the length of time that
your securities are outstanding and
accruing interest. The last factor is
the biggest uncertainty in an investment
in the securities.
An obligor may prepay a student loan in
whole or in part, at any time. The
likelihood of an obligor prepaying a
student loan is higher as a result of
federal loan consolidation programs. In
addition, a trust may receive other
unscheduled payments from liquidations
due to default, including receipt of
guarantee payments and other student
loans purchased or repurchased by a
servicer or the seller. The rate of
prepayments on the student loans may be
influenced by a variety of economic,
social, competitive and other factors,
including changes in interest rates, the
availability of alternative financings
and the general economy. Because a pool
will include thousands of student loans
that are payable by obligors, it is
impossible to predict the amount and
timing of payments that will be received
and paid to securityholders in any month
or over the period of time that the
securities of a series remain
outstanding. In addition, the student
loans may be extended which may lengthen
the remaining term of the student loans
and delay payments to you. The seller's
or other entity's option to terminate a
trust early and, the possibility that
all of any pre-funded amount or any
collateral reinvestment amount will not
be used to purchase subsequent student
loans, creates additional uncertainty
regarding the timing of payments to
securityholders.
The different amounts of principal
payments on the securities and the
uncertainty of the timing of those
payments creates reinvestment risk.
Reinvestment risk refers to the fact
that you may not be able to invest the
payments on the securities received by
you at a rate that is equal to or
greater than the rate of interest borne
by your securities.
RISK OF VARIABILITY OF ACTUAL
CASH FLOWS Amounts received by the related trust
for a particular collection period may
vary greatly from the payments actually
due on the student loans for the
collection period for a variety of
economic, social and other factors. The
amount available for distribution to you
will be reduced by the failure of
borrowers to pay timely the principal
and interest due on the related student
loans. In addition, the failure of a
guarantor to timely meet its guarantee
obligations with respect to the student
loans could also reduce the amount of
funds available for distribution to you
on a given distribution date. The effect
of these factors is impossible to
predict.
NOTEHOLDERS' RIGHT TO CONTROL UPON
CERTAIN DEFAULTS MAY ADVERSELY AFFECT
CERTIFICATEHOLDERS In the event of a default by the
servicer or the administrator, the
indenture trustee or the noteholders may
remove a servicer or the administrator,
as the case may be, without the consent
of the eligible lender trustee or any of
the certificateholders. In addition, the
noteholders have the ability, with
specified exceptions, to waive defaults
by the servicer or the administrator,
including defaults that could materially
adversely affect the certificateholders.
CONSUMER PROTECTION LAWS MAY
AFFECT ENFORCEABILITY
OF STUDENT LOANS Numerous federal and state consumer
protection laws and related regulations
impose substantial requirements upon
lenders and servicers involved in
consumer finance. Also, some state laws
impose finance charge ceilings and other
restrictions on consumer transactions
and require contract disclosures in
addition to those required under federal
law. These requirements impose specific
statutory liability that could affect an
assignee's ability to enforce consumer
finance contracts, including the student
loans. In addition, the remedies
available to the indenture trustee or
the noteholders upon an event of default
under the indenture may not be readily
available or may be limited by
applicable state and federal laws.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST Issuance of the securities in book-entry
form may reduce the liquidity of these
securities in the secondary trading
market since investors may be unwilling
to purchase securities for which they
cannot obtain physical certificates.
Since transactions in the securities can
be effected only through The Depository
Trust Company, Clearstream, Luxembourg,
Euroclear, participating organizations,
indirect participants and specified
banks, your ability to pledge a security
to persons or entities that do not
participate in The Depository Trust
Company, Clearstream, Luxembourg or
Euroclear system or otherwise to take
actions in respect of the securities may
be limited due to lack of a physical
certificate representing the securities.
You may experience some delay in the
receipt of distributions of interest and
principal on the securities since the
distributions will be forwarded by the
trustee to The Depository Trust Company
and The Depository Trust Company will
credit the distributions to the accounts
of its participants which will
thereafter credit them to your account
either directly or indirectly through
indirect participants.
<PAGE>
FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of securities, the depositor will
establish a separate trust (each a "Trust" or the "Issuer") pursuant to the
respective trust agreement (each a "Trust Agreement"), for the transactions
described in this prospectus and in the related prospectus supplement. The
property of each Trust will consist of:
o a pool of education loans to students and parents of students
(the "Student Loans"), legal title to which is held by the
related eligible lender trustee (the "Eligible Lender Trustee")
on behalf of each Trust,
o all funds collected or to be collected in respect thereof
(including any Guarantee Payments with respect thereto) on or
after the applicable date specified in the related prospectus
supplement (the "Cutoff Date"),
o any other rights under certain collateral agreements with respect
to certain Private Graduate Loans to the extent assigned to each
Trust, and
o all moneys and investments on deposit in the collection account,
any reserve account and any other trust accounts or any other
form of credit or cash flow enhancement that may be obtained for
the benefit of holders of one or more classes of the Securities.
To the extent provided in the applicable prospectus supplement, the Notes will
be collateralized by the property of the related Trust. To facilitate servicing
and to minimize administrative burden and expense, the Servicer will be
appointed the custodian of the promissory notes representing the Student Loans
for each Trust and the related Eligible Lender Trustee.
The principal offices of each Trust and the related Eligible Lender
Trustee will be specified in the applicable prospectus supplement.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be the entity
specified in the related prospectus supplement. The Eligible Lender Trustee on
behalf of the related Trust will acquire legal title to all the related Student
Loans acquired pursuant to the related loan sale agreement and will enter into a
guarantee agreement with each of the guarantors with respect to the Student
Loans. Each Eligible Lender Trustee will qualify as an eligible lender and owner
of all Federal Student Loans for all purposes under the Higher Education Act and
the guarantee agreements. Failure of the Federal Student Loans to be owned by an
eligible lender would result in the loss of any federal guarantee payments from
any federal guarantor and any Federal Assistance with respect to the Federal
Student Loans. See "Federal Family Education Loan Program-Eligible Lenders,
Students and Educational Institutions" and "-Federal Insurance and Reinsurance
of Federal Guarantors." An Eligible Lender Trustee's liability in connection
with the issuance and sale of the Notes and the Certificates is limited solely
to the express obligations of the Eligible Lender Trustee set forth in the
related trust agreement and the related loan sale agreement. See "Description of
the Transfer and Servicing Agreements." An Eligible Lender Trustee may resign at
any time, in which event the administrator, or its successor, will be obligated
to appoint a successor trustee. The administrator of a Trust may also remove the
Eligible Lender Trustee if the Eligible Lender Trustee ceases to be eligible to
continue as Eligible Lender Trustee under the related Trust Agreement or if the
Eligible Lender Trustee becomes insolvent. In these circumstances, the
administrator will be obligated to appoint a qualified successor trustee. Any
resignation or removal of an Eligible Lender Trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in loans and
other financial assets, collections on the loans and related assets; and to
engage in any acts that are incidental to, or necessary, suitable or convenient
to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
USE OF PROCEEDS
The net proceeds from the sale of securities of a given series will be
applied by the applicable Trust to purchase the related Student Loans on the
closing date from the Depositor and to make the initial deposit into the reserve
account or pre-funding account, if any. The Depositor will use the net proceeds
paid to it with respect to any Trust for general corporate purposes.
THE SELLER AND THE SERVICER
Information with respect to the seller (the "Seller") and the servicer
(the "Servicer") will be set forth in the related prospectus supplement.
THE STUDENT LOAN POOLS
The Student Loans to be sold by the Seller to Depositor and by the
Depositor to the Eligible Lender Trustee on behalf of a Trust pursuant to the
related loan sale agreement (the "Loan Sale Agreement") will be selected from
the portfolio of Student Loans by several criteria, including that each Student
Loan:
o was originated in the United States of America, its territories
or its possessions under and in accordance with the Programs,
o contains terms in accordance with those required by the Programs,
the applicable guarantee agreements, if any, by which the Student
Loan may be guaranteed as to principal and interest by a
Guarantor and other applicable requirements, and
o satisfies the other criteria, if any, set forth in the related
prospectus supplement. No selection procedures believed by the
Seller or the Depositor to be adverse to the Securityholders of
any series will be used in selecting the related Student Loans.
The Student Loans that comprise assets of each Trust will be held by
the related Eligible Lender Trustee, as trustee on behalf of the Trust. The
Eligible Lender Trustee will also enter into, on behalf of the Trust, Guarantee
Agreements with the Guarantors pursuant to which each of the Student Loans will
be guaranteed by one of the Guarantors. SEE "Formation of the Trusts-Eligible
Lender Trustee".
Information with respect to each pool of Student Loans for a given
Trust will be set forth in the related prospectus supplement, including, to the
extent appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of the Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire or
originate Student Loans after the related Cutoff Date, information with respect
to the Student Loans eligible to be acquired or originated by the related Trust
will be set forth in the related prospectus supplement as will information
regarding the duration and conditions of any related funding period (a "Funding
Period") or revolving period (a "Revolving Period"), the circumstances under
which Additional Fundings will be made during the period, and, if Additional
Fundings may continue to be made after the period, the circumstances under which
the Additional Fundings will be made.
In addition, if specified in the related prospectus supplement, the
assets of the related Trust may include specified rights of the Seller or the
Depositor to receive excess cashflow ("Excess Cashflow Rights") in respect of
Student Loans that are owned by one or more other Trusts established or
sponsored by the Seller or the Depositor. Excess Cashflow Rights will not exceed
10% of the assets of any Trust. The related prospectus supplement will disclose
summary data relating to the Excess Cashflow Rights.
THE STUDENT LOAN FINANCING BUSINESS
STUDENT LOAN PROGRAMS
The Student Loans to be sold by the Seller to the Depositor and by the
Depositor to the Eligible Lender Trustee on behalf of a Trust pursuant to the
related Loan Sale Agreement will be selected from Student Loans originated or
acquired by the Seller under various loan programs (the "Programs"). The
proceeds of the loans are used to finance a portion of the costs of
(1) undergraduate education ("Undergraduate Loans"),
(2) graduate education ("Graduate Loans") or
(3) post-graduate activities such as studying for bar exams or
participating in residency programs ("Post-Graduate Loans").
Undergraduate Loans and Graduate Loans may be originated through the
Federal Family Education Loan Program ("FFELP") under Title IV of the Higher
Education Act of 1965, as amended (together with all rules and regulations
promulgated thereunder by the Department and/or the Guarantor (the "Act")). As
described herein and in the related prospectus supplement, substantially all
payments of principal and interest with respect to loans originated through
FFELP (collectively, the "Federal Student Loans") will be guaranteed against
default, death, bankruptcy or disability of the applicable borrower, and a
closing of or a false certification by such borrower's school, by certain
federal guarantors pursuant to a guarantee agreement to be entered into between
such federal guarantors specified in the related Prospectus Supplement (each a
"Federal Guarantor" and collectively, the "Federal Guarantors") and the
applicable Eligible Lender Trustee (such agreements, each as amended or
supplemented from time to time, the "Federal Guarantee Agreements"). Each of the
Federal Guarantors is entitled, subject to certain conditions, to be reimbursed
by the Department for 75% to 100% of all Guarantee Payments it makes pursuant to
a program of federal reinsurance under the Higher Education Act of 1965, as
amended (such act, together with all rules and regulations promulgated
thereunder by the Department and/or the Federal Guarantors, the "Higher
Education Act"). In addition, each Eligible Lender Trustee, as a holder of the
Federal Student Loans on behalf of the related Trust, is entitled to receive
from the Department certain interest subsidy payments and special allowance
payments with respect to certain of such Federal Student Loans as described
herein. See "--Description of Federal Student Loans" below.
Payments of principal and interest with respect to the Private Student
Loans may be (1) unguaranteed by any federal or private guarantor, or by any
other party or governmental agency ("Private Unguaranteed Loans") or (2)
guaranteed against default, death, bankruptcy or disability of the applicable
borrower ("Private Guaranteed Loans") by certain private guarantors pursuant to
a guarantee agreement to be entered into among private guarantors specified in
the related Prospectus Supplement (each a "Private Guarantor" and collectively,
"Private Guarantors," and together with the Federal Guarantors, the "Guarantors"
or individually a "Guarantor"), the Seller and the Eligible Lender Trustee, or
by Private Guarantors pursuant to surety bonds issued to the Seller or the
Depositor and assigned to each Eligible Lender Trustee on behalf of the related
Trust (such agreement and surety bonds, each as amended or supplemented from
time to time, the "Private Guarantee Agreements" and, together with the Federal
Guarantee Agreements, the "Guarantee Agreements"). Payments under the Private
Guarantee Agreements are referred to as "Private Guarantee Payments" and
payments under Federal Guarantee Agreements are referred to as "Federal
Guarantee Payments." Private Guarantee Payments and Federal Guarantee Payments
are together referred to as "Guarantee Payments." See "--Description of Private
Student Loans" below.
DESCRIPTION OF FEDERAL STUDENT LOANS
FFELP provides for loans to be made to students or parents of students
enrolled in eligible institutions to finance a portion of the costs of attending
school. FFELP provides for loans to students and parents of students which are
(1) guaranteed by a Guarantor and reinsured by the federal government or (2)
directly insured by the federal government. Several types of Federal Student
Loans are currently authorized under the Act:
o loans to students who demonstrate need ("Federal Stafford
Loans");
o loans to students who do not demonstrate need or who need
additional loans to supplement their Federal Stafford Loans
("Federal Unsubsidized Stafford Loans");
o loans to parents of students ("Federal PLUS Loans") who are
dependents and whose estimated costs of attendance exceed the
available Federal Unsubsidized Stafford Loans, Federal Stafford
Loans and other financial aid; and
o loans to consolidate the borrower's obligations under various
federally authorized student loan programs into a single loan
(each, a "Federal Consolidation Loan").
Prior to July 1, 1994, the Act also authorized loans to graduate and
professional students, independent undergraduate students and, under limited
circumstances, dependent undergraduate students, to supplement their Federal
Stafford Loans ("Federal Supplemental Loans to Students" or "Federal SLS
Loans"). The description and summaries of the Act, FFELP, the Guarantee
Agreements and the other statutes, regulations and amendments referred to in
this Prospectus describe or summarize the material provisions of the statutes,
regulations and agreements but do not purport to be comprehensive and are
qualified in their entirety by reference to each statute, regulation or
document. There can be no assurance that future amendments or modifications will
not materially change any of the terms or provisions of the programs described
in this Prospectus or of the statutes and regulations implementing these
programs. See "Risk Factors-CHANGES IN LEGISLATION MAY ADVERSELY AFFECT STUDENT
LOANS AND FEDERAL GUARANTORS."
LEGISLATIVE AND ADMINISTRATIVE MATTERS
Both the Act and the regulations promulgated thereunder have been the
subject of extensive amendments in recent years and there can be no assurance
that further amendment will not materially change the provisions described in
this prospectus or the effect thereof. The 1992 Amendments to the Act (the "1992
Amendments") extended the principal provisions of FFELP to October 1, 1998 (or,
in the case of borrowers who have received loans prior to that date, September
30, 2002, and the Higher Education Act Amendments of 1998 (the "1998
Reauthorization Bill") further extended the principal provisions of FFELP
through June 30, 2003.
The 1993 Act made a number of changes to the Federal Student Loan
programs, including imposing on lenders or holders of Federal Student Loans fees
and affecting the Department's financial assistance to Federal Guarantors by
reducing the percentage of claim payments the Department will reimburse to
Federal Guarantors, reducing more substantially the insurance premiums and
default collections that Federal Guarantors are entitled to receive and/or
retain and allowing the Department to reduce the administrative fees it pays to
Federal Guarantors. In addition, legislation contemplated replacement of a
minimum of approximately 60% of the Federal Student Loan programs with direct
lending by the Department by 1998. The expansion of the new program may involve
increasing reductions in the volume of loans made under the existing programs,
which could result in increased costs for the Seller and the Servicer due to
reduced economies of scale. It is expected that the volume of new loans held and
serviced by the Servicer will decrease due to the new program, although the
entities have not experienced a reduction to date and any reduction will not
necessarily be equal to the percentage by which existing Federal Student Loan
programs are replaced by the new program. As these reductions occur, the Seller
and the Servicer could experience increased costs due to reduced economies of
scale to the extent the volume of loans held by the Seller and the Servicer is
reduced. These cost increases could affect the ability of the Servicer to
satisfy its obligations to service the Student Loans or the obligations of the
Seller and the Servicer to repurchase Student Loans in the event of specified
breaches of their respective representations and warranties or covenants. SEE
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and"--Servicer Covenants". These volume
reductions could also reduce revenues received by Federal Guarantors that are
available to pay claims on defaulted Student Loans. Finally, the level of
competition in existence in the secondary market for loans made under the
existing programs could be reduced, resulting in fewer potential buyers of the
Federal Student Loans and lower prices available in the secondary market for
those loans. Further, the Department is implementing a direct consolidation loan
program, which may further reduce the volume of Federal Student Loans and
increase the prepayment of existing FFELP Loans. The volume of existing loans
that may be prepaid in this fashion is not determinable at this time. The
Emergency Student Loan Consolidation Act of 1997 authorizes FFELP loan
originators to consolidate direct loans into Federal Consolidated Loans. This
provision applies to loan applications received on or after November 13, 1997.
ELIGIBLE LENDERS, STUDENTS AND EDUCATIONAL INSTITUTIONS
Lenders eligible to make loans under FFELP generally include banks,
savings and loan associations, credit unions, pension funds, insurance
companies, and with conditions, schools and guarantors. Federal Student Loans
may only be made to a "qualified student", generally defined as a United States
citizen or national or otherwise eligible individual under federal regulations
who:
o has been accepted for enrollment or is enrolled and is
maintaining satisfactory academic progress at a participating
educational institution,
o is carrying at least one-half of the normal full-time academic
workload for the course of study the student is pursuing, as
determined by the institution,
o has agreed to notify promptly the holder of the loan of any
address change, and
o for Federal Stafford Loans, meets the application "need"
requirements for the particular loan program.
Each loan is to be evidenced by an unsecured promissory note.
Eligible schools include institutions of higher education and
proprietary institutions. Institutions of higher education must meet specified
standards, which generally provide that the institution:
o only admits persons who have a high school diploma or its
equivalent,
o is legally authorized to operate within a state,
o provides not less than a two-year program with credit acceptable
toward a bachelor's degree,
o is a public or non-profit institution and
o is accredited by a nationally recognized accrediting agency or is
determined by the Department to meet the standards of an
accredited institution.
Eligible proprietary institutions of higher education include
business, trade and vocational schools meeting standards which provide that the
institution:
o only admits persons who have a high school diploma or its
equivalent,
o or persons who are beyond the age of compulsory school attendance
and have the ability to benefit from the training offered (as
defined in the Act),
o is authorized by a state to provide a program of vocational
education designed to fit individuals for useful employment in
recognized occupations,
o has been in existence for at least two years,
o provides at least a six-month training program to prepare
students for gainful employment in a recognized occupation and
o is accredited by a nationally recognized accrediting agency or is
specially accredited by the Department.
With specified exceptions, institutions are excluded from
consideration as educational institutions if the institution:
o offers more than 50 percent of its courses by correspondence,
o enrolls 50 percent or more of its students in correspondence
courses,
o has a student enrollment in which more than 25 percent of the
students are incarcerated or
o has a student enrollment in which more than 50 percent of the
students are admitted without a high school diploma or its
equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation).
Further, schools are specifically excluded from participation if
o the educational institution has filed for bankruptcy,
o the owner, or its chief executive officer, has been convicted or
pleaded "NOLO CONTENDERE" or "guilty" to a crime involving the
acquisition, use or expenditure of federal student aid funds, or
has been judicially determined to have committed fraud involving
funds under the student aid program or
o the educational institution has a cohort default rate in excess
of the rate prescribed by the Act.
In order to participate in the program, the eligibility of a school
must be approved by the Department under standards established by regulation.
FINANCIAL NEED ANALYSIS
Student Loans may generally be made in amounts, subject to limits and
conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each Federal
Stafford Loan and Federal Unsubsidized Stafford Loan borrower must undergo a
financial need analysis, which requires the borrower to submit a financial need
analysis form to a multiple data entry processor that forwards the information
to the federal central processor. The central processor evaluates the parents'
and student's financial condition under federal guidelines and calculates the
amount that the student and/or the family is expected to contribute towards the
student's cost of education (the "family contribution"). After receiving
information on the family contribution, the institution then subtracts the
family contribution from the cost for the student to attend the institution to
determine the student's eligibility for grants, loans, and work assistance. The
difference between the amount of grants and Federal Stafford Loans for which the
borrower is eligible and the student's estimated cost of attendance (the "Unmet
Need") may be borrowed through Federal Unsubsidized Stafford Loans subject to
annual and aggregate loan limits prescribed in the Act. Parents may finance the
family contribution amount through their own resources or through Federal PLUS
Loans.
SPECIAL ALLOWANCE PAYMENTS
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of Federal Student
Loans to the extent necessary to ensure that the holder receives at least a
specified market interest rate of return on the loans. The rates for Special
Allowance Payments are based on formulas that differ according to the type of
loan, the date the loan was originally made or insured and the type of funds
used to finance the loan (tax-exempt or taxable). A Special Allowance Payment is
made for each of the 3-month periods ending March 31, June 30, September 30 and
December 31. The Special Allowance Payment equals the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by the holder during the period multiplied by the special allowance
percentage. The special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of 91-day
Treasury bills auctioned for the 3-month period,
(2) subtracting the applicable borrower interest rate on the loan
from the average,
(3) adding the applicable Special Allowance Margin (as set forth
below) to the resultant percentage and
(4) dividing the resultant percentage by 4; provided, however, that,
if the amount determined by the application of clauses (1), (2)
and (3) is in the negative, the Special Allowance Margin is zero.
<TABLE>
<CAPTION>
DATE OF FIRST DISBURSEMENT SPECIAL ALLOWANCE MARGIN
-------------------------- ---------------------------------------------------------------
<S> <C>
Prior to 10/17/86 3.50%
10/17/86 - 09/30/92 3.25%
10/01/92 - 06/30/95 3.10%
07/01/95 - 06/30/98 2.50% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are In-School, Grace or Deferment); 3.10%
(Federal Stafford Loans and Federal Unsubsidized Stafford
Loans that are in repayment and all other loans)
07/01/98 - 06/30/03 2.20% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are In-School, Grace or Deferment); 2.80%
(Federal Stafford Loans and Federal Unsubsidized Loans that
are in repayment) and 3.10% for all other loans
</TABLE>
Special Allowance Payments are available on variable rate Federal PLUS
and Federal SLS Loans only if the variable rate, which is reset annually based
on the 52-week Treasury Bill, exceeds the applicable maximum rate. The maximum
is generally between 9% and 12%.
FEDERAL STAFFORD LOANS
The Act provides for:
(1) federal insurance or reinsurance of Federal Stafford Loans made
by eligible lenders to qualified students,
(2) federal interest subsidy payments on eligible Federal Stafford
Loans to be paid by the Department to holders of the loans in
lieu of the borrower making interest payments ("Interest Subsidy
Payments") and
(3) Special Allowance Payments representing an additional subsidy
paid by the Department to the holders of eligible Federal
Stafford Loans (the federal reinsurance obligations, together
with those obligations referred to in clauses (2) and (3) being
collectively referred to in this prospectus as "Federal
Assistance").
INTEREST. The borrower's interest rate on a Federal Stafford Loan may
be fixed or variable. Federal Stafford Loan interest rates are summarized in the
chart below.
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE INTEREST RATE MARGIN
<S> <C> <C> <C>
Prior to 01/01/81.......... 7% 7% N/A
01/01/81 - 09/12/83........ 9% 9% N/A
09/13/83 - 06/30/88........ 8% 8% N/A
07/01/88 - 09/30/92........ 8% for 48 months; 8% for 48 months, 3.25%
thereafter, 91-Day Treasury then 10%
+ Interest Rate Margin
10/01/92 - 06/30/94........ 91-Day Treasury + Interest 9% 3.10%
Rate Margin
07/01/94 - 06/30/95........ 91-Day Treasury + Interest 8.25% 3.10%
Rate Margin
07/01/95 - 06/30/98........ 91-Day Treasury + Interest 8.25% 2.50% (In-School, Grace or
Rate Margin Deferment); 3.10% (in
repayment)
On or after 07/01/98....... 91-Day Treasury + Interest 8.25% 1.70% (In-School, Grace or
Rate Margin Deferment); 2.30% (in
repayment)
--------------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992
is the first day of enrollment period for which a borrower's first
Federal Stafford Loan is made and for Federal Stafford Loans made on
October 1, 1992 and after the Trigger Date is the date of the
disbursement of a borrower's first Federal Stafford Loan.
(2) The rate for variable rate Federal Stafford Loans applicable for any
12-month period beginning on July 1 and ending on June 30, is
determined on the preceding June 1 and is equal to the lesser of (a)
the applicable Maximum Rate or (b) the sum of (1) the bond equivalent
rate of 91-day Treasury bills auctioned at the final auction held prior
to June 1 and (2) the applicable Interest Rate Margin.
</TABLE>
The 1992 Amendments provide that, for fixed rate loans made on or
after July 23, 1992 and for specified loans made to new borrowers on or after
July 1, 1988, the lender must have converted by January 1, 1995 the interest
rate on the loans to an annual interest rate adjusted each July 1 equal to:
o for specified loans made between July 1, 1988 and July 23, 1992,
the 91-day Treasury bill rate at the final auction prior to the
preceding June 1 plus 3.25%,
o for loans made on or after July 23, 1992 and prior to July 1,
1998, the 91-day Treasury bill rate at the final auction prior to
the preceding June 1 plus 3.10%, and
o for loans made on or after July 1, 1998, the 91-day Treasury bill
rate at the final auction prior to the preceding June 1 plus 2.2%
(In-School, Grace or Deferment) or 2.8% (in repayment) in each
case capped at the applicable interest rate for the loan existing
prior to the conversion.
The variable interest rate does not apply to loans made prior to July 23, 1992
during the first 48 months of repayment.
INTEREST SUBSIDY PAYMENTS. The Department is responsible for paying
interest on Federal Stafford Loans while the borrower is a qualified student,
during a Grace Period or during Deferral Periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Federal Stafford Loans in the amount
of interest accruing on the unpaid balance thereof prior to the commencement of
repayment or during any Deferral Periods. The Act provides that the owner of an
eligible Federal Stafford Loan shall be deemed to have a contractual right
against the United States of America to receive Interest Subsidy Payments (and
Special Allowance Payments) in accordance with its provisions. Receipt of
Interest Subsidy Payments and Special Allowance Payments is conditioned on
compliance with the requirements of the Act, including satisfaction of
need-based criteria (and the delivery of sufficient information by the borrower
and the lender to the Department to confirm the foregoing) and continued
eligibility of the loan for federal reinsurance. This eligibility may be lost,
however, if the loans are not held by an eligible lender, in accordance with the
requirement of the Act and the applicable Federal Guarantee Agreements. See
"--Eligible Lenders, Students and Educational Institutions" above, "Risk
Factors--RISK OF LOSS OF FEDERAL GUARANTOR AND DEPARTMENT OF EDUCATION PAYMENTS
FOR FAILURE TO COMPLY WITH LOAN ORIGINATION AND SERVICING PROCEDURES FOR STUDENT
LOANS", "Formation of the Trusts--Eligible Lender Trustee" and "Description of
the Transfer and Servicing Agreements--Servicing Procedures".
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after submission to the Department of the
applicable claim forms for any given calendar quarter, although there can be no
assurance that the payments will in fact be received from the Department within
that period. See "Risk Factors--RISK OF VARIABILITY OF ACTUAL CASH FLOWS". The
Servicer has agreed to prepare and file with the Department all claims forms and
any other required documents or filings on behalf of each Eligible Lender
Trustee as owner of the related Federal Student Loans on behalf of each Trust.
The Servicer has also agreed to assist each Eligible Lender Trustee in
monitoring, pursuing and obtaining Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to Federal Student Loans. Each Eligible
Lender Trustee will be required to remit Interest Subsidy Payments and Special
Allowance Payments it receives with respect to Federal Student Loans within two
business days of receipt thereof to the related Collection Account.
LOAN LIMITS. The Act requires that loans be disbursed by eligible
lenders in at least two separate and equal disbursements; except that for
schools with a cohort default rate of less than 10% for the three most recent
fiscal years for which data is available, loans for a period of enrollment of
not more than one semester, trimester or quarter, or of not more than four
months, may be disbursed in a single disbursement. The Act limited the amount a
student can borrow in any academic year and the amount he or she can have
outstanding in the aggregate. The following chart sets forth the current and
historic loan limits.
<TABLE>
<CAPTION>
ALL
STUDENTS(1) INDEPENDENT STUDENTS
BASE AMOUNT
SUBSIDIZED AND ADDITIONAL MAXIMUM
SUBSIDIZED UNSUBSIDIZED UNSUBSIDIZED AGGREGATE
SUBSIDIZED ON OR AFTER ON OR AFTER ONLY ON OR TOTAL
BORROWER'S ACADEMIC LEVEL PRE-1/1/87 1/1/87 10/1/93(2) AFTER 7/1/94(3) AMOUNT IN
-----------------------------
Undergraduate (per year)
<S> <C> <C> <C> <C> <C>
1st year............ $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year............ $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above.. $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year)...... $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limit;
Undergraduate....... $ 12,500 $ 17,250 $ 23,000 $ 23,000 $ 46,000
Graduate (including
undergraduate)...... $ 25,000 $ 54,750 $ 65,500 $ 73,000 $ 138,500
---------------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Federal Stafford and Federal Unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under a Federal Unsubsidized
Stafford Loan is the difference between the combined maximum loan amount
and the amount the student received in the form of a Federal Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of the students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
</TABLE>
The annual loan limits are reduced in some instances where the student
is enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive courses of study.
REPAYMENT. Repayment of principal on a Federal Stafford Loan generally
does not commence while a student remains a qualified student, but generally
begins upon expiration of the applicable Grace Period, as described below. Any
borrower may voluntarily prepay without premium or penalty any loan and in
connection therewith may waive any Grace Period or Deferral Period. In general,
each loan must be scheduled for repayment over a period of not more than ten
years after the commencement of repayment. New borrowers on or after October 7,
1998 who accumulate outstanding loans under FFELP totaling more than $30,000 are
entitled to extended repayment schedules of up to 25 years subject to minimum
repayment amounts. The Act currently requires minimum annual payments of $600
or, if greater, the amount of accrued interest for that year, unless the
borrower and the lender agree to lesser payments. Effective July 1, 1993, the
Act and regulations promulgated thereunder require lenders to offer the choice
of a standard, graduated or income-sensitive repayment schedule to all borrowers
who receive a loan on or after that date.
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS. Repayment of
principal on a Federal Stafford Loan must generally commence following a period
of (a) not less than 9 months or more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is 9% per
annum or 8% per annum and for loans to first-time borrowers on or after July 1,
1988) after the borrower ceases to pursue at least a half-time course of study
(a "Grace Period"). However, during other periods (each, a "Deferral Period")
and subject to conditions, no principal repayments need be made, including
periods when the student has returned to an eligible educational institution on
a full-time basis or is pursuing studies pursuant to an approved graduate
fellowship program, or when the student is a member of the United States Armed
Forces or a volunteer under the Peace Corps Act or the Domestic Volunteer
Service Act of 1973, or when the borrower is temporarily totally disabled, or
periods during which the borrower may defer principal payments because of
temporary financial hardship. For new borrowers to whom loans are first
disbursed on or after July 1, 1993, payment of principal may be deferred only
while the borrower is at least a half-time student or is in an approved graduate
fellowship program or is enrolled in a rehabilitation program, or when the
borrower is seeking but unable to find full-time employment, subject to a
maximum deferment of three years, or when for any reason the lender determines
that payment of principal will cause the borrower economic hardship, also
subject to a maximum deferment of three years. The 1992 Amendments also permit
and in some cases require forbearance of loan collection in specified
circumstances (each period, a "Forbearance Period").
FEDERAL UNSUBSIDIZED STAFFORD LOANS
The Federal Unsubsidized Stafford Loan program created under the 1992
Amendments is designed for students who do not qualify for the maximum Federal
Stafford Loan due to parental and/or student income and assets in excess of
permitted amounts. The basic requirements for Federal Unsubsidized Stafford
Loans are essentially the same as those for the Federal Stafford Loans,
including with respect to provisions governing the interest rate, the annual
loan limits and the Special Allowance Payments. The terms of the Federal
Unsubsidized Stafford Loans, however, differ in some respects. The federal
government does not make Interest Subsidy Payments on Federal Unsubsidized
Stafford Loans. The borrower must either begin making interest payments within
60 days after the time the loan is disbursed or permit capitalization of the
interest by the lender until repayment begins. Federal Unsubsidized Stafford
Loan borrowers who obtained the loans on or after October 1, 1992 are required
to pay, upon disbursement, a 6.5% insurance fee to the Department, though no
guarantee fee may be charged by the applicable Federal Guarantor. Effective July
1, 1994, the maximum insurance premium charged by the Federal Guarantor is
reduced to 1% and the origination fee is 3%. Subject to the same loan limits
established for Federal Stafford Loans, the student may borrow up to the amount
of the student's Unmet Need. Lenders are authorized to make Federal Unsubsidized
Stafford Loans applicable for periods of enrollment beginning on or after
October 1, 1992.
FEDERAL PLUS AND FEDERAL SLS LOAN PROGRAMS
The Act authorizes Federal PLUS Loans to be made to parents of
eligible dependent students and previously authorized Federal SLS Loans to be
made to specified categories of students. After July 1, 1993, only parents who
do not have an adverse credit history or who can secure an endorser without an
adverse credit history are eligible for Federal PLUS Loans. The basic provisions
applicable to Federal PLUS and Federal SLS Loans are similar to those of Federal
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, Federal PLUS and Federal SLS Loans differ from Federal Stafford
Loans, particularly because Interest Subsidy Payments are not available under
the Federal PLUS and Federal SLS Programs and in some instances Special
Allowance Payments are more restricted.
LOAN LIMITS. Federal PLUS and Federal SLS Loans disbursed prior to
July 1, 1993 are limited to $4,000 per academic year with a maximum aggregate
amount of $20,000. Federal SLS Loan limits for loans disbursed on or after July
1, 1993 depended upon the class year of the student and the length of the
academic year. The annual loan limit for Federal SLS Loans first disbursed on or
after July 1, 1993 ranged from $4,000 for first and second year undergraduate
borrowers to $10,000 for graduate borrowers, with a maximum aggregate amount of
$23,000 for undergraduate borrowers and $73,000 for graduate and professional
borrowers. After July 1, 1994, for purposes of new loans being originated, the
Federal SLS programs were merged with the Federal Unsubsidized Stafford Loan
program with the borrowing limits reflecting the combined eligibility under both
programs. The only limit on the annual and aggregate amounts of Federal PLUS
Loans first disbursed on or after July 1, 1993 is the cost of the student's
education less other financial aid received, including scholarship, grants and
other student loans.
INTEREST. THE INTEREST RATE DETERMINATION FOR A PLUS OR SLS LOAN IS
DEPENDENT ON WHEN THE LOAN WAS ORIGINALLY MADE AND DISBURSED AND THE PERIOD OF
ENROLLMENT. THE INTEREST RATES FOR PLUS AND SLS LOANS ARE SUMMARIZED IN THE
FOLLOWING CHART.
<TABLE>
<CAPTION>
Interest
Trigger Date(1) Borrower Rate(2) Maximum Rate Rate Margin
<S> <C> <C> <C>
Prior to 10/01/81............ 9% 9% N/A
10/01/81 - 10/30/82.......... 14% 14% N/A
11/01/82 - 06/30/87.......... 12% 12% N/A
07/01/87 - 09/30/92.......... 52-Week Treasury + Interest Rate Margin 12% 3.25%
10/01/92 - 06/30/94.......... 52-Week Treasury + Interest Rate Margin PLUS 10%, SLS 11% 3.10%
07/01/94 - 06/30/98.......... 52-Week Treasury + Interest Rate Margin 9% 3.10%
(SLS repealed 07/01/94)
After 06/30/98............... 91-Day Treasury + Interest Rate Margin 9% 3.10%
---------------
(1) The Trigger Date for PLUS and SLS loans made before October 1, 1992 is
the first day of enrollment period for which the loan is made, and for
PLUS and SLS loans made on October 1, 1992 and after the Trigger Date
is the date of the disbursement of the loan, respectively.
(2) For PLUS or SLS loans that carry a variable rate, the rate is set
annually for 12-month periods beginning on July 1 and ending on June 30
on the preceding June 1 and is equal to the lesser of (a) the
applicable maximum rate and (b) the sum of (1) the bond equivalent rate
of 52-week Treasury bills (or 91 day Treasury bills in the case of
loans made or disbursed on or after June 30, 1998) auctioned at the
final auction held prior to June 1, and (2) the applicable Interest
Rate Margin.
</TABLE>
A holder of a PLUS or SLS Loan is eligible to receive Special
Allowance Payments during any quarter if (a) the sum of (1) the average of the
bond equivalent rates of 91-day Treasury bills auctioned during the quarter and
(2) the Interest Rate Margin exceeds (b) the Maximum Rate.
REPAYMENT, DEFERMENTS. The 1992 Amendments provide Federal SLS
borrowers with the option to defer commencement of repayment of principal until
the commencement of repayment of Federal Stafford Loans. Otherwise, repayment of
principal of Federal PLUS and Federal SLS Loans is required to commence no later
than 60 days after the date of disbursement of the loan, subject to deferral and
forbearance provisions. The deferral provisions which apply are more limited
than those which apply to Federal Stafford Loans. Repayment of interest,
however, may be deferred and capitalized during periods of educational
enrollments and periods of unemployment or hardship as specified under the Act.
Further, whereas Interest Subsidy Payments are not available for the deferments,
interest may be capitalized during the periods upon agreement of the lender and
borrower. Maximum loan repayment periods and minimum payment amounts are the
same as for Federal Stafford Loans.
A borrower may refinance all outstanding Federal PLUS Loans under a
single repayment schedule for principal and interest, with the new repayment
period calculated from the date of repayment of the most recent included loan.
The interest rate of the refinanced loan shall be the weighted average of the
rates of all Federal PLUS Loans being refinanced. A second type of refinancing
enables an eligible lender to reissue a Federal PLUS Loan which was initially
originated at a fixed rate prior to July 1, 1987 in order to permit the borrower
to obtain the variable interest rate available on Federal PLUS Loans on and
after July 1, 1987. If a lender is unwilling to refinance the original Federal
PLUS Loan, the borrower may obtain a loan from another lender for the purpose of
discharging the loan and obtaining a variable interest rate.
FEDERAL CONSOLIDATION LOAN PROGRAM
The Act authorizes a program under which borrowers may consolidate one
or more of their Student Loans into a single loan (each, a "Federal
Consolidation Loan") insured and reinsured on a basis similar to Federal
Stafford Loans. Federal Consolidation Loans may be made in an amount sufficient
to pay outstanding principal, unpaid interest, late charges and collection costs
on all federally insured or reinsured student loans incurred under FFELP
selected by the borrower, as well as loans made pursuant to various other
federal student loan programs and which may have been made by different lenders.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding loan of the borrower or the borrower certifies that he has been
unable to obtain a Federal Consolidation Loan from the holders of the
outstanding loans made to him. The 1998 Reauthorization Bill allows lenders to
make Federal Consolidation Loans to borrowers with multiple holders of
underlying FFELP loans even if the lender does not hold an outstanding loan. A
borrower who is unable to obtain a Federal Consolidation Loan from an eligible
lender or a Federal Consolidation Loan with an income-sensitive repayment plan
acceptable to the borrower may obtain a Federal Consolidation Loan under the
direct loan program. Federal Consolidation Loans that were made on or after July
1, 1994 have no minimum loan amount, although Federal Consolidation Loans for
less than $7,500 must be repaid in ten years. Applications for Federal
Consolidation Loans received on or after January 1, 1993 but prior to July 1,
1994, were available only to borrowers who had aggregate outstanding student
loan balances of at least $7,500; for applications received before January 1,
1993, Federal Consolidation Loans are available only to borrowers who have
aggregate outstanding student loan balances of at least $5,000. The borrowers
must be either in repayment status or in a grace period preceding repayment and,
for applications received prior to January 1, 1993, the borrower must not have
been delinquent by more than 90 days on any student loan payment; for
applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Federal Consolidation Loans if they will
reenter repayment through loan consolidation. For applications received on or
after January 1, 1993, borrowers may, within 180 days of the origination of a
Federal Consolidation Loan, add additional loans made prior to consolidation
("Add-on Consolidation Loans") for consolidation therewith. If the borrower
obtains loans subsequent to the Federal Consolidation Loan, the borrower may
consolidate the new loans and the Federal Consolidation Loan. The interest rate
and term of the Federal Consolidation Loan, following the consolidation with the
related Add-on Consolidation Loans, may be recomputed within the parameters
permitted by the Act. For applications received on or after January 1, 1993,
married couples who agree to be jointly and severally liable will be treated as
one borrower for purposes of loan consolidation eligibility. For applications
received on or after November 13, 1997, student loan borrowers may include
federal direct loans in Federal Consolidation Loans.
Federal Consolidation Loans made prior to July 1, 1994 bear interest
at a rate which equals the weighted average of interest rates on the unpaid
principal balances of outstanding loans, rounded up to the nearest whole one
percent, with a minimum rate of 9%. For Federal Consolidation Loans made on or
after July 1, 1994 through November 12, 1997, the weighted average interest rate
must be rounded up to the nearest whole percent. Federal Consolidation Loans
made on or after November 13, 1997 through September 30, 1998 will bear interest
at the annual variable rate applicable to Stafford Loans. Federal Consolidation
Loans for which the application is received on or after October 1, 1998 bear
interest at a rate equal to the weighted average interest rate of the loans
consolidated, rounded up to the nearest one-eighth of one percent and capped at
8.25%. Interest on Federal Consolidation Loans accrues and, for applications
received prior to January 1, 1993, is to be paid without Interest Subsidy by the
Department. For Federal Consolidation Loans received on or after January 1,
1993, all interest of the borrower is paid during all periods of Deferment.
However, Federal Consolidation Loan applications received on or after August 10,
1993 will only be subsidized if all of the underlying loans being consolidated
were subsidized Federal Stafford Loans; PROVIDED, HOWEVER, that in the case of
Federal Consolidation Loans made on or after November 13, 1997, that portion of
the Federal Consolidation Loan that is comprised of Subsidized Stafford Loans
will retain its subsidy benefits during periods of deferment. Borrowers may
elect to accelerate principal payments without penalty. Further, no insurance
premium may be charged to a borrower and no insurance premium may be charged to
a lender in connection with a Federal Consolidation Loan. However, a fee may be
charged to the lender by a Federal Guarantor to cover the costs of increased or
extended liability with respect to a Consolidation Loan, and lenders must pay a
Monthly Rebate Fee at an annualized rate of 1.05% for loans disbursed on or
after October 1, 1993 (0.62% for loans for which applications were received
between October 1, 1998 and January 31, 1999). Special Allowance Payments are
made on Consolidation Loans whenever the rate charged the borrower is limited by
the 9%/8.25% cap. However, for applications received on or after October 1,
1998, Special Allowance Payments are paid in order to afford the lender a yield
equal to the 91-day T-bill plus 3.1%, whenever that formula exceeds the
borrower's interest rate.
Repayment of Federal Consolidation Loans begins within 60 days after
discharge of all prior loans which are consolidated. Repayment schedule options
must include, for applications received on or after January 1, 1993, the
establishment of graduated or income sensitive repayment plans, subject to
limits applicable to the sum of the Federal Consolidation Loan and the amount of
the borrower's other eligible student loans outstanding. The lender may, at its
option, include the graduated and income sensitive repayment plans for
applications received prior to that date. Generally, depending on the total of
loans outstanding, repayment may be scheduled over periods no shorter than ten
but not more than 25 years in length. For applications received on or after
January 1, 1993, the maximum maturity schedule is 30 years for Federal
Consolidation Loans of $60,000 or more.
All eligible loans of a borrower paid in full through consolidation
are discharged in the consolidation process when the new Federal Consolidation
Loan is issued.
DESCRIPTION OF PRIVATE STUDENT LOANS UNDER THE PROGRAMS
In addition to the Federal Student Loans originated under the Act, the
Seller may sell to the Depositor for sale to the Trust, student loans that are
not federally guaranteed ("Private Student Loans"), that can be used by
borrowers to supplement their Federal Student Loans in situations where the
Federal Student Loans do not cover the cost of education. The holders of Private
Student Loans are not entitled to receive any Federal Assistance with respect
thereto. The terms any underwriting criteria for any program relating to the
origination of Private Student Loans will be set forth in the related prospectus
supplement.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
FEDERAL GUARANTORS. The Act authorizes Federal Guarantors to support
education financing and credit needs of students at post-secondary schools. The
Act encourages every state either to establish its own agency or to designate
another Federal Guarantor in cooperation with the Secretary. Under various
programs throughout the United States of America, Federal Guarantors insure and
sometimes service guaranteed student loans. The Federal Guarantors are reinsured
by the federal government for from 80% to 100% of each default claim paid,
depending on their claims experience, for loans disbursed prior to October 1,
1993, from 78% to 98% of each default claim paid for loans disbursed on or after
October 1, 1993 and prior to October 1, 1998 and from 75% to 95% of each default
claim paid for loans disbursed on or after October 1, 1998. Federal Guarantors
are reinsured by the federal government for 100% of death, disability,
bankruptcy, closed school and false certification claims paid. Loans guaranteed
under the lender of last resort provisions of the Act are also 100% guaranteed
and reinsured. SEE"--Federal Insurance and Reinsurance of Federal Guarantors"
below.
Federal Guarantors collect a one-time insurance premium ranging up to
1% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Federal Unsubsidized Stafford Loan program prior to July 1,
1994. On the loans made prior to July 1, 1994, the Act requires that a 6.5%
combined loan origination fee and insurance premium be paid by the borrower on
Federal Unsubsidized Stafford Loans. This fee is passed through to the
Department by the originating lender. Effective July 1, 1994, the maximum
insurance premium and origination fee for Federal Stafford Loans and Federal
Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Student Loan to be sold to an Eligible Lender Trustee on
behalf of a Trust will be guaranteed as to principal and interest by a Federal
Guarantor pursuant to a Guarantee Agreement between the Federal Guarantor and
the applicable Eligible Lender Trustee. The applicable prospectus supplement for
each Trust will identify each related Federal Guarantor for the Federal Student
Loans held by the Trust as of the applicable Closing Date and the amount of the
Federal Student Loans it is guaranteeing for the Trust.
The 1993 Act granted the Department broad powers over Federal
Guarantors and their reserves. These powers include the authority to require a
Federal Guarantor to return all reserve funds to the Department if the
Department determines the action is necessary to ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of the Federal Guarantor's funds or
assets. The Department is also now authorized to direct a Federal Guarantor to
return a portion of its reserve funds which the Department determines is
unnecessary to pay the program expenses and contingent liabilities of the
Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is a
misapplication or otherwise improper. The Department may also terminate a
Federal Guarantor's reinsurance agreement if the Department determines that the
action is necessary to protect the federal fiscal interest. These various
changes create a significant risk that the resources available to the Federal
Guarantors to meet their guarantee obligations will be significantly reduced.
FEDERAL INSURANCE AND REINSURANCE OF FEDERAL GUARANTORS. A Federal
Student Loan is considered to be in default for purposes of the Act when the
borrower fails to make an installment payment when due or to comply with other
terms of the loan, and if the failure persists for a period of time as specified
by the Act. Under specified circumstances a loan deemed ineligible for Federal
Reinsurance may be restored to eligibility. Procedures for the restoration of
eligibility are discussed below.
If the loan in default is covered by federal loan insurance in
accordance with the provisions of the Act, the Department is to pay the
applicable Federal Guarantor, as insurance beneficiary, the amount of the loss
sustained thereby, upon notice and determination of the amount, within 90 days
of the notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender
is reimbursed by the Federal Guarantor for 100% (or not more than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced the loan. Under the Act, the
Department enters into a guarantee agreement with each Federal Guarantor, which
provides for federal reinsurance for amounts paid to eligible lenders by the
Federal Guarantor with respect to defaulted loans.
Pursuant to the agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, ineligible loan, the death of a student whose parent is the borrower
of a Federal PLUS Loan or claims by borrowers who received loans on or after
January 1, 1986 and who are unable to complete the programs in which they are
enrolled due to school closure or borrowers whose borrowing eligibility was
falsely certified by the eligible institution; claims are not included in
calculating a Federal Guarantor's claims rate experience for federal reinsurance
purposes. The Department also agrees to reimburse a Federal Guarantor for 100%
of the amounts expended in connection with claims on loans made under the lender
of last resort provisions. The Department is also required to repay the unpaid
balance of any loan if the borrower files for relief under Chapter 12 or 13 of
the Bankruptcy Code or files for relief under Chapter 7 or 11 of the Bankruptcy
Code and has been in repayment for more than 7 years or commences an action for
a determination of dischargeability under Section 523(a)(8)(b) of the Bankruptcy
Code, and is authorized to acquire the loans of borrowers who are at high risk
of default and who request an alternative repayment option from the Department.
Effective for bankruptcy actions commenced by the borrower on or after October
8, 1998, student loans will not be discharged unless there is an undue hardship
determination made by the bankruptcy court.
The amount of the reinsurance payment to the Federal Guarantor for
default claims is subject to reduction based upon the annual default claims rate
of the Federal Guarantor, calculated to equal the amount of federal reinsurance
claims paid by the Department to the Federal Guarantor during any fiscal year as
a percentage of the original principal amount of guaranteed loans in repayment
at the end of the prior federal fiscal year. The formula is summarized as
follows:
<TABLE>
<CAPTION>
Claims Rate of Federal Guarantor Reimbursement to Federal Guarantor by the Department of Education(1)
<S> <C>
0% to and including 5%................. 100%
Greater than 5% to and including 9%.... 100% of claims to and including 5%; 90% of claims greater than 5%
Greater than 9%........................ 100% of claims to and including 5%; 90% of claims greater than 5%
to and including 9%; and 80% of claims greater than 9%
---------
(1) The federal reimbursement has been reduced to 98%, 88% and 78% for loans
disbursed on or after October 1, 1993 and prior to October 1, 1998 and 95%,
85% and 75% for loans disbursed on or after October 1, 1998.
</TABLE>
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year compared
with the original principal balance of loans in repayment at the beginning of
that year.
The 1992 Amendments addressed education loan industry concerns
regarding the Department's commitment to providing support in the event of
Federal Guarantor failures. Pursuant to the 1992 Amendments, Federal Guarantors
are required to maintain specified reserve fund levels. The levels are defined
as 0.5% of the total attributable amount of all outstanding loans guaranteed by
the Federal Guarantor for the fiscal year of the Federal Guarantor that begins
in 1993, 0.7% for the Federal Guarantor's fiscal year beginning in 1994, 0.9%
for the Federal Guarantor's fiscal year beginning in 1995, and 1.1% for the
Federal Guarantor's fiscal year beginning on or after January 1, 1996. If the
Federal Guarantor fails to achieve the minimum reserve level in any two
consecutive years, if the Federal Guarantor's federal annual claims rate equals
or exceeds 9% or if the Department determines the Federal Guarantor's
administrative or financial condition jeopardizes its continued ability to
perform its responsibilities, the Department may require the Federal Guarantor
to submit and implement a management plan to address the deficiencies. The
Department may terminate the Federal Guarantor's agreements with the Department
if the Guarantor fails to submit the required plan, or fails to improve its
administrative or financial condition substantially, or if the Department
determines the Federal Guarantor is in danger of financial collapse. In this
event, the Department is required to assume responsibility for the functions of
the Federal Guarantor and in connection therewith is authorized to undertake
specified actions to assure the continued payment of claims, including maturity
advances to Federal Guarantors to cover immediate cash needs, transferring of
guarantees to another Federal Guarantor, or transfer of guarantees to the
Department itself. No assurance can be made that the Department will under any
given circumstance exercise its right to terminate a reimbursement agreement
with a Federal Guarantor or make a determination that the Federal Guarantor is
unable to meet its guarantee obligations.
The Act requires that, subject to compliance with the Act, the
Secretary must pay all amounts, which may be required to be paid under the Act
as a result of specified events of death, disability, bankruptcy, school closure
or false certification by the educational institution described in the Act. It
further provides that Federal Guarantors shall be deemed to have a contractual
right against the United States of America to receive reinsurance in accordance
with its provisions. In addition, the 1992 Amendments provide that if the
Department determines that a Federal Guarantor is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until the obligations are transferred to a new Federal Guarantor
capable of meeting the obligations or until a successor Federal Guarantor
assumes the obligations. No assurance can be made that the Department would
under any given circumstances assume the obligation to assure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Federal Guarantor or by making a determination that the Federal
Guarantor is unable to meet its guarantee obligations.
PRIVATE GUARANTORS. Private Student Loans are not entitled to any
federal reinsurance or assistance from the Department or any other governmental
entity. Although each Private Guarantor maintains a loan loss reserve intended
to absorb losses arising from its guarantee commitments, there can be no
assurance that the amount of such reserve will be sufficient to cover the
obligations of such Private Guarantor over the term of the related Private
Student Loans.
ORIGINATION AND MARKETING PROCESS
The Act specifies rules regarding loan origination practices, which
lenders must comply with in order for their Federal Student Loans to be
guaranteed and to be eligible to receive Federal Assistance. Lenders of Federal
Student Loans are prohibited from offering points, premiums, payments or other
inducements, directly or indirectly, to any educational institution, guarantor
or individual in order to secure Federal Student Loan applications, and no
lender may conduct unsolicited mailings of Federal Student Loan applications to
students who have not previously received student loans from that lender.
Generally the student and school complete the combined application
with promissory note and mail or electronically transmit it either to a lender
or directly to the applicable Guarantor, if applicable. Both the lender and the
Guarantor, if applicable must approve the application, including confirming that
the application is complete and that it (as well as the prospective borrower and
institution) complies with all applicable requirements of the Act and the
requirements of the Guarantor, if applicable. The Act requires that each Federal
Guarantor have procedures designed to assure that it guarantees Federal Student
Loans only to students attending institutions which meet the requirements of the
Act. Certain lenders establish maximum default rates for institutions whose
students they will serve. For each application that is approved, the applicable
Guarantor, if applicable, will issue a guarantee certificate to the lender,
which will then cause the loan to be disbursed (typically in multiple
installments) and a disclosure statement confirming the terms of the Student
Loan to be sent to the student borrower. These procedures differ slightly for
Federal Consolidation Loans.
The origination procedures for any Private Student Loans included in a
Trust will be set forth in the related prospectus supplement.
SERVICING AND COLLECTIONS PROCESS
The applicable Guarantee Agreements and the Act require the holder of
Federal Student Loans to cause specified procedures, including due diligence
procedures and the taking of specific steps at specific intervals, to be
performed with respect to the servicing of the Federal Student Loans. These
procedures are designed to ensure that the Federal Student Loans are repaid on a
timely basis by or on behalf of borrowers. The Servicer agrees to perform the
servicing and collection procedures with respect to the Federal Student Loans on
behalf of each Trust pursuant to the related Loan Servicing Agreement between
the Servicer and the Eligible Lender Trustee (the "Loan Servicing Agreement").
The procedures generally include periodic attempts to contact any delinquent
borrower by telephone and by mail, commencing with one written notice within the
first ten days of delinquency and including multiple written notices and
telephone calls to the borrower thereafter at specified times during any
delinquency. All telephone calls and letters are automatically registered, and a
synopsis of each call or the mailing of each letter is noted in the Servicer's
loan file for the borrower. The Servicer is also required to perform skip
tracing procedures on delinquent borrowers whose current location is unknown,
including contacting the borrowers' schools and references. Failure to comply
with the established procedures could adversely affect the ability of a given
Eligible Lender Trustee, as holder of legal title to the Federal Student Loans
on behalf of the related Trust, to realize the benefits of any Guarantee
Agreement or to receive the benefits of Federal Assistance from the Department
with respect thereto. Failure to comply with established procedures with respect
to a Federal Student Loan may also result in the denial of coverage under a
Guarantee Agreement for specified accrued interest amounts, in circumstances
where the failure has not caused the loss of the guarantee of the principal of
the Federal Student Loan. SEE "Risk Factors--Risk that Failure to Comply with
Student Loan Origination and Servicing Procedures for Federal Student Loans May
Adversely Affect the Trust's Ability to Pay Principal and Interest on the
Related Notes and Certificates".
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Federal Student Loan, the Servicer
generally is required to notify the applicable Guarantor of the existence of the
delinquency. These notices advise the Guarantor of seriously delinquent accounts
and allow the Guarantor to make additional attempts to collect on the loans
prior to the filing of claims. Any Federal Student Loan which is delinquent
beyond a specified number of days is considered to be in default, after which
the Servicer will submit a claim for reimbursement therefor to the applicable
Guarantor. Failure to file a claim within specified times of delinquency may
result in denial of the guarantee claim with respect to the Federal Student
Loan. The Servicer's failure to file a guarantee claim in a timely fashion would
constitute a breach of its covenants and, unless otherwise specified in the
prospectus supplement for a given series of Securities, would, if as a result of
the failure the related guaranty payment is no longer available to the related
Trust, create an obligation of the Servicer to arrange for the purchase of the
applicable Federal Student Loan from the applicable Eligible Lender Trustee on
behalf of the related Trust. The obligation of the Servicer to arrange for a
purchase will constitute the sole remedy available to Securityholders or the
Eligible Lender Trustee for a failure by the Servicer. SEE "Description of the
Transfer and Servicing Agreements--Servicer Covenants".
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and
recovery rates of the Guarantors for the Student Loans held by the related Trust
as of the applicable closing date specified in the related prospectus supplement
(the "Closing Date") with respect to each series of Securities will be set forth
in each prospectus supplement. There can be no assurance that the claim and
recovery experience on any pool of Student Loans with respect to a given Trust
will be comparable to prior experience or to any information set forth in each
prospectus supplement.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The weighted average lives of the Notes and the Certificates of any
series will generally be influenced by the rate at which the principal balances
of the related Student Loans are paid, which payment may be in the form of
scheduled amortization or prepayments. (For this purpose, the term "prepayments"
includes prepayments in full or in part (including pursuant to Federal
Consolidation Loans), as a result of:
o borrower default, death, disability or bankruptcy,
o a closing of or a false certification by the borrower's school
and
o subsequent liquidation of the loans or collection of Guarantee
Payments with respect thereto and as a result of Student Loans
being repurchased by the Seller or the Servicer for
administrative reasons.)
Except as otherwise set forth in your prospectus supplement, all of the Student
Loans are prepayable at any time without penalty to the borrower. The rate of
prepayment of Student Loans is influenced by a variety of economic, social and
other factors, including as described below and in the applicable prospectus
supplement. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Student
Loans. However, because many of the Student Loans bear interest that either
actually or effectively is floating, it is impossible to predict whether changes
in prevailing interest rates will be similar to or will vary from changes in the
interest rates on the Student Loans. In addition, under specified circumstances,
the Seller or the Servicer will be obligated to repurchase or arrange for the
repurchase of Student Loans from a given Trust pursuant to the related Loan Sale
Agreement or Loan Servicing Agreement, as applicable, as a result of breaches of
applicable representations and warranties or covenants. SEE "Description of the
Transfer and Servicing Agreements--Sale of Student Loans; Representations and
Warranties" and"--Servicer Covenants". SEE ALSO "Description of the Transfer and
Servicing Agreements--Termination--Optional Redemption" regarding the Servicer's
option to purchase the Student Loans from a given Trust and "Insolvency Event"
regarding the sale of the Student Loans if an Insolvency Event with respect to
the Company occurs. Also, in the case of a Trust having a Funding Period or
Revolving Period, the addition of Student Loans to the Trust during the period
could affect the weighted average lives of the Securities of the related series.
SEE "Description of the Transfer and Servicing Agreements--Additional Fundings".
On the other hand, scheduled payments with respect to, and maturities
of, the Student Loans may be extended, including pursuant to applicable grace,
deferral and forbearance periods. The rate of payment of principal of the Notes
and the Certificates and the yield on the Notes and the Certificates may also be
affected by the rate of defaults resulting in losses on Student Loans, by the
severity of those losses and by the timing of those losses, which may affect the
ability of the Guarantors to make Guarantee Payments with respect thereto.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the Notes or the Certificates of
a given series on each Distribution Date, since the amount will depend, in part,
on the amount of principal collected on the related pool of Student Loans during
the applicable Collection Period. Any reinvestment risks resulting from a faster
or slower incidence of prepayment of Student Loans will be borne entirely by the
Noteholders and the Certificateholders of a given series. The related prospectus
supplement may set forth additional information with respect to the maturity and
prepayment considerations applicable to the particular pool of Student Loans and
the related series of Securities.
POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the
"Certificate Pool Factor" for each class of Certificates (each, a "Pool Factor")
will be a seven-digit decimal which the Servicer will compute prior to each
Distribution Date indicating the remaining outstanding principal amount of the
class of Notes or the remaining principal balance for the class of Certificates
(the "Certificate Balance"), respectively, as of that Distribution Date (after
giving effect to distributions to be made on the Distribution Date), as a
fraction of the initial outstanding principal amount of the class of the Notes
or the initial Certificate Balance for the class of Certificates, respectively.
Each Pool Factor will be 1.0000000 as of the Closing Date, and thereafter will
decline to reflect reductions in the outstanding principal amount of the
applicable class of Notes or reductions of the Certificate Balance of the
applicable class of Certificates, as applicable. A Securityholder's portion of
the aggregate outstanding principal amount of the related class of Notes or of
the aggregate outstanding Certificate Balance for the related class of
Certificates, as applicable, is the product of (1) the original denomination of
that Securityholder's Note or Certificate and (2) the applicable Pool Factor.
If so provided in the related prospectus supplement with respect to a
Trust, the Securityholders will receive reports on or about each Distribution
Date concerning the payments received on the Student Loans, the Pool Balance (as
the term is defined in the related prospectus supplement, the "Pool Balance"),
the applicable Pool Factor and various other items of information.
Securityholders of record during any calendar year will be furnished information
for tax reporting purposes not later than the latest date permitted by law. SEE
"Certain Information Regarding the Securities--Reports to Securityholders".
DESCRIPTION OF THE NOTES
With respect to each Trust, one or more classes of notes (the "Notes")
of a given series will be issued pursuant to the terms of an indenture (an
"Indenture") between the Trust and the trustee specified in the related
prospectus supplement (an "Indenture Trustee"), a form of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
The following summary describes terms of the Notes and the Indenture. The
summary does not purport to be complete and is qualified in its entirety by
reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related prospectus supplement, each
class of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Administrator, the "Depositary") except as set forth
below. Unless otherwise specified in the related prospectus supplement, the
Notes will be available for purchase in denominations of $1,000 and integral
multiples thereof in book-entry form only. The Depositor has been informed by
DTC that DTC's Nominee will be Cede, unless another nominee is specified in the
related prospectus supplement. Accordingly, the nominee is expected to be the
holder of record of the Notes of each class. Unless and until Definitive Notes
(as defined below) are issued under the limited circumstances described in this
prospectus or in the related prospectus supplement, no Noteholder will be
entitled to receive a physical certificate representing a Note. All references
in this prospectus and in the related prospectus supplement to actions by
Noteholders of Notes held in book-entry form refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references in this prospectus to distributions, notices, reports and statements
to Noteholders refer to distributions, notices, reports and statements to DTC or
its nominee, as the case may be, as the registered holder of the Notes for
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. SEE "Certain Information Regarding the Securities--Book-Entry
Registration" and"--Definitive Securities".
PRINCIPAL OF AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
interest at a per annum interest rate (the "Interest Rate") and amount of or
method of determining payments of principal and interest on each class of Notes
of a given series will be described in the related prospectus supplement. The
right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any other
class or classes of Notes of the series, as described in the related prospectus
supplement. Unless otherwise provided in the related prospectus supplement,
payments of interest on the Notes of the series will be made prior to payments
of principal thereon. Each class of Notes may have a different Interest Rate,
which may be a fixed, variable or adjustable Interest Rate or any combination of
the foregoing. The related prospectus supplement will specify the Interest Rate
for each class of Notes of a given series or the method for determining the
Interest Rate. SEE ALSO "Certain Information Regarding the Securities--Fixed
Rate Securities" and "Floating Rate Securities". One or more classes of the
Notes of a series may be redeemable in whole or in part under the circumstances
specified in the related prospectus supplement, including as a result of the
exercise by the Seller, or another party named in the related prospectus
supplement, of its option to purchase the related Student Loans.
Unless otherwise specified in the related prospectus supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. The amount available for the payments could be
less than the amount of interest payable on the Notes on any of the dates
specified for payments in the related prospectus supplement (each, a
"Distribution Date"), in which case each class of Noteholders will receive its
ratable share (based upon the aggregate amount of interest due to the class of
Noteholders) of the aggregate amount available to be distributed in respect of
interest on the Notes of the series. SEE "Description of the Transfer and
Servicing Agreements-Distributions" and "Credit and Cash Flow Enhancement".
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each class will be set forth in the related prospectus
supplement. Payments in respect of principal and interest of any class of Notes
will be made on a pro rata basis among all the Noteholders of the class.
In the case of a series of Notes relating to a Trust having a
Pre-Funding Account or Collateral Reinvestment Account, the Notes of the series
will be redeemed in part on the Distribution Date on or immediately following
the last day of the related Funding Period or Revolving Period, respectively, in
the event that any amount remains on deposit in the applicable account after
giving effect to all Additional Fundings on or prior to the date, in an
aggregate principal amount described in the related prospectus supplement.
SEE "Description of the Transfer and Servicing Agreements-Credit and
Cash Flow Enhancement-RESERVE ACCOUNT" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related prospectus supplement).
If specified in the related prospectus supplement, the Trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to your Notes or Certificates.
THE INDENTURE
MODIFICATION OF INDENTURE. WITH RESPECT TO EACH TRUST, WITH THE
CONSENT OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING NOTES OF THE RELATED
SERIES, THE INDENTURE TRUSTEE AND THE TRUST MAY EXECUTE A SUPPLEMENTAL INDENTURE
TO ADD PROVISIONS TO, OR CHANGE IN ANY MANNER OR ELIMINATE ANY PROVISIONS OF,
THE INDENTURE WITH RESPECT TO THE NOTES, OR TO MODIFY (EXCEPT AS PROVIDED BELOW)
IN ANY MANNER THE RIGHTS OF THE RELATED NOTEHOLDERS.
Unless otherwise specified in the related prospectus supplement with
respect to a series of Notes, however, without the consent of the holder of each
outstanding Note affected thereby, no supplemental indenture will:
o change the due date of any installment of principal of or
interest on any Note or reduce the principal amount thereof, the
interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin
or currency in which any Note or any interest thereon is payable,
o impair the right to institute suit for the enforcement of
provisions of the related Indenture regarding payment,
o reduce the percentage of the aggregate amount of the outstanding
Notes of the series, the consent of the holders of which is
required for any supplemental indenture or the consent of the
holders of which is required for any waiver of compliance with
provisions of the related Indenture or of defaults thereunder and
their consequences as provided for in the Indenture,
o modify or alter the provisions of the related Indenture regarding
the voting of Notes held by the applicable Trust, the Seller or
the Depositor, an affiliate of either of them or any obligor on
the Notes,
o reduce the percentage of the aggregate outstanding amount of the
Notes, the consent of the holders of which is required to direct
the related Eligible Lender Trustee on behalf of the applicable
Trust to sell or liquidate the Student Loans if the proceeds of
the sale would be insufficient to pay the principal amount and
accrued but unpaid interest on the outstanding Notes of the
series,
o decrease the percentage of the aggregate principal amount of the
Notes required to amend the sections of the related Indenture
which specify the applicable percentage of aggregate principal
amount of the Notes necessary to amend the related Indenture or
other related agreements, or
o permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the Notes of the series or, except as otherwise
permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any collateral or deprive the holder of any Note
of the security afforded by the lien of the Indenture.
Unless otherwise specified in the applicable prospectus supplement,
the applicable Trust and the related Indenture Trustee may also enter into
supplemental indentures without obtaining the consent of Noteholders of the
series, for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the related Indenture or of modifying in
any manner the rights of Noteholders of the series so long as the action will
not, in the opinion of counsel satisfactory to the applicable Indenture Trustee,
materially and adversely affect the interest of any Noteholder of the series.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the
Notes of a given series, unless otherwise specified in the related prospectus
supplement, an "Event of Default" under the related Indenture will consist of
the following:
(1) a default for five days or more in the payment of any interest on
any Note after the same becomes due and payable;
(2) a default in the payment of the principal of or any installment
of the principal of any Note when the same becomes due and
payable;
(3) a default in the observance or performance of any covenant or
agreement of the applicable Trust made in the related Indenture
and the continuation of any default for a period of 30 days after
notice thereof is given to the applicable Trust by the applicable
Indenture Trustee or to the applicable Trust and the applicable
Indenture Trustee by the holders of at least 25% in principal
amount of the Notes then outstanding; provided, however, that if
the Trust demonstrates that it is making a good faith attempt to
cure the default, the 30-day period may be extended by the
Indenture Trustee to 90 days;
(4) any representation or warranty made by the applicable Trust in
the related Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect in a
material respect as of the time made, and the breach is not cured
within 30 days after notice thereof is given to the Trust by the
applicable Indenture Trustee or to the Trust and the applicable
Indenture Trustee by the holders of at least 25% in principal
amount of the Notes of the series then outstanding; provided,
however, that if the Trust demonstrates that it is making a good
faith attempt to cure the breach, the 30-day period may be
extended by the Indenture Trustee to 90 days, or
(5) events of bankruptcy, insolvency, receivership or liquidation of
the Trust. However, the amount of principal required to be
distributed to Noteholders of the series under the related
Indenture on any Distribution Date will generally be limited to
amounts available after payment of all prior obligations of the
Trust.
Therefore, unless otherwise specified in the related prospectus supplement, the
failure to pay principal on a class of Notes generally will not result in the
occurrence of an Event of Default until the final scheduled Distribution Date
for the class of Notes. If, with respect to any series of Notes, interest is
paid at a variable rate based on an index, the related prospectus supplement may
provide that, in the event that, for any Distribution Date, the Interest Rate as
calculated based on the index is less than an alternate rate calculated for the
Distribution Date based on interest collections on the Student Loans (the amount
of the difference, the "Index Shortfall Carryover"), the Interest Rate for the
Distribution Date shall be the alternate rate and the Interest Shortfall
Carryover shall be payable as described in the prospectus supplement. Unless
otherwise provided in the prospectus supplement, payment of the Index Shortfall
Carryover shall be lower in priority than payment of interest on the Notes at
the Interest Rate (whether the Interest Rate is based on the index or the
alternate rate) and, accordingly, the nonpayment of the Interest Shortfall
Carryover on any Distribution Date shall not generally constitute a default in
the payment of interest on the Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a majority
in principal amount of the Notes then outstanding may declare the principal of
the Notes to be immediately due and payable. Unless otherwise specified in the
related prospectus supplement, the declaration may be rescinded by the holders
of a majority in principal amount of the Notes then outstanding if (1) the
Eligible Lender Trustee on behalf of the related Trust has paid or deposited
with the Indenture Trustee a sum sufficient to pay (A) all payments of principal
of and interest on all Notes and all other amounts that would then be due under
the related Indenture or upon the Notes if the Event of Default giving rise to
the acceleration had not occurred, and (B) all sums paid or advanced by the
Indenture Trustee under the related Indenture and the reasonable compensation,
expenses, disbursements and advances of the Indenture Trustee and its agents and
counsel, and (2) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by the acceleration, have been
cured or, under the circumstances described below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related Eligible Lender Trustee to sell the Student Loans or elect to have
the related Eligible Lender Trustee maintain possession of the Student Loans and
continue to apply collections with respect to the Student Loans as if there had
been no declaration of acceleration. Unless otherwise specified in the related
prospectus supplement, however, the related Indenture Trustee is prohibited from
directing the related Eligible Lender Trustee to sell the Student Loans
following an Event of Default, other than a default in the payment of any
principal or a default for five days or more in the payment of any interest on
any Note with respect to any series, unless
o the holders of all the outstanding Notes consent to the sale,
o the proceeds of the sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding Notes at
the date of the sale, or
o the related Indenture Trustee determines that the collections on
the Student Loans would not be sufficient on an ongoing basis to
make all payments on the Notes as the payments would have become
due if the obligations had not been declared due and payable, and
the related Indenture Trustee obtains the consent of the holders
of 662/3% of the aggregate principal amount of the Notes then
outstanding.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of the
Notes, if the Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with the request. Subject to the provisions for
indemnification and other limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Notes of a given
series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to the Indenture Trustee and the holders
of a majority in principal amount of the Notes then outstanding may, in
specified 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 applicable Indenture that cannot be modified without the waiver
or consent of all the holders of the outstanding Notes.
Unless otherwise specified in the related prospectus supplement, no
holder of Notes of any series will have the right to institute any proceeding
with respect to the related Indenture, unless:
o the holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default,
o the holders of not less than 25% in principal amount of the
outstanding Notes have requested in writing that the Indenture
Trustee institute the proceeding in its own name as Indenture
Trustee,
o the holder or holders have offered the Indenture Trustee
reasonable indemnity,
o the Indenture Trustee has for 60 days failed to institute the
proceeding, and
o no direction inconsistent with the written request has been given
to the Indenture Trustee during the 60-day period by the holders
of a majority in principal amount of the outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will
covenant that they will not at any time institute against the applicable Trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
With respect to any Trust, none of the related Indenture Trustee, the
Seller, the Depositor, the Administrator, the Servicer or the Eligible Lender
Trustee in its individual capacity, or any holder of a Certificate representing
an ownership interest in the applicable Trust, or any of their respective
owners, beneficiaries, agents, officers, directors, employees, successors or
assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the Notes
or for the agreements of the Trust contained in the Indenture.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States of America, any
state thereof or the District of Columbia,
o the entity expressly assumes the Trust's obligation to make due
and punctual payments upon the Notes of the related series and
the performance or observance of every agreement and covenant of
the Trust under the related Indenture,
o no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation,
o the Trust has been advised that the ratings of the Notes and the
Certificates of the related series would not be reduced or
withdrawn by the Rating Agencies as a result of the merger or
consolidation, and
o the Trust has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse
federal or Indiana state tax consequence to the Trust or to any
Certificateholder or Noteholder of the related series.
Each Trust will not, among other things,
o except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or related documents
(collectively, the "Related Documents"), sell, transfer, exchange
or otherwise dispose of any of the assets of the Trust,
o claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes of the related series
(other than amounts withheld under the Code or applicable state
law) or assert any claim against any present or former holder of
the Notes because of the payment of taxes levied or assessed upon
the Trust,
o except as contemplated by the Related Documents, dissolve or
liquidate in whole or in part,
o permit the validity or effectiveness of the applicable Indenture
to be impaired or permit any person to be released from any
covenants or obligations with respect to the Notes under the
applicable Indenture except as may be expressly permitted
thereby, or
o permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any
part thereof, or any interest in the Trust or the proceeds
thereof, except as expressly permitted by the Related Documents.
No Trust may engage in any activity other than as specified under the
section of the related prospectus supplement entitled "Formation of the Trust".
No Trust will incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes of the related series and the
applicable Indenture or otherwise in accordance with the Related Documents.
ANNUAL COMPLIANCE STATEMENT. Each Trust will be required to file
annually with the applicable Indenture Trustee a written statement as to the
fulfillment of its obligations under the related Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. Each Indenture Trustee will be
required to mail each year to all related Noteholders a brief report relating
to, among other things, its eligibility and qualification to continue as the
Indenture Trustee under the applicable Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of indebtedness
owing by the Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by the applicable Indenture
Trustee and any action taken by it that materially affects the related Notes and
that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all the Notes or,
with limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all the Notes.
THE INDENTURE TRUSTEE. The Indenture Trustee for a series of Notes
will be specified in the related prospectus supplement. The Indenture Trustee
for any series may resign at any time, in which event the Issuer will be
obligated to appoint a successor trustee for the series. The Issuer may also
remove any Indenture Trustee if the Indenture Trustee ceases to be eligible to
continue under the related Indenture or if the Indenture Trustee becomes
insolvent. In these circumstances, the Issuer will be obligated to appoint a
successor trustee for the applicable series of Notes. Any resignation or removal
of the Indenture Trustee and appointment of a successor trustee for any series
of Notes does not become effective until acceptance of the appointment by the
successor trustee for the series. In addition, the Administrator for any series
may remove the related Indenture Trustee at any time.
DESCRIPTION OF THE CERTIFICATES
With respect to each Trust, one or more classes of certificates (the
"Certificates" and together with the Notes, the "Securities") of a given series
will, unless otherwise specified in the related prospectus supplement, be issued
pursuant to the terms of a Trust Agreement, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary describes terms of the Certificates and the Trust Agreement.
The summary does not purport to be complete and is qualified in its entirety by
reference to all the provisions of the Certificates and the Trust Agreement.
Unless otherwise specified in the related prospectus supplement, each
class of Certificates will initially be represented by a single Certificate
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related prospectus supplement and except for the
Certificates of a given series purchased by the Depositor or the Seller or an
affiliate specified in the related prospectus supplement (the "Company"), the
Certificates will be available for purchase in minimum denominations of $1,000
and integral multiples of $1,000 in excess thereof in book-entry form only. The
Depositor has been informed by DTC that DTC's Nominee will be Cede, unless
another nominee is specified in the related prospectus supplement. Accordingly,
the nominee is expected to be the holder of record of the Certificates of any
series that are not purchased by the applicable Company. Unless and until
Definitive Certificates (as defined below) are issued under the limited
circumstances described in this prospectus or in the related prospectus
supplement, no Certificateholder (other than the applicable Company) will be
entitled to receive a physical certificate representing a Certificate. All
references in this prospectus and in the related prospectus supplement to
actions by Certificateholders (other than the applicable Company) refer to
actions taken by DTC upon instructions from the Participants and all references
in this prospectus and in the related prospectus supplement to distributions,
notices, reports and statements to Certificateholders (other than the applicable
Company) refer to distributions, notices, reports and statements to DTC or its
nominee, as the case may be, as the registered holder of the Certificates, for
distribution to Certificateholders in accordance with DTC's procedures with
respect thereto. SEE "Certain Information Regarding the Securities--Book-Entry
Registration" and"--Definitive Securities". Unless otherwise specified in the
related prospectus supplement, Certificates of a given series owned by the
Seller, the Depositor or either's affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement, except that,
assuming that all Certificates of a given series are not all owned by the
Seller, the Depositor or either's affiliates, the Certificates owned by the
Seller, the Depositor or either's affiliates will be deemed not to be
outstanding for the purpose of determining whether the requisite percentage of
Certificateholders has given any request, demand, authorization, direction,
notice, consent or other action under the Related Documents (other than the
commencement by the related Trust of a voluntary proceeding in bankruptcy as
described under "Description of the Transfer and Servicing
Agreements--Insolvency Event").
PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of
losses, interest at a per annum interest rate (the "Pass-Through Rate") and
amount of or method of determining distributions with respect to principal and
interest of each class of Certificates of a given series will be described in
the related prospectus supplement. Distributions of interest on the Certificates
will be made on each Distribution Date and will be made prior to distributions
with respect to principal of the Certificates. Each class of Certificates may
have a different Pass-Through Rate, which may be a fixed, variable or adjustable
Pass-Through Rate or any combination of the foregoing. The related prospectus
supplement will specify the Pass-Through Rate for each class of Certificates of
a given series or the method for determining the Pass-Through Rate. SEE ALSO
"Certain Information Regarding the Securities--Fixed Rate Securities" and
"Floating Rate Securities". Unless otherwise provided in the related prospectus
supplement, distributions in respect of the Certificates of a given series may
be subordinate to payments in respect of the Notes of the series as more fully
described in the related prospectus supplement. Distributions in respect of
interest on and principal of any class of Certificates will be made on a pro
rata basis among all the Certificateholders of the class.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
class shall be as set forth in the related prospectus supplement.
SEE "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--RESERVE ACCOUNT" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related prospectus supplement).
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum
("Fixed Rate Securities") or at a variable or adjustable rate per annum
("Floating Rate Securities"), as more fully described below and in the
applicable prospectus supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Pass-Through Rate, as the
case may be, specified in the applicable prospectus supplement. Unless otherwise
set forth in the applicable prospectus supplement, interest on each class of
Fixed Rate Securities will be computed on the basis of a 360-day year of twelve
30-day months. See "Description of the Notes--Principal of and Interest on the
Notes" and "Description of the Certificates--Principal and Interest in Respect
of the Certificates".
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as the term is defined in the related
prospectus supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in the
related prospectus supplement. The "Spread" is the number of basis points (one
basis point equals one one-hundredth of a percentage point) that may be
specified in the applicable prospectus supplement as being applicable to the
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable prospectus supplement as being applicable to the class.
The applicable prospectus supplement will designate a Base Rate for a
given Floating Rate Security based on LIBOR, commercial paper rates, Federal
funds rates, U.S. Government treasury securities rates, negotiable certificates
of deposit rates or another rate or rates as set forth in the prospectus
supplement.
As specified in the applicable prospectus supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (1) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (2) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities
will be issued will appoint, and enter into agreements with, a calculation agent
(each, a "Calculation Agent") to calculate interest rates on each class of
Floating Rate Securities issued with respect thereto. The applicable prospectus
supplement will set forth the identity of the Calculation Agent for each class
of Floating Rate Securities of a given series, which may be the Administrator,
the Eligible Lender Trustee or the Indenture Trustee with respect to the series.
All determinations of interest by the Calculation Agent shall, in the absence of
manifest error, be conclusive for all purposes and binding on the holders of
Floating Rate Securities of a given class. Unless otherwise specified in the
applicable prospectus supplement, all percentages resulting from any calculation
of the rate of interest on a Floating Rate Security will be rounded, if
necessary, to the nearest 1/100,000 of 1% (.0000001), with five one-millionths
of a percentage point rounded upward.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through The Depository Trust Company ("DTC") in the United
States or Clearstream, Luxembourg or Euroclear in Europe and persons acquiring
beneficial ownership interests in the Certificates may hold their interests
through DTC. Securities will be registered in the name of Cede & Co. ("Cede") as
nominee for DTC. Clearstream, Luxembourg and Euroclear will hold omnibus
positions with respect to the Notes on behalf of Clearstream, Luxembourg
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in Clearstream, Luxembourg's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositaries") which
in turn will hold the positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others
including banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities held through DTC may do so only through Participants and Indirect
Participants. In addition, Securityholders will receive all distributions of
principal and interest from the related Indenture Trustee or the related
Eligible Lender Trustee, as applicable (the "Applicable Trustee"), through
Participants and Indirect Participants. Under a book-entry format,
Securityholders may experience some delay in their receipt of payments, since
the payments will be forwarded by the Applicable Trustee to DTC's Nominee. DTC
will forward the payments to its Participants, which thereafter will forward
them to Indirect Participants or Securityholders. Except for the Seller or an
affiliate of the Seller with respect to any series of Securities, it is
anticipated that the only "Securityholder", "Certificateholder" and "Noteholder"
will be DTC's Nominee. Securityholders will not be recognized by the Applicable
Trustee as Noteholders or Certificateholders, as the terms are used in each
Indenture and each Trust Agreement, respectively, and Securityholders will be
permitted to exercise the rights of Securityholders only indirectly through DTC
and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit the payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and specified banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to the
Securities, may be limited due to the lack of a physical certificate for the
Securities.
DTC has advised the Depositor that it will take any action permitted
to be taken by a Securityholder under the related Indenture or the related Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that the actions
are taken on behalf of Participants whose holdings include the undivided
interests.
Except as required by law, neither the Administrator nor the
Applicable Trustee will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Securities held by DTC's nominee or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
Unless otherwise specified in the related prospectus supplement and
except with respect to the Certificates of a given series that may be purchased
by the Depositor or the Seller or an affiliate, the Notes and the Certificates
of a given series will be issued in fully registered, certificated form
("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to in this prospectus as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if:
o the related Administrator advises the Applicable Trustee in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the
Securities and the Administrator is unable to locate a qualified
successor,
o the Administrator, at its option, elects to terminate the
book-entry system through DTC, or
o after the occurrence of an Event of Default or a Servicer
Default, Securityholders representing at least a majority of the
outstanding principal amount of the Notes or the Certificates, as
the case may be, of the series advise the Applicable Trustee
through DTC in writing that the continuation of a book-entry
system through DTC (or a successor thereto) with respect to the
Notes or Certificates is no longer in the best interest of the
holders of the Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Applicable Trustee will be required to notify all
applicable Securityholders of a given series through Participants of the
availability of Definitive Securities. Upon surrender by DTC of the Definitive
Securities representing the corresponding Securities and receipt of instructions
for re-registration, the Applicable Trustee will reissue the Securities as
Definitive Securities to the Securityholders.
Distributions of principal of, and interest on, the Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the related Indenture or the related Trust
Agreement, as the case may be, directly to holders of Definitive Securities in
whose names the Definitive Securities were registered at the close of business
on the applicable Record Date specified for the Securities in the related
prospectus supplement. Distributions will be made by check mailed to the address
of the holder as it appears on the register maintained by the Applicable
Trustee. The final payment on any Definitive Security, however, will be made
only upon presentation and surrender of the Definitive Security at the office or
agency specified in the notice of final distribution to applicable
Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Unless otherwise specified in the related prospectus supplement,
holders of Notes evidencing not less than 25% of the aggregate outstanding
principal balance of the Notes may, by written request to the related Indenture
Trustee, obtain access to the list of all Noteholders maintained by the
Indenture Trustee for the purpose of communicating with other Noteholders with
respect to their rights under the related Indenture or the Notes. The Indenture
Trustee may elect not to afford the requesting Noteholders access to the list of
Noteholders if it agrees to mail the desired communication or proxy, on behalf
and at the expense of the requesting Noteholders, to all Noteholders of the
series.
Unless otherwise specified in the related prospectus supplement, three
or more Certificateholders of the series or one or more holders of the
Certificates evidencing not less than 25% of the Certificate Balance of the
Certificates may, by written request to the related Eligible Lender Trustee,
obtain access to the list of all Certificateholders for the purpose of
communicating with other Certificateholders with respect to their rights under
the related Trust Agreement or under the Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date,
the Applicable Trustee will provide to Securityholders of record as of the
related Record Date a statement setting forth substantially the same information
as is required to be provided on the periodic report provided to the related
Indenture Trustee and the related Trust described under "Description of Transfer
and Servicing Agreements--Statements to Indenture Trustee and Trust". The
statements will be filed with the Commission during the period required by Rule
15d-1 under the Securities Exchange Act of 1934, as amended, and will not be
filed with the Commission thereafter. The statements provided to Securityholders
will not constitute financial statements prepared in accordance with generally
accepted accounting principles.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of each Trust, the Applicable
Trustee will mail to each person who at any time during the calendar year was a
Securityholder with respect to the Trust and received any payment thereon, a
statement containing information for the purposes of the Securityholder's
preparation of federal income tax returns. See "Certain Federal Income Tax
Consequences".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following is a summary of terms of each Loan Sale Agreement and
Loan Servicing Agreement, pursuant to which the Depositor will purchase Student
Loans from the Seller, the related Eligible Lender Trustee on behalf of a Trust
will purchase Student Loans from the Depositor and the Servicer will service the
same; each Administration Agreement, pursuant to which the Administrator will
undertake administrative duties with respect to a Trust and the Student Loans;
and each Trust Agreement, pursuant to which a Trust will be created and the
related Certificates will be issued (collectively, the "Transfer and Servicing
Agreements"). Forms of each of the Transfer and Servicing Agreements have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. However, this summary does not purport to be complete and is qualified in
its entirety by reference to all of the provisions of the Transfer and Servicing
Agreements.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On the applicable Closing Date, the Seller will sell and assign to the
Depositor and the Depositor will sell and assign to the related Eligible Lender
Trustee on behalf of the Trust, without recourse, except as provided in the Loan
Sale Agreement, its entire interest in the Student Loans and all collections
received and to be received with respect thereto for the period on and after the
Cutoff Date pursuant to the Loan Sale Agreement. Each Student Loan will be
identified in a schedule appearing as an exhibit to the Loan Sale Agreement.
Each Eligible Lender Trustee will, concurrently with the sale and assignment,
execute, authenticate and deliver the related Certificates and Notes. The net
proceeds received from the sale of the related Notes and Certificates will be
applied to the purchase of the Student Loans.
In each Loan Sale Agreement, the Seller will make representations and
warranties with respect to the Student Loans to a Trust for the benefit of the
Certificateholders and the Noteholders of a given series, including, among other
things, that:
o each Student Loan, on the date on which it is transferred to the
Trust, is free and clear of all security interests, liens,
charges and encumbrances and no offsets, defenses or
counterclaims with respect thereto have been asserted or
threatened;
o the information provided with respect to the Student Loans is
true and correct as of the Cutoff Date; and
o each Student Loan, at the time it was originated, complied and,
at the Closing Date, complies in all material respects with
applicable federal and state laws (including, without limitation,
the Act) and applicable restrictions imposed by FFELP or any
Guarantee Agreement.
Unless otherwise provided in the related prospectus supplement,
following the discovery by or notice to the Seller of a breach of any
representation or warranty with respect to any Student Loan that materially and
adversely affects the interests of the related Certificateholders or the
Noteholders in the Student Loan (it being understood that any breach that does
not affect any Guarantor's obligation to guarantee payment of the Student Loan
will not be considered to have a material adverse effect), the Seller will,
unless the breach is cured within 60 days, repurchase the Student Loan from the
related Eligible Lender Trustee, as of the first day following the end of the
60-day period that is the last day of a Collection Period, at a price equal to
the unpaid principal balance owed by the applicable borrower plus accrued
interest thereon to the day of repurchase (the "Purchase Amount").
Alternatively, the Seller may, at its option, remit all or a portion of the
Purchase Amount by substituting into the related Trust a Student Loan that meets
criteria set forth in the related Loan Sale Agreement for the Student Loan as to
which the breach has occurred. In addition, the Seller will reimburse the
related Trust for any accrued interest amounts that a Guarantor refuses to pay
pursuant to its Guarantee Agreement, or for any Interest Subsidy Payments and
Special Allowance Payments that are lost or that must be repaid to the
Department with respect to a Federal Student Loan as a result of a breach of any
representation or warranty by the Seller. The repurchase, substitution and
reimbursement obligations of the Seller will constitute the sole remedy
available to or on behalf of a Trust, the related Certificateholders and the
related Noteholders for any uncured breach. The Seller's repurchase and
reimbursement obligations are contractual obligations pursuant to a Loan Sale
Agreement that may be enforced against the Seller, but the breach of which will
not constitute an Event of Default.
To assure uniform quality in servicing and to reduce administrative
costs, the Servicer will be appointed custodian of the promissory notes
representing the Student Loans and any other related documents by the related
Eligible Lender Trustee on behalf of each Trust. The Seller's and the Servicer's
records and computer systems will reflect the sale and assignment by the Seller
of the Student Loans to the related Eligible Lender Trustee on behalf of the
related Trust, and Uniform Commercial Code financing statements reflecting the
sale and assignment will be filed by the Administrator.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or a Collateral
Reinvestment Account, the Trust will use funds on deposit in the account from
time to time during the related Funding Period or Revolving Period,
respectively, (1) to make interest payments to Noteholders and
Certificateholders in lieu of collections of interest on the Student Loans to
the extent interest is not paid currently but is capitalized and added to the
principal balance of the Student Loans and (2) to fund the addition of Student
Loans to the Trust under the circumstances and having the characteristics
described in the related prospectus supplement ("Additional Fundings"). The
additional Student Loans may be purchased by the Trust from the Seller or may be
originated by the Trust, if and to the extent specified in the related
prospectus supplement.
There can be no assurance that substantially all of the amounts on
deposit in any Pre-Funding Account or Collateral Reinvestment Account will be
expended during the related Funding Period or Revolving Period, respectively. If
the amount initially deposited into a Pre-Funding Account or a Collateral
Reinvestment Account for a series has not been reduced to zero by the end of the
related Funding Period or Revolving Period, respectively, the amounts remaining
on deposit in the Pre-Funding Account will be distributed to the related
Securityholders in the amounts described in the related prospectus supplement.
If and to the extent specified in the related prospectus supplement,
the related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Seller, in order to pay for Additional Fundings after any
Funding Period or Revolving Period.
ACCOUNTS
With respect to each Trust, the Administrator will establish and
maintain with the applicable Indenture Trustee one or more accounts, in the name
of the Indenture Trustee on behalf of the related Noteholders and
Certificateholders, into which all payments made on or with respect to the
related Student Loans will be deposited (the "Collection Account"). Any other
accounts to be established with respect to a Trust, including any Reserve
Account, any pre-funding account (the "Pre-Funding Account") and any collateral
reinvestment account ("Collateral Reinvestment Account"), will be described in
the related prospectus supplement.
For any series of Securities, funds in the Collection Account, any
Reserve Account, any Pre-Funding Account, any Collateral Reinvestment Account
and any other accounts identified in the related prospectus supplement
(collectively, the "Trust Accounts") will be invested as provided in the
applicable Trust Indenture in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies as consistent
with the rating of the Securities. Except as described below or in the related
prospectus supplement, Eligible Investments are limited to obligations or
securities that mature not later than the business day immediately preceding the
next applicable Distribution Date. However, to the extent permitted by the
Rating Agencies, funds in any Reserve Account may be invested in securities that
will not mature prior to the date of the next distribution with respect to the
Securities and will not be sold to meet any shortfalls. Thus, the amount of cash
in any Reserve Account at any time may be less than the balance of the Reserve
Account. If the amount required to be withdrawn from any Reserve Account to
cover shortfalls in collections on the related Student Loans (as provided in the
related prospectus supplement) exceeds the amount of cash in the Reserve
Account, a temporary shortfall in the amounts distributed to the related
Noteholders or Certificateholders could result, which could, in turn, increase
the average lives of the Notes or the Certificates of the series. Except as
otherwise specified in the related prospectus supplement, investment earnings on
funds deposited in the Trust Accounts, net of losses and investment expenses
(collectively, "Investment Earnings"), will be deposited in the Collection
Account on each Distribution Date and will be treated as collections of interest
on the related Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in the account, so long as any of the
securities of the depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means a depository institution organized under the laws
of the United States of America or any one of the states thereof or the District
of Columbia (or any domestic branch of a foreign bank), (1) which has either (A)
a long-term unsecured debt rating acceptable to the Rating Agencies or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies, and (2) whose deposits are insured by the Federal Deposit
Insurance Corporation.
SERVICING PROCEDURES
Pursuant to each Loan Servicing Agreement, the Servicer will service,
and perform all other related tasks with respect to, all the Student Loans
acquired from time to time on behalf of each Trust. The Servicer will be
required pursuant to the related Loan Servicing Agreement to perform all
services and duties customary to the servicing of Student Loans (including all
collection practices), to do so in the same manner as the Servicer has serviced
student loans for parties other than the Seller and to do so in compliance with,
and to otherwise comply with, all standards and procedures provided for in the
Act, if applicable, the Guarantee Agreements and all other applicable federal
and state laws.
Without limiting the foregoing, the duties of the Servicer with
respect to each Trust under the related Loan Servicing Agreement will include,
but will not be limited to, the following:
o collecting and depositing into the Collection Account all
payments with respect to the Student Loans, including claiming
and obtaining any Guarantee Payments, any Interest Subsidy
Payments and Special Allowance Payments with respect to the
Federal Student Loans,
o responding to inquiries from borrowers under the Student Loans,
o investigating delinquencies and
o sending out statements and payment coupons.
In addition, the Servicer will keep ongoing records with respect to the Student
Loans and collections thereon and will furnish monthly and annual statements
with respect to the information to the Administrator, in accordance with the
Servicer's customary practices with respect to the Seller and as otherwise
required in the related Loan Servicing Agreement.
If so provided in the related prospectus supplement, the Servicer may
act as a master servicer and may from time to time perform its servicing
obligations under the applicable Loan Sale Agreement through subservicing
agreements with affiliated or unrelated third-party loan servicers.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, the Servicer will deposit into the related
Collection Account, within two business days after receipt of freely available
funds, all payments on Student Loans and all proceeds of Student Loans received
by it during each collection period specified in the related prospectus
supplement (each, a "Collection Period"). The Eligible Lender Trustee will
deposit into the Collection Account, within two business days after receipt, all
Interest Subsidy Payments and all Special Allowance Payments with respect to the
Student Loans received by it during each Collection Period.
SERVICER COVENANTS
With respect to each Trust, the Servicer will covenant in the related
Loan Servicing Agreement that:
o it will duly satisfy all obligations on its part to be fulfilled
under or in connection with the Student Loans, maintain in effect
all qualifications required in order to service the Student Loans
and comply in all material respects with all requirements of law
in connection with servicing the Student Loans, the failure to
comply with which would have a materially adverse effect on the
related Certificateholders or Noteholders;
o it will not permit any rescission or cancellation of a Student
Loan except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the
related Eligible Lender Trustee and the related Indenture
Trustee;
o it will do nothing to impair the rights of the related
Certificateholders and the related Noteholders in the Student
Loans; and
o it will not reschedule, revise, defer or otherwise compromise
with respect to payments due on any Student Loan except pursuant
to any applicable deferral or forbearance periods or otherwise in
accordance with its guidelines for servicing student loans in
general and those of the Seller in particular and any applicable
FFELP or Guarantor requirements.
Under the terms of each Loan Servicing Agreement, unless otherwise
specified in the related prospectus supplement, if the Administrator or the
Servicer discovers, or receives written notice, that any covenant of the
Servicer set forth above has not been complied with in all material respects and
the noncompliance has not been cured within 60 days thereafter and has a
materially adverse effect on the interest of the related Certificateholders or
Noteholders in any Student Loan, unless the breach is cured or unless the Seller
is otherwise required to purchase the related Student Loan as a result of a
breach of the Seller's warranties in the related Loan Sale Agreement, the
Servicer will arrange for the purchase of the Student Loan as of the first day
following the end of the 60-day period that is the last day of a Collection
Period. In that event, the Servicer will arrange to be deposited into the
Collection Account an amount equal to the Purchase Amount of the Student Loan
and the related Trust's interest in any purchased Student Loan will be
automatically assigned to the Servicer or its designee. Upon the assignment, the
Servicer or its designee will be entitled to all payments made on the Student
Loan. In addition, if so specified in the related prospectus supplement, the
Servicer will reimburse the related Trust for any accrued interest amounts that
a Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any prior
Interest Subsidy Payments and Special Allowance Payments that are lost or that
must be repaid to the Department with respect to a Federal Student Loan, as a
result of a breach of any covenant of the Servicer.
SERVICER COMPENSATION
Unless otherwise specified in the related prospectus supplement with
respect to any Trust, the Servicer will be entitled to receive the Servicing Fee
for each Collection Period at the specified percentage per annum (as set forth
in the related prospectus supplement) of the average Pool Balance for the
related Collection Period together with any other administrative fees and
similar charges specified in the related prospectus supplement, as compensation
for performing the functions as servicer for the related Trust described above
(the "Servicing Fee"). The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Distribution Dates) will be paid
prior to any payment in respect of the related Securities, as specified in the
applicable prospectus supplement.
The Servicing Fee will compensate the Servicer for performing the
functions of a third-party servicer of student loans as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of borrowers on the Student Loans, investigating delinquencies,
pursuing, filing and directing the payment of any Guarantee Payments, Interest
Subsidy Payments or Special Allowance Payments, accounting for collections and
furnishing periodic accounting reports to the Administrator.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the
Distribution Date specified in the related prospectus supplement, distributions
of principal and interest on each class of the Securities entitled thereto will
be made by the applicable Trustee to the Noteholders and the Certificateholders
of the series. The timing, calculation, allocation, order, source, priorities of
and requirements for all payments to each class of Noteholders and all
distributions to each class of Certificateholders of the series will be set
forth in the related prospectus supplement.
With respect to each Trust, collections on the related Student Loans
will be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to the extent provided in the related
prospectus supplement. Credit and cash flow enhancement, including a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution to the extent specified in the related prospectus supplement. As
more fully described in the related prospectus supplement, and unless otherwise
specified in the related prospectus supplement, distributions in respect of
principal and/or interest of a class of Securities of a given series will be
subordinate to distributions in respect of interest on one or more other classes
of the series, and distributions in respect of the Certificates of the series
may be subordinate to payments in respect of the Notes of the series.
CREDIT AND CASH FLOW ENHANCEMENT
The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related prospectus supplement. If
and to the extent provided in the related prospectus supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, interest rate swaps, interest rate caps, interest rate
floors, currency swaps, other agreements with respect to third party payments or
other support, cash deposits or other arrangements described in the related
prospectus supplement or any combination of two or more of the foregoing. If
specified in the applicable prospectus supplement, credit enhancement for a
class of Securities may cover one or more other classes of Securities of the
same series, and credit enhancement for a series of Securities may cover one or
more other series of Securities.
The presence of a Reserve Account and other forms of credit
enhancement for the benefit of any class or series of Securities is intended to
enhance the likelihood of receipt by the Securityholders of the class or series
of the full amount of principal and interest due thereon and to decrease the
likelihood that the Securityholders will experience losses. Unless otherwise
specified in the related prospectus supplement, the credit enhancement for a
class or series of Securities will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance and
interest thereon. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
of any class or series will bear their allocable share of deficiencies, as
described in the related prospectus supplement. In addition, if a form of credit
enhancement covers more than one series of Securities, Securityholders of any
series will be subject to the risk that the credit enhancement will be exhausted
by the claims of Securityholders of other series.
RESERVE ACCOUNT. If so provided in the related prospectus supplement,
pursuant to the related Loan Sale Agreement, the Seller will establish for a
series or class of Securities an account, as specified in the related prospectus
supplement (the "Reserve Account"), which will be maintained in the name of the
applicable Indenture Trustee. Unless otherwise provided in the related
prospectus supplement, the Reserve Account will be funded by an initial deposit
by the Seller on the Closing Date in the amount set forth in the related
prospectus supplement. As further described in the related prospectus
supplement, the amount on deposit in the Reserve Account will be increased on
each Distribution Date thereafter up to the Specified Reserve Account Balance
(as defined in the related prospectus supplement) by the deposit in the Reserve
Account of the amount of collections on the related Student Loans remaining on
each Distribution Date after the payment of all other required payments and
distributions on the date. Amounts in the Reserve Account will be available to
cover shortfalls in amounts due to the holders of those classes of Securities
specified in the related prospectus supplement in the manner and under the
circumstances specified in the related prospectus supplement. The related
prospectus supplement will also specify to whom and the manner and circumstances
under which amounts on deposit in the Reserve Account (after giving effect to
all other required distributions to be made by the applicable Trust) in excess
of the Specified Reserve Account Balance (as defined in the related prospectus
supplement) will be distributed.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of
Securities, the Administrator will prepare and provide to the related Indenture
Trustee and the related Eligible Lender Trustee as of the close of business on
the last day of the preceding Collection Period a statement, which will include
the following information (and any other information so specified in the related
prospectus supplement) with respect to the Distribution Date or the preceding
Collection Period as to the Notes and the Certificates of the series, to the
extent applicable:
(1) the amount of the distribution allocable to principal of each
class of the Notes and the Certificates;
(2) the amount of the distribution allocable to interest on each
class of the Notes and the Certificates, together with the interest
rates applicable with respect thereto;
(3) the Pool Balance as of the close of business on the last day
of the preceding Collection Period;
(4) the aggregate outstanding principal amount and the Note Pool
Factor of each class of the Notes, and the Certificate Balance and the
Certificate Pool Factor for each class of the Certificates as of the
Distribution Date, each after giving effect to payments allocated to
principal reported under clause (1) above;
(5) the amount of the Servicing Fee and the Administration Fee
paid to the Servicer and the Administrator, respectively, with respect
to the Collection Period;
(6) the Interest Rate or Pass-Through Rate for the next period
for any class of Notes or Certificates of the series with variable or
adjustable rates;
(7) the amount of the aggregate realized losses, if any, for the
Collection Period;
(8) the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover Shortfall (each as defined in the related prospectus
supplement), if any, in each case as applicable to each class of
Securities, and the change in the amounts from the preceding
statement;
(9) the aggregate Purchase Amounts for Student Loans, if any,
that were repurchased in the Collection Period;
(10) the balance of the Reserve Account (if any) on the
Distribution Date, after giving effect to changes in the Reserve
Account on the Distribution Date;
(11) for each date during the Funding Period (if any), the
remaining Pre-Funding Amount or, for each date during the Revolving
Period (if any), the amount on deposit in the Collateral Reinvestment
Account; and
(12) the principal balance and number of Student Loans conveyed
to or originated by the Trust during the Collection Period.
Each amount set forth pursuant to subclauses (1), (2), (5) and (8)
with respect to the Notes or the Certificates of any series will be expressed as
a dollar amount per $1,000 of the initial principal amount of the Notes or the
initial Certificate Balance of the Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each Loan Servicing Agreement will provide that a firm of independent
public accountants will furnish to the related Trust and Indenture Trustee
annually a statement (based on the examination of documents and records and on
the accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Servicer during the preceding twelve
months (or, in the case of the first certificate, the period from the applicable
Closing Date) with all applicable standards under the Loan Servicing Agreement
relating to the servicing of student loans, the Servicer's accounting records
and computer files with respect thereto and other matters.
Each Loan Servicing Agreement will also provide for delivery to the
related Trust and Indenture Trustee, concurrently with the delivery of each
statement of compliance referred to above, of a certificate signed by an officer
of the Servicer stating that, to his knowledge, the Servicer has fulfilled its
obligations under the Loan Servicing Agreement throughout the preceding twelve
months (or, in the case of the first certificate, the period from the applicable
Closing Date) or, if there has been a default in the fulfillment of any
obligation, describing each default. The Servicer has agreed to give the
Administrator, the related Indenture Trustee and Eligible Lender Trustee notice
of Servicer Defaults under the Loan Servicing Agreement.
Copies of the statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
Each Loan Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as Servicer thereunder, except upon
determination that the Servicer's performance of the duties is no longer
permissible under applicable law. No resignation will become effective until the
related Indenture Trustee or a successor servicer has assumed the Servicer's
servicing obligations and duties under the Loan Servicing Agreement.
Each Loan Servicing Agreement will further provide that neither the
Servicer nor any of its directors, officers, employees or agents will be under
any liability to the related Trust or the related Noteholders or
Certificateholders for taking any action or for refraining from taking any
action pursuant to the related Loan Servicing Agreement, or for errors in
judgment; provided, however, that, unless otherwise limited in the related
prospectus supplement, neither the Servicer nor any person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of the Servicer's duties
thereunder or by reason of reckless disregard of its obligations and duties
thereunder. In addition, each Loan Servicing Agreement will provide that the
Servicer is under no obligation to appear in, prosecute, or defend any legal
action that is not incidental to its servicing responsibilities under the Loan
Servicing Agreement and that, in its opinion, may cause it to incur any expense
or liability. Each Loan Servicing Agreement will, however, provide that the
Servicer may undertake any reasonable action that it deems necessary or
desirable in respect of the Loan Servicing Agreement and the interests of the
Securityholders.
Under the circumstances specified in each Loan Servicing Agreement,
any entity into which the Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which the Servicer is a party, or
any entity succeeding to the business of the Servicer, which corporation or
other entity in each of the foregoing cases assumes the obligations of the
Servicer, will be the successor of the Servicer under the Loan Servicing
Agreement.
SERVICER DEFAULT
Except as otherwise provided in the related prospectus supplement,
"Servicer Default" under each Loan Servicing Agreement will occur in the event
of:
o any failure by the Servicer to deliver to the Indenture Trustee
for deposit in any of the Trust Accounts any required payment,
which failure continues unremedied for three business days after
written notice from the Indenture Trustee or the related Eligible
Lender Trustee is received by the Servicer or after discovery by
the Servicer,
o any failure by the Servicer to observe or perform in any material
respect any other covenant or agreement of the Servicer under the
related Loan Servicing Agreement,
o any limitation, suspension or termination by the Secretary of the
Servicer's eligibility to service Federal Student Loans which
materially and adversely affects its ability to service the
Student Loans in the related Trust, or
o an Insolvency Event with respect to the Servicer occurs.
"Insolvency Event" means, with respect to any person, any of the
following events or actions: specified events of insolvency,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings with respect to the person and specified
actions by the person indicating its insolvency, reorganization
pursuant to bankruptcy proceedings or inability to pay its
obligations.
RIGHTS UPON SERVICER DEFAULT
Unless otherwise specified in the related prospectus supplement, as
long as a Servicer Default under a Loan Servicing Agreement remains unremedied,
the related Indenture Trustee, or holders of Notes of the related series
evidencing not less than 75% in principal amount of the then outstanding Notes,
may terminate all the rights and obligations of the Servicer under the Loan
Servicing Agreement, whereupon a successor servicer appointed by the related
Indenture Trustee or the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Loan
Servicing Agreement, and will be entitled to similar compensation arrangements.
If, however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than the appointment has occurred, the
trustee or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting a transfer. In the event that the Indenture Trustee
is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor whose regular
business includes the servicing of student loans. The Indenture Trustee may make
the arrangements for compensation to be paid, which in no event may be greater
than the servicing compensation to the Servicer under the Loan Servicing
Agreement, unless the compensation arrangements will not result in a downgrading
of the Notes and Certificates by any Rating Agency. In the event a Servicer
Default occurs and is continuing, the Indenture Trustee or the Noteholders, as
described above, may remove the Servicer, without the consent of the related
Eligible Lender Trustee or any of the Certificateholders of the related series.
Moreover, only the Indenture Trustee or the Noteholders, and not the Eligible
Lender Trustee or the Certificateholders, have the ability to remove the
Servicer if a Servicer Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, unless otherwise specified in the related
prospectus supplement, the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes (or the holders of Certificates
evidencing not less than a majority of the outstanding Certificate Balance), in
the case of any Servicer Default which does not adversely affect the Indenture
Trustee or the Noteholders of the related series, may, on behalf of all the
Noteholders and Certificateholders, waive any default by the Servicer in the
performance of its obligations under the related Loan Servicing Agreement and
its consequences, except a default in making any required deposits to or
payments from any of the Trust Accounts in accordance with the Loan Servicing
Agreement. Therefore, the Noteholders have the ability, except as noted above,
to waive defaults by the Servicer which could materially adversely affect the
Certificateholders. No waiver will impair the Noteholders' or
Certificateholders' rights with respect to subsequent defaults.
AMENDMENT
Unless otherwise provided in the related prospectus supplement, each
of the Transfer and Servicing Agreements may be amended by the parties thereto,
without the consent of the related Noteholders or Certificateholders, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Transfer and Servicing Agreements or of modifying in
any manner the rights of the Noteholders or Certificateholders; provided that
the action will not, in the opinion of counsel satisfactory to the related
Indenture Trustee and Eligible Lender Trustee, materially and adversely affect
the interest of any Noteholder or Certificateholder. Unless otherwise provided
in the related prospectus supplement, each of the Transfer and Servicing
Agreements may also be amended by the Seller, the Administrator, the Servicer,
the related Eligible Lender Trustee and the related Indenture Trustee, as
applicable, with the consent of the holders of Notes of the related series
evidencing at least a majority in principal amount of the then outstanding Notes
and the holders of Certificates of the related series evidencing at least a
majority of the Certificate Balance for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Transfer
and Servicing Agreements or of modifying in any manner the rights of the
Noteholders or Certificateholders; provided, however, that no amendment may (1)
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments (including any Guarantee Payments) with
respect to the Student Loans or distributions that are required to be made for
the benefit of the Noteholders or Certificateholders, or (2) reduce the
aforesaid percentage of the Notes or Certificates which are required to consent
to any amendment, without the consent of the holders of all the outstanding
Notes and Certificates.
Each Trust Agreement will provide that the related Eligible Lender
Trustee does not have the power to commence a voluntary proceeding in bankruptcy
relating to the Trust without the unanimous prior approval of all
Certificateholders (including the applicable Company) of the related series and
the delivery to the Eligible Lender Trustee by each Certificateholder (including
the Company) of a certificate certifying that the Certificateholder reasonably
believes that the related Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series
and the satisfaction and discharge of the related Indenture, the Eligible Lender
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of the series will succeed to all the rights of the
Noteholders of the series, under the related Loan Servicing Agreement, except as
otherwise provided under the related Loan Servicing Agreement.
TERMINATION
With respect to each Trust, the obligations of the Depositor , the
Seller, the Servicer, the Administrator, the related Eligible Lender Trustee and
the related Indenture Trustee pursuant to the related Transfer and Servicing
Agreements will terminate upon (1) the maturity or other liquidation of the last
related Student Loan and the disposition of any amount received upon liquidation
of any remaining Student Loans and (2) the payment to the Noteholders and the
Certificateholders of the related series of all amounts required to be paid to
them pursuant to the Transfer and Servicing Agreements.
OPTIONAL REDEMPTION. If so specified in the related prospectus
supplement, in order to avoid excessive administrative expense, the Seller or
another party will be permitted at its option to purchase from the related
Eligible Lender Trustee, as of the end of any Collection Period immediately
preceding a Distribution Date, if the then outstanding Pool Balance is a
percentage specified in the related prospectus supplement (not to exceed 30%) of
the Initial Pool Balance (as defined in the related prospectus supplement, the
"Initial Pool Balance"), all remaining related Student Loans at a price equal to
the aggregate Purchase Amounts thereof as of the end of the Collection Period,
which amounts will be used to retire the related Notes and Certificates
concurrently therewith. Upon termination of a Trust, as more fully described in
the related prospectus supplement, all right, title and interest in the Student
Loans and other funds of the Trust, after giving effect to any final
distributions to Noteholders and Certificateholders of the related series
therefrom, will be conveyed and transferred to the Seller or other party.
AUCTION OF STUDENT LOANS. If so provided in the related prospectus
supplement, all remaining Student Loans held by a Trust will be offered for sale
by the Indenture Trustee on any Distribution Date occurring on or after a date
specified in the prospectus supplement. The Seller and unrelated third parties
may offer bids for the Student Loans. The Indenture Trustee will accept the
highest bid equal to or in excess of the aggregate Purchase Amounts of the
Student Loans as of the end of the Collection Period immediately preceding the
related Distribution Date. The proceeds of the sale will be used to redeem all
related Notes and to retire the Certificates.
ADMINISTRATION AGREEMENT
The administrator set forth in the related prospectus supplement, in
its capacity as administrator (the "Administrator"), will enter into an
agreement (as amended and supplemented from time to time, an "Administration
Agreement") with each Trust and the related Indenture Trustee pursuant to which
the Administrator will agree, to the extent provided Administration Agreement,
to provide the notices and to perform other administrative obligations required
by the related Indenture, the related Trust Agreement, the related Loan Sale
Agreement and the related Loan Servicing Agreement. Unless otherwise specified
in the related prospectus supplement with respect to any Trust, as compensation
for the performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to an administration fee as specified in the
related prospectus supplement (the "Administration Fee").
Except as otherwise provided in the related prospectus supplement, an
"Administrator Default" will occur under an Administration Agreement in the
event of:
o a failure by the Administrator to direct the Indenture Trustee to
make any required distributions from any of the Trust Accounts,
which failure continues unremedied for three business days after
written notice from the Indenture Trustee or the Eligible Lender
Trustee of the failure,
o any failure by the Administrator to observe or perform in any
material respect any other covenant or agreement of the
Administrator in the Administration Agreement or
o an Insolvency Event with respect to the Administrator occurs.
Unless otherwise specified in the related prospectus supplement, the
procedures for terminating the rights and obligations of the Administrator and
appointing a successor Administrator following the occurrence of an
Administrator Default under the Administration Agreement and for waiving
defaults by the Administrator under the Administration Agreement will be
identical to those for replacing the Servicer and appointing a successor
Servicer following the occurrence of a Servicer Default under the Loan Servicing
Agreement and for waiving defaults by the Servicer under the Loan Servicing
Agreement, except that the procedures will apply to the Administrator and the
Administration Agreement rather than the Servicer and the Loan Servicing
Agreement.
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
The Seller intends that the transfer of the Student Loans by it to the
Depositor will constitute a valid sale and assignment of the Student Loans. The
Depositor intends that the transfer of the Student Loans by it to the related
Eligible Lender Trustee on behalf of each Trust will constitute a valid sale and
assignment of the Student Loans. Notwithstanding the foregoing, if the transfer
of the Student Loans is deemed to be an assignment of collateral as security for
the benefit of the Depositor or a Trust, as applicable, a security interest in
the Student Loans may, pursuant to the provisions of 20 U.S.C. ss. 1087-2(d)(3),
be perfected either through the taking of possession of the loans or by the
filing of notice of the security interest in the manner provided by the
applicable Uniform Commercial Code ("UCC") for perfection of security interests
in accounts. A financing statement or statements covering the Student Loans will
be filed under the UCC to protect the interest of the Depositor and the Eligible
Lender Trustee in the event the transfer by the Seller or the Depositor is
deemed to be an assignment of collateral as security for the benefit of the
Depositor or the Trust, as applicable.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of the Depositor or a Trust, as applicable, there are
limited circumstances under the UCC in which prior or subsequent transferees of
Student Loans coming into existence after the Closing Date could have an
interest in the Student Loans with priority over the Depositor or related
Eligible Lender Trustee's interest, as applicable. A tax or other government
lien on property of the Seller or the Depositor, as applicable, arising prior to
the time a Student Loan comes into existence may also have priority over the
interest of the Depositor or related Eligible Lender Trustee, as applicable, in
the Student Loan. Under the related Loan Sale Agreement, however, the Seller
will warrant that it has caused the Student Loans to be transferred to the
Depositor free and clear of the lien of any third party and the Depositor will
warrant that it has caused the Student Loans to be transferred to the related
Eligible Lender Trustee on behalf of a Trust free and clear of the lien of any
third party. In addition, each of the Depositor and the Seller will covenant
that it will not sell, pledge, assign, transfer or grant any lien on any Student
Loan held by a Trust (or any interest in any Student Loan) other than to the
Depositor or the related Eligible Lender Trustee on behalf of a Trust, as
applicable, except as provided below.
Pursuant to each Loan Servicing Agreement, the Servicer as custodian
on behalf of the related Trust will have custody of the promissory notes
evidencing the Student Loans following the sale of the Student Loans to the
related Eligible Lender Trustee. Although the accounts and computer records of
the Seller and Servicer will be marked to indicate the sale and although the
Seller will cause UCC financing statements to be filed with the appropriate
authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that the Student Loans have been sold to the
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Student Loans were sold to another party, or a security interest in the Student
Loans were granted to another party, that purchased (or took the security
interest in) any of the Student Loans in the ordinary course of its business and
took possession of the Student Loans, then the purchaser (or secured party)
might acquire an interest in the Student Loans superior to the interest of the
Eligible Lender Trustee if the purchaser (or secured party) acquired (or took a
security interest in) the Student Loans for new value and without actual
knowledge of the related Eligible Lender Trustee's interest. See "Description of
the Transfer and Servicing Agreements--Sale of Student Loans; Representations
and Warranties".
With respect to each Trust, in the event of a Servicer Default
resulting solely from specified events of insolvency or bankruptcy that may
occur with respect to the Seller or the Servicer, a court,
trustee-in-bankruptcy, conservator, receiver or liquidator may have the power to
prevent either the related Indenture Trustee or Noteholders of the related
series from appointing a successor Servicer. See "Description of the Transfer
and Servicing Agreements--Rights upon Servicer Default".
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. These requirements impose specific
statutory liabilities upon lenders who fail to comply with their provisions.
These requirements are generally inapplicable to Federal Student Loans, but a
Trust may be liable for violations of consumer protection laws that may apply to
the Student Loans, either as assignee or as the party directly responsible for
obligations arising after the transfer. For a discussion of a Trust's rights if
the Student Loans were not originated or serviced in compliance in all material
respects with applicable laws, SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--Servicer Covenants".
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Act, including the implementing regulations thereunder, imposes
specified requirements, guidelines and procedures with respect to originating
and servicing student loans including the Federal Student Loans. Generally,
those procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under applicable
standards (including a review of a financial need analysis) be made, the
borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, a
lender or a servicing agent must perform collection procedures (primarily
telephone calls and demand letters) which vary depending upon the length of time
a loan is delinquent. The Servicer has agreed pursuant to the related Loan
Servicing Agreement to perform collection and servicing procedures on behalf of
the related Trust. However, failure to follow these procedures or failure of the
originator of the loan to follow procedures relating to the origination of any
Federal Student Loans could result in adverse consequences. Any failure could
result in the Department's refusal to make reinsurance payments to the Federal
Guarantors or to make Interest Subsidy Payments and Special Allowance Payments
to the Eligible Lender Trustee with respect to the Federal Student Loans or in
the Federal Guarantors' refusal to honor their Guarantee Agreements with the
Eligible Lender Trustee with respect to the Federal Student Loans. Failure of
the Federal Guarantors to receive reinsurance payments from the Department could
adversely affect the Federal Guarantors' ability or legal obligation to make
Guarantee Payments to the related Eligible Lender Trustee with respect to the
Federal Student Loans.
Loss of any Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the related Trust's ability to pay principal and interest
on the Notes of the related series and to make distributions in respect of the
Certificates of the related series. Under specified circumstances, unless
otherwise specified in the related prospectus supplement, the related Trust has
the right, pursuant to the related Loan Sale Agreement and Loan Servicing
Agreement, to cause the Seller to repurchase any Student Loan, or to cause the
Servicer to arrange for the purchase of any Student Loan, if a breach of the
representations, warranties or covenants of the Seller or the Servicer, as the
case may be, with respect to the Student Loan has a material adverse effect on
the interest of the Trust in the Student Loan and the breach is not cured within
any applicable cure period. SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--Servicer Covenants". The failure of the Seller to so purchase, or of the
Servicer to arrange for the purchase of, a Student Loan, if so required, would
constitute a breach of the related Loan Sale Agreement and Loan Servicing
Agreement, enforceable by the related Eligible Lender Trustee on behalf of the
related Trust or by the related Indenture Trustee on behalf of the Noteholders
of the related series, but would not constitute an Event of Default under the
Indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Effective for bankruptcy actions commenced on or after October 8,
1998, Student Loans are generally not dischargeable by a borrower in bankruptcy
pursuant to the U.S. Bankruptcy Code, unless excepting the debt from discharge
will impose an undue hardship on the debtor and the debtor's dependents.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is, in the opinion of Stroock & Stroock & Lavan LLP
("Federal Tax Counsel"), a summary of all material federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. This summary does not purport to deal with federal income tax
consequences applicable to all categories of holders, some of which may be
subject to special rules. For example, it does not discuss the tax treatment of
Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving debt
and/or equity interests issued by a trust with terms similar to those of the
Notes and/or the Certificates. As a result, the IRS may disagree with all or a
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any other
tax consequences to them of the purchase, ownership and disposition of the Notes
and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Federal Tax Counsel regarding federal income tax matters
discussed below, which opinion will be filed with the Commission on a Form 8-K
prior to the sale of the securities issued by the Trust. An opinion of Federal
Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any
of the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified in this prospectus, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to the Trust. EACH PROSPECTIVE
INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL, STATE, LOCAL,
FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF SECURITIES SPECIFIC TO THE PROSPECTIVE INVESTOR.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with and
on counsel's conclusions that the nature of the income of the Trust or the
satisfaction of safe harbors relating to the trading of the Certificates will
exempt the Trust from the rule that specified publicly traded partnerships are
taxable as corporations.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Seller and the Depositor
will agree, and the Noteholders will agree by their purchase of Notes, to treat
the Notes as debt for federal income tax purposes. Federal Tax Counsel will,
except as otherwise provided in the related prospectus supplement, deliver an
opinion to the Trust that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
ORIGINAL ISSUE DISCOUNT. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, that the interest formula
for the Notes meets the requirements for "qualified stated interest" under
Treasury regulations (the "OID Regulations") relating to original issue discount
("OID"), and that any OID on the Notes (i.e., any excess of the stated
redemption price at maturity of the Notes, generally the principal amount of the
Notes, over their issue price) is less than a de minimis amount (i.e., 0.25% of
their principal amount multiplied by the weighted number of full years included
in their term), all within the meaning of the OID regulations. If these
conditions are not satisfied with respect to any given series of Notes,
additional tax considerations with respect to the Notes will be disclosed in the
Related prospectus supplement. The OID Regulations do not address their
application to debt instruments including the Notes that are subject to
prepayment based on the prepayment of other debt instruments. The legislative
history of the OID provisions of the Code provides, however, that the
calculation and accrual of OID should be based on the prepayment assumption used
by the parties in pricing the transaction. In the event that any of the notes
are issued with OID, the prepayment assumption will be set forth in the related
prospectus supplement. Furthermore, although premium amortization and accrued
market discount on debt instruments including the Notes, which are subject to
prepayment based on the payments on other debt instruments, are to be determined
under regulations yet to be issued, the legislative history of these Code
provisions provides that the same prepayment assumption used to calculate OID,
whether or not the debt instrument is issued with OID, should be used.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except
as discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with the
Noteholder's method of tax accounting. Under the OID Regulations, a holder of a
Note that was issued with a de minimis amount of OID must include the OID in
income, on a pro rata basis, as principal payments are made on the Note.
Alternatively, a Noteholder may elect to accrue all interest, discount
(including de minimis market discount or OID) and premium in income as interest,
based on a constant yield method. If an election were made with respect to a
Note with market discount, the Noteholder would be deemed to have made an
election to include in income currently market discount with respect to all debt
instruments having market discount that the Noteholder acquires during the year
of the election and thereafter. Similarly, a Noteholder that makes this election
for a Note 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 the Noteholder owns at the beginning of the first taxable year
to which the election applies or acquires thereafter. The election to accrue
interest, discount and premium under a constant yield method with respect to a
Note is irrevocable. A purchaser who buys a Note for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
Qualified Stated Interest, which is taxable in accordance with the
holder's method of accounting, is interest that is unconditionally payable
(I.E., payments can be compelled or the debt instrument provides terms and
conditions that make the likelihood of late payment or nonpayment remote) at
least annually at a single fixed rate (or variable rates). The Company intends
to treat the interest paid on the Notes as Qualified Stated Interest.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of the Note (each, a "Short-Term Note") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and specified
cash method holders, including regulated investment companies, banks and
securities dealers, as set forth in Section 1281 of the Code) generally will be
required to report interest income as interest accrues on a ratable basis over
the term of each interest period or, at the election of the holder, on a
constant yield basis. Cash basis holders of a Short-Term Note will, in general,
be required to report interest income as interest is paid (or, if earlier, upon
the taxable disposition of the Short-Term Note). However, a cash basis holder of
a Short-Term Note reporting interest income as it is paid may be required to
defer a portion of any interest expense otherwise deductible on indebtedness
incurred to purchase or carry the Short-Term Note until the taxable disposition
of the Short-Term Note. A cash basis taxpayer may elect under Section 1282 of
the Code to accrue interest income on all nongovernment debt obligations with a
term of one year or less, in which case the taxpayer would include interest on
the Short-Term Note in income as it accrues, and would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by the Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by the Noteholder
with respect to the Note. Any gain or loss will be capital gain or loss if the
Note was held as a capital asset, except for gain representing accrued interest
and accrued market discount not previously included in income. Any gain or loss
would be long-term capital gain or loss if the Noteholder's holding period
exceeded one year. Capital losses generally may be used only to offset capital
gains.
FOREIGN HOLDERS. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as the term is defined in the Code and the Treasury regulations
thereunder (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, provided, that:
o the interest is not effectively connected with the conduct of a
trade or business within the United States by the foreign person
o the foreign person is not actually or constructively a "10
percent shareholder" of the Trust, the Seller or the Company
(including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust,
the Seller or the Company is a "related person" within the
meaning of the Code, and
o the foreign person provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes
with an appropriate statement (on Form W-8 or a similar form),
signed under penalty of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign
person's name and address.
If a Note is held through a securities clearing organization or specified other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
foreign person that owns the Note. If the interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30%, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person generally will be exempt from
United States federal income and withholding tax, provided that (1) the gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) 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.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for specified
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to transition rules. The discussion set forth above
does not take the New Withholding Regulations into account. Prospective
Noteholders who are foreign persons are strongly urged to consult their own tax
advisors with respect to the New Withholding Regulations.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
including a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 2000, subject
to transition rules.
RECENT LEGISLATION
Sections 860H through 860L to the Code (the "FASIT Provisions")
provide for a new type of entity for federal income tax purposes known as a
"financial asset securitization investment trust" (a "FASIT"). The legislation
providing for the new FASIT entity, however, did not become effective until
September 1, 1997, and many technical issues are to be addressed in Treasury
regulations yet to be drafted. In general, the FASIT legislation enables trusts
including the Trust to elect to be treated as a pass-through entity not subject
to federal entity-level income tax (except with respect to prohibited
transactions) and to issue securities that would be treated as debt for federal
income tax purposes. If a Trust is intended to qualify as a FASIT for federal
income tax purposes, the prospectus supplement will so indicate.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues one or
more classes of Certificates and assumes that all payments on the Certificates
are denominated in U.S. dollars, that a series of Securities includes a single
class of Certificates, that any Certificates are sold to persons other than the
Company, and that the Company retains an equity interest in the Trust. If these
conditions are not satisfied with respect to any given series of Certificates,
any additional tax considerations with respect to the Certificates will be
disclosed in the applicable prospectus supplement.
CLASSIFICATION AS A PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller, the Depositor and
the Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust 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, the partners of the partnership being the Certificateholders (including
the Company in its capacity as recipient of distributions from the Reserve
Account, if any), and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust, the
Certificateholders, the Noteholders, the Seller, the Depositor and the Servicer
is not clear because there is no authority on transactions comparable to that
contemplated in this prospectus.
Under the provisions of Subchapter K, a partnership is not considered
a separate taxable entity. Instead, partnership income is taxed directly to the
partners and each partner generally is viewed as owning a direct undivided
interest in each partnership asset. The partnership is generally treated as an
entity, however, for computing partnership income, determining the tax
consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest. The
following discussion is a summary of some of the material federal income tax
consequences of classifying the Trust as a partnership. Prospective owners of
Trust Certificates should consult their own tax advisors regarding the federal
income tax consequences discussed below, as well as any other material federal
income tax consequences that may result from applying the provisions of
Subchapter K to the ownership and transfer of a Trust Certificate.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of Student Loans. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Student Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust for each Interest Period (as defined in the applicable
prospectus supplement, an "Interest Period") equal to the sum of:
o the interest that accrues on the Certificates in accordance with
their terms for the Interest Period, including interest accruing
at the Pass-Through Rate for the Interest Period and interest on
amounts previously due on the Certificates but not yet
distributed;
o any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; and
o all other amounts of income payable to the Certificateholders for
the Interest Period.
All remaining taxable income of the Trust will be allocated to the Company.
Losses will generally be allocated in the manner in which they are borne. Based
on the economic arrangement of the parties, this approach for allocating Trust
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
amount of interest accruing on the Certificates for an Interest Period, based on
the Pass-Through Rate plus the other items described above, even though the
Trust might not make (or have sufficient cash to make) current cash
distributions of this 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 income even if they have
not received cash from the Trust to pay the 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.
An individual taxpayer's share of expenses of the Trust (including
fees to the Servicer but not interest expenses) are miscellaneous itemized
deductions which are deductible only to the extent they exceed two percent of
the individual's adjusted gross income (and not at all for alternative minimum
tax purposes). Accordingly, the deductions might be disallowed to the individual
in whole or in part and might result in the holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to the holder over
the life of the Trust. The deductions may also be subject to reduction under
Section 68 of the Code if an individual taxpayer's adjusted gross income exceeds
limits.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that the calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
COMPUTATION OF INCOME. Taxable income of the Trust will be computed at
the Trust level and the portion allocated to the Trust Certificateholders will
be allocated to them pro rata. Consequently, the method of accounting for
taxable income will be chosen by, and any elections (including those described
above with respect to the market discount rules) will be made by, the Trust
rather than the Trust Certificateholders. The Trust intends, to the extent
possible, to (1) have the taxable income of the Trust computed under the accrual
method of accounting and (2) adopt a calendar-year taxable year for computing
the taxable income of the Trust. The tax year of the Trust, however, is
generally determined by reference to the tax years of the Certificateholders. An
owner of a Trust Certificate is required to include its pro rata share of Trust
income for a taxable year as determined by the Trust in the Trust
Certificateholder's gross income for its taxable year in which the taxable year
of the Trust ends.
DETERMINING THE BASES OF TRUST ASSETS. The Trust will become a
partnership on the first date when Trust Certificates are held by more than one
person. On that date, each of the Trust Certificateholders should be treated as
having purchased a share of the assets of the Trust (subject to the liability
for the Notes) followed immediately by a deemed contribution of the assets to
the newly formed partnership. The partnership's basis in the Trust's assets
would therefore equal the sum of the Trust Certificateholders' bases in their
respective interests in the Trust's assets immediately prior to the deemed
contribution to the partnership. To the extent that the fair market value of the
assets deemed contributed to the partnership varied from the bases of the assets
to the partnership, the allocation of taxable income to the Trust
Certificateholders would be adjusted in accordance with Section 704(c) of the
Code to account for the variations.
Under Section 708 of the Code, if 50% or more of the outstanding
interests in a partnership are sold or exchanged within any 12-month period, the
partnership will be deemed to terminate and then be reconstituted for federal
income tax purposes. If a termination occurs, the assets of the terminated
partnership are deemed to be constructively contributed to a reconstituted
partnership in exchange for interests in the reconstituted partnership. The
interests would be deemed distributed to the partners of the terminated
partnership in liquidation thereof, which distribution would not constitute a
sale or exchange. Accordingly, if the sale of the Trust Certificates terminates
the partnership under Section 708 of the Code, a Certificateholder's basis in
its ownership interest would not change. The Trust's taxable year would also
terminate as a result of a constructive termination and, if the
Certificateholder's taxable year is different from the Trust's, the termination
could result in the "bunching" of more than 12 months' income or loss of the
Trust in the Certificateholder's income tax return for the year in which the
Trust was deemed to terminate. A redemption of interests is not considered a
sale or exchange of interests for purposes of applying this constructive
termination rule.
DISCOUNT AND PREMIUM. To the extent that OID, if any, on the Student
Loans exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of the OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans
may be greater or less than the remaining aggregate principal balances of the
Student Loans at the time of purchase. If so, the Student Loans will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.)
If the Trust acquires the Student Loans at a market discount or
premium, the Trust will elect to include any discount in income currently as it
accrues over the life of the Student Loans or to offset any premium against
interest income on the Student Loans. As indicated above, a portion of the
market discount income or premium deduction may be allocated to
Certificateholders.
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.
Any gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Trust income (includible in gross income) and decreased by any
distributions received or losses allocated with respect to the Certificate. In
addition, both the tax basis in the Certificate 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. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in the
Certificates and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of the 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 Student Loans would
generally be treated as ordinary income to the holder.
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, the excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust'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 the month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect the tax liability and
tax basis of the holder) attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing laws
and 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 might be reallocated among the Certificateholders. The Depositor
and the Company are authorized to revise the Trust's method of allocation
between transferors and transferees to conform to a method permitted by future
laws, regulations or other IRS guidance.
SECTION 754 ELECTION. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust 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 will not make the election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
ADMINISTRATIVE MATTERS. The Eligible Lender Trustee is required to
keep or cause to be kept complete and accurate books of the Trust. The Eligible
Lender Trustee will file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the IRS on Schedule K-1. The Trust will provide the Schedule K-1
information to nominees that fail to provide the Trust with the information
statement described below and the nominees will be required to forward the
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information returns filed by
the Trust or be subject to penalties unless the holder timely notifies the IRS
of all the 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
with a statement containing information on the nominee, the beneficial owners
and the Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner:
o the name, address and identification number of the person,
o whether the 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
o information on Certificates that were held, bought or sold on
behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any information statement to the Trust. The information
referred to above for any calendar year must be furnished to the Trust on or
before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust with the information described above may be
subject to penalties.
The Company will be designated as "tax matters partner" in the related
Trust Agreement and will be responsible for representing the Certificateholders
in disputes 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 later of the date on which the partnership
information return is filed or the last day for filing the return for the year
(determined without regard to extensions). Any adverse determination following
an audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
specified circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. 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.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear
whether the Trust would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described in this prospectus.
Although it is not expected that the Trust would be engaged in a trade or
business in the United States for the purposes, the Trust will withhold as if it
were so engaged in order to protect the Trust from possible adverse consequences
of a failure to withhold. The Trust expects to withhold on the portion of its
taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if the 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 to change its withholding procedures. In determining a
holder's withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9 or
the holder's certification of nonforeign status signed under penalty of perjury.
As previously mentioned, the New Withholding Regulations generally will be
effective for payments made after December 31, 2000, subject to transition
rules. The discussion set forth above does not take into account the New
Withholding Regulations. Prospective Certificateholders who are foreign persons
are strongly urged to consult their own tax advisors with respect to the New
Withholding Regulations.
Each foreign holder may 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's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust in order to assure appropriate crediting of the taxes withheld. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes were
due because the Trust was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a foreign
person may be considered "guaranteed payments" (to the extent the payments are
determined without regard to the income of the Trust). If these interest
payments are properly characterized as guaranteed payments, then the interest
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% on the Trust's gross income, unless reduced or eliminated pursuant
to an applicable treaty. In this case, a foreign holder 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. As a result,
each potential foreign Certificateholder should consult its tax advisor as to
whether the tax consequences of holding a Certificate make it an unsuitable
investment.
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 identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. As previously mentioned, the New Withholding
Regulations generally will be effective for payments made after December 31,
1999, subject to transition rules.
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER, THE DEPOSITOR
OR AN AFFILIATE OF THE SELLER OR THE DEPOSITOR
TAX CHARACTERIZATION OF THE TRUST
Any party that retains or acquires 100% of the Certificates agrees by
this retention or acquisition to disregard the Trust as an entity separate from
the sole Certificateholder. Federal Tax Counsel will deliver its opinion that a
Trust which issues one or more classes of Notes to investors and all the
Residual Interests of which are retained by the Seller, the Depositor or an
affiliate thereof will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes, assuming that the
terms of the Trust Agreement and related documents will be complied with so
that, among other things, no election will be made to treat the Trust as a
corporation for federal income tax purposes.
Absent the election to be treated as a corporation for federal income
tax purposes, Treasury regulations provide that the Trust will be disregarded as
an entity separate from its sole Certificateholder for federal income tax
purposes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Seller and the Depositor
will agree, and the Noteholders will agree by their purchase of Notes, to treat
the Notes as debt for federal income tax purposes. Federal Tax Counsel will,
except as otherwise provided in the related prospectus supplement, advise the
Trust that the Notes will be classified as debt for federal income tax purposes.
Assuming the characterization of the Notes is correct, the federal income tax
consequences to Noteholders described above under"--Trusts for Which a
Partnership Election is Made--Tax Consequences to Holders of the Notes" would
apply to the Noteholders.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or more
classes of Notes did not represent debt for federal income tax purposes, the
class or classes of Notes might be treated as equity interests in the Trust. If
so treated, the Trust could, in the view of Federal Tax Counsel, be treated as a
publicly traded partnership that would be taxable as a corporation In this case,
the entity would be subject to federal income taxes at corporate tax rates on
its taxable income generated by Student Loans. An entity-level tax could result
in reduced distribution to Noteholders and Noteholders could be liable for a
share of the tax.
Furthermore, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in a partnership could have adverse tax
consequences to holders of the Notes. For example, income from classes of Notes
to tax-exempt entities (including pension funds) might be "unrelated business
taxable income", income to foreign holders may be subject to U.S. withholding
tax and U.S. tax return filing requirements, and individual holders might be
subject to limitations on their ability to deduct their share of Trust expenses.
In the event one or more classes of Notes were treated as interests in a
partnership, the consequences governing the Certificates as equity interests in
a partnership described above under"--Trusts for Which a Partnership Election is
Made--Tax Consequences to Holders of the Certificates" would apply to the
holders of the Notes.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S OR
CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
TRUSTS FOR WHICH A GRANTOR TRUST ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
CHARACTERIZATION. In the case of a grantor trust, Federal Tax Counsel
will deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that the Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of certificates (referred to in this prospectus as "grantor
trust certificateholders") will be treated for federal income tax purposes as
owners of a portion of the Trust's assets as described below. The certificates
issued by a Trust that is treated as a grantor trust are referred to in this
prospectus as "grantor trust certificates".
TAXATION OF GRANTOR TRUST CERTIFICATEHOLDERS. Subject to the
discussion below under "--Stripped Certificates" and "--Subordinated
certificates," each grantor trust certificateholder will be treated as the owner
of a pro rata undivided interest in the assets of the Trust. Accordingly, and
subject to the discussion below of the recharacterization of the Servicing Fee,
each grantor trust certificateholder must include in income its pro rata share
of the interest and other income from the Student Loans, including any interest,
original issue discount, market discount, prepayment fees, assumption fees, and
late payment charges with respect to the assets, and, subject to limitations
discussed below, may deduct its pro rata share of the fees and other deductible
expenses paid by the Trust, at the same time and to the same extent as these
items would be included or deducted by the grantor trust certificateholder if
the grantor trust certificateholder held directly a pro rata interest in the
assets of the Trust and received and paid directly the amounts received and paid
by the Trust. Any amounts received by a grantor trust certificateholder in lieu
of amounts due with respect to any Student Loan because of a default or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Under Sections 162 and 212 each grantor trust certificateholder will
be entitled to deduct its pro rata share of servicing fees, and other fees and
charges retained by the Servicer, provided that these amounts are reasonable
compensation for services rendered to the Trust. Grantor trust
certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent these expenses plus all other
miscellaneous itemized deductions exceed two percent of the grantor trust
certificateholder's adjusted gross income, and will be allowed no deduction for
these expenses in determining their liabilities for alternative minimum tax. In
addition, Section 68 of the Code provides that the amount of itemized
deductions, including those provided for in Section 212 of the Code, otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code, $100,000 (or $50,000 in the
case of a separate return by a married individual), adjusted for changes in the
cost of living subsequent to 1990, will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
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 the 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 servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made pursuant to the Student Loans. In this event, a Certificate might be
treated as a Stripped Certificate subject to the stripped bond rules of Section
1286 of the Code and the original issue discount provisions rather than to the
market discount and premium rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "--Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a grantor trust Certificate will be treated as
purchasing an interest in each Student Loan in the Trust at a price determined
by allocating the purchase price paid for the Certificate among all Student
Loans in proportion to their fair market values at the time of the purchase of
the Certificate. To the extent that the portion of the purchase price of a
grantor trust certificate allocated to a Student Loan is less than or greater
than the portion of the stated redemption price at maturity of the Student Loan,
the interest in the Student Loan will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on a Student Loan will depend on whether
the discount represents original issue discount or market discount. Except as
indicated otherwise in the applicable prospectus supplement, we do not expect
that any Student Loan will have original issue discount (except as discussed
below under "--Stripped Certificates" or "--Subordinated Certificates"). For the
rules governing original issue discount, see "Trusts for Which a Partnership
Election is Made--Tax Consequences to Holders of Notes--Original Issue Discount"
above.
The information provided to grantor trust certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Student Loan is acquired.
MARKET DISCOUNT. A grantor trust certificateholder that acquires an
undivided interest in Student Loans may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Student
Loan is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "Trusts for Which a
Partnership Election is Made--Classification as a Partnership--Discount and
Premium" above.
PREMIUM. To the extent a grantor trust certificateholder is considered
to have purchased an undivided interest in a Student Loan for an amount that is
greater than the stated redemption price at maturity of the interest, the
grantor trust certificateholder will be considered to have purchased the
interest in the Student Loan with "amortizable bond premium" equal in amount to
the excess. For a discussion of the rules applicable to amortizable bond
premium, see "Trusts for Which a Partnership Election is Made--Classification as
a Partnership--Discount and Premium" above.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Student Loan from ownership of the right to receive some
or all of the related interest payments. In general, where a separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount, the difference between the holder's initial purchase price for
the right to receive and the principal or interest payment to be received with
respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable;
o if the company or any other party retains a retained yield with
respect to the Student Loans held by the Trust;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Student Loans; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. For
purposes of applying the original issue discount provisions of the Code, the
issue price of a Stripped Certificate will be the purchase price paid by each
holder of the Stripped Certificate and the stated redemption price at maturity
may include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated as
zero under the original issue discount DE MINIMIS rules described above.
SUBORDINATED CERTIFICATES. In the event the Trust issues two classes
of grantor trust certificates that are identical except that one class is a
subordinate class, with a relatively high certificate pass through rate, and the
other is a senior class, with a relatively low certificate pass through rate
(referred to in this prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the grantor trust certificateholders will be
deemed to have acquired the following assets: (1) the principal portion of each
Student Loan plus a portion of the interest due on each Student Loan (the "Trust
Stripped Bond"), and (2) a portion of the interest due on each Student Loan
equal to the difference between the certificate pass through rate on the
Subordinate Certificates and the certificate pass through rate on the Senior
Certificates, if any, which difference is then multiplied by the Subordinate
Class Percentage (the "Trust Stripped Coupon"). The "Subordinate Class
Percentage" equals the initial aggregate principal amount of the Subordinate
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates. The "Senior Class
Percentage" equals the initial aggregate principal amount of the Senior
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of each asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both assets. The Trust Stripped Bond
will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped coupons" within the meaning of Section 1286 of the Code.
Because the purchase price paid by each Subordinate Certificateholder will be
allocated between that certificateholder's interest in the Trust Stripped Bond
and the Trust Stripped Coupon based on the relative fair market value of each
asset on the date the Subordinate Certificate is purchased, the Trust Stripped
Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped
Bond represented by a Certificate will be reported in the same manner as
described generally above for holders of certificates. The interest income on
the Subordinate Certificates at the Senior Certificate pass-through rate and the
portion of the Servicing Fee that does not constitute excess servicing will be
treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the Trust Stripped Coupon, based on the prepayment assumption used in pricing
the certificates, over the portion of the purchase price allocated to the Trust
Stripped Coupon. The sum of the daily portions of original issue discount on the
Trust Stripped Coupon for each day during a year in which the Subordinate
Certificateholder holds the Trust Stripped Coupon will be included in the
Subordinate Certificateholder's income.
If the Subordinate Certificateholders receive distribution of less
than their share of the Trust's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts,
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result of
collections on the Student Loans or amounts available from a
Reserve Account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income or original issue discount of
the Trust that was a component of the Shortfall Amount, even
though that amount was in fact paid to the Senior
Certificateholders,
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that amount will not be available from any source to
reimburse the loss) and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
regulations permit a grantor trust certificateholder to elect to accrue all
interest, discount, including DE MINIMIS market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield method.
If an election were to be made with respect to an interest in a Student Loan
with market discount, the Certificate Owner 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 the grantor trust
certificateholder acquires during the year of the election or afterward. See
"--Market Discount" above. Similarly, a grantor trust certificateholder that
makes this election for an interest in a Student Loan 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 the grantor
trust certificateholder owns at the beginning of the first taxable year to which
the election applies or acquires afterward. See "--Premium" above. The election
to accrue interest, discount and premium on a constant yield method with respect
to a grantor trust Certificate is irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the prepayment assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
grantor trust certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized, exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income, allocable to the Student Loan and the owner's adjusted basis in
the grantor trust certificate. The adjusted basis generally will equal the
seller's cost for the grantor trust certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the grantor trust certificate, and reduced, but not below zero, by
any premium amortized by the seller and by principal payments on the grantor
trust certificate previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
Student Loans represented by a grantor trust certificate are "capital assets"
within the meaning of Section 1221, except that gain will be treated in whole or
in part as ordinary interest income to the extent of the seller's interest in
accrued market discount not previously taken into income on underlying Student
Loans having a fixed maturity date of more than one year from the date of
origination. A capital gain or loss will be long-term or short-term depending on
whether or not the grantor trust certificate has been owned for the long-term
capital gain holding period, currently more than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a grantor trust certificate will be ordinary income to the extent of
the seller's interest in accrued market discount on Student Loans not previously
taken into income. See "--Market Discount," above.
NON-UNITED STATES GRANTOR TRUST CERTIFICATE OWNERS. Amounts paid to
Non-United States Owners of grantor trust certificates will be treated as
interest for purposes of United States withholding tax. The interest
attributable to the underlying Student Loans will not be subject to the normal
30%, or any lower rate provided for by an applicable tax treaty, withholding tax
imposed on these amounts provided that (1) the Non-U.S. Certificate Owner does
not own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation, within the definition of Section 957, related to any of the issuers
of the Student Loans and (2) the Certificate Owner fulfills specific
certification requirements. Under these requirements, the Certificate Owner must
certify, under penalty of perjury, that it is not a "United States person" and
must provide its name and address. "United States person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision of the United States, or an estate or trust the income of which is
includable in gross income for United States federal income tax purposes,
without regard to its source. If, however, interest or gain is effectively
connected to the conduct of a trade or business within the United States by the
Certificate Owner, the owner will be subject to United States federal income tax
on the interest or gain at graduated rates and, in the case of a corporation, to
a possible branch profits tax, and will not be subject to withholding tax
provided that the owner meets applicable documentation requirements. Potential
investors who are not United States persons should consult their own tax
advisors regarding the specific tax consequences of owning a Certificate.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Owners of grantor trust certificates. The 1997 Withholding Regulations
are generally effective for payments after December 31, 1999, regardless of the
issue date of the Student Loans with respect to which payments are made, subject
to particular transition rules.
BACKUP WITHHOLDING. Distributions made on the grantor trust
certificates and proceeds from the sale of the grantor trust certificates will
be subject to a "backup" withholding tax of 31% if, in general, the grantor
trust certificateholder fails to comply with particular identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
CERTAIN STATE TAX CONSEQUENCES
Because of the variation in each state's tax laws based in whole or in
part upon income, it is not feasible to predict tax consequences to holders of
Notes and Certificates in all of the state taxing jurisdictions in which they
are already subject to tax. Noteholders and Certificateholders are urged to
consult their own tax advisors with respect to state tax consequences arising
out of the purchase, ownership and disposition of Notes and Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose requirements on employee benefit plans and on
other retirement plans and arrangements, including individual retirement
accounts and annuities and collective investment funds and separate accounts
(and, as applicable, insurance company general accounts) in which the plans,
accounts or arrangements are invested that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and Section 4975
of the Code ("Plans") and on persons who are fiduciaries with respect to the
Plans in connection with the investment of Plan assets. Certain employee benefit
plans, including governmental plans (as defined in ERISA Section 3(32)), and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of the plans may be invested in Notes without regard to the
ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any plan which is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Code, however, is subject to
the exclusive benefit rule under Section 401(a)(2) of ERISA and the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of Plan and persons
(parties in interest under ERISA and disqualified persons under the Code,
collectively, "Parties in Interest") who have specified relationships to the
Plan unless a statutory, regulatory or administrative exemption is available.
Certain Parties in Interest that participate in a prohibited transaction may be
subject to an excise tax imposed pursuant to Section 4975 of the Code or a
penalty imposed pursuant to Section 502(i) of ERISA, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
THE NOTES
Unless otherwise specified in the related prospectus supplement, the
Notes of each series may be purchased by a Plan. The Issuer, the Company, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Servicer,
the Administrator, any provider of credit support or any of their affiliates may
be considered to be or may become Parties in Interest with respect to specified
Plans. Prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code may arise if a Note is acquired by a Plan with respect to which the
persons are Parties in Interest unless the transactions are subject to one or
more statutory or administrative exemptions, including: Prohibited Transaction
Class Exemption ("PTCE") 96-23, which exempts specified transactions effected on
behalf of a Plan by an "in-house asset manager"; PTCE 90-1, which exempts
specified transactions between insurance company separate accounts and Parties
in Interest; PTCE 91-38, which exempts specified transactions between bank
collective investment funds and Parties in Interest; PTCE 95-60, which exempts
specified transactions between insurance company general accounts and Parties in
Interest; or PTCE 84-14, which exempts specified transactions effected on behalf
of a Plan by a "qualified professional asset manager". There can be no assurance
that any of these class exemptions will apply with respect to any particular
Plan investment in Notes or, even if it were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with the
investment. Accordingly, prior to making an investment in the Notes, investing
Plans should determine whether the Issuer, the Company, any underwriter, the
Eligible Lender Trustee, the Indenture Trustee, the Servicer, the Administrator,
or any provider of credit support or any of their affiliates is a Party in
Interest with respect to the Plan and, if so, whether the transaction is subject
to one or more statutory, regulatory or administrative exemptions.
Any Plan fiduciary considering whether to invest in 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 the investment. Each Plan fiduciary also should determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Notes is appropriate for the Plan, considering the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio, as well as whether the investment is permitted under the governing
Plan instruments.
THE CERTIFICATES
Unless otherwise specified in the prospectus supplement, the
Certificates of each series may not be purchased by a Plan or by any entity
whose underlying assets include plan assets by reason of a plan's investment in
the entity (each, a "Benefit Plan"). The purchase of an equity interest in the
Trust will result in the assets of the Trust being deemed assets of a Benefit
Plan for the purposes of ERISA and the Code and specified transactions involving
the Trust may then be deemed to constitute prohibited transactions under Section
406 of ERISA and Section 4975 of the Code. A violation of the "prohibited
transaction" rules may result in an excise tax or other penalties and
liabilities under ERISA and the Code for the persons.
By its acceptance of a Certificate, each Certificateholder will be
deemed to have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, the
exception will be discussed in the related prospectus supplement.
* * *
A PLAN FIDUCIARY CONSIDERING THE PURCHASE OF SECURITIES OF A GIVEN
SERIES SHOULD CONSULT ITS TAX AND/OR LEGAL ADVISORS REGARDING WHETHER THE ASSETS
OF THE RELATED TRUST WOULD BE CONSIDERED PLAN ASSETS, THE POSSIBILITY OF
EXEMPTIVE RELIEF FROM THE PROHIBITED TRANSACTION RULES AND OTHER ISSUES AND
THEIR POTENTIAL CONSEQUENCES.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of the series (collectively, the "Underwriting
Agreements"), the Depositor will agree to cause the related Trust to sell to the
underwriters named in the Underwriting Agreement and in the related prospectus
supplement, and each of the underwriters will severally agree to purchase, the
principal amount of each class of Notes and Certificates, as the case may be, of
the related series set forth in the Underwriting Agreement and in the related
prospectus supplement.
In each of the Underwriting Agreements with respect to any given
series of Securities, the several underwriters will agree, subject to the terms
and conditions set forth in the Underwriting Agreement, to purchase all the
Notes and Certificates, as the case may be, described in the Underwriting
Agreement which are offered hereby and by the related prospectus supplement if
any of the Notes and Certificates, as the case may be, are purchased.
Each prospectus supplement will either (1) set forth the price at
which each class of Notes and Certificates, as the case may be, being offered
thereby will be offered to the public and any concessions that may be offered to
dealers participating in the offering of the Notes and Certificates, as the case
may be, or (2) specify that the related Notes and Certificates, as the case may
be, are to be resold by the underwriters in negotiated transactions at varying
prices to be determined at the time of the sale. After the initial public
offering of any Notes and Certificates, as the case may be, the public offering
prices and the concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase the Securities. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price of
the Securities. The transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in
connection with the offering (i.e., if it sells more Securities than are set
forth on the cover page of the related prospectus supplement), the underwriter
may reduce that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on underwriters and
selling group members. This means that if the underwriter purchases Securities
in the open market to reduce the underwriters' short position or to stabilize
the price of the Securities, it may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those Securities as
part of the offering.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of the purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Depositor nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Depositor nor the underwriters make any representation that the underwriters
will engage in the transactions or that the transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Depositor will
indemnify the underwriters against civil liabilities, including liabilities
under the Securities Act, or contribute to payments the several underwriters may
be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a
given series of Securities, the closing of the sale of any class of Securities
subject to either thereof will be conditioned on the closing of the sale of all
other the classes subject to either thereof.
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.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the Securities in which the underwriter acts as
principal. The underwriter may also act as agent in these transactions. Sales
will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust and for the underwriters for the series by
Stroock & Stroock & Lavan LLP, New York, New York or other counsel specified in
the related prospectus supplement.
AVAILABLE INFORMATION
The Depositor, as originator of each trust, has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This prospectus, which forms part
of the Registration Statement, does not contain all the information contained in
the Registration Statement. For further information, reference is made to the
Registration Statement which may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; and at the Commission's regional offices at Seven World Trade
Center, New York, New York 10048, and 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661. Copies of the Registration Statement may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
at http://www.sec.gov containing registration statements and other information
regarding registrants, including the Depositor, that file electronically with
the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor, as originator of any trust,
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this prospectus and prior to the
termination of the offering of the securities shall be deemed to be incorporated
by reference in this prospectus. Any statement contained in this prospectus or
in a document incorporated or deemed to be incorporated by reference in this
prospectus shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
subsequently filed document which also is to be incorporated by reference in
this prospectus modifies or supersedes the statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The Depositor will provide without charge to each person, including
any beneficial owner of securities, to whom a copy of this prospectus is
delivered, on the written or oral request of any person, a copy of any or all of
the documents incorporated in this prospectus or in any related prospectus
supplement by reference, except the exhibits to the documents (unless the
exhibits are specifically incorporated by reference in the documents). Requests
for the copies should be directed to Secretary, ACE Securities Corp., 6525
Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211, telephone, (704)
365-0569
<PAGE>
Index of Principal Terms
PAGE
10 percent shareholder......................................................43
1992 Amendments..............................................................5
1993 Act.....................................................................5
1997 Act....................................................................53
1998 Reauthorization Bill....................................................5
Act..........................................................................4
Additional Fundings.........................................................31
Add-on Consolidation Loans..................................................13
Administration Agreement....................................................39
Administration Fee..........................................................39
Administrator...............................................................39
Administrator Default.......................................................39
Applicable Trustee..........................................................28
Base Rate...................................................................26
Benefit Plan................................................................56
Calculation Agent...........................................................26
Cede........................................................................27
Certificate Balance.........................................................19
Certificate Pool Factor.....................................................19
Certificates................................................................25
Closing Date................................................................18
Code........................................................................41
Collateral Reinvestment Account.............................................31
Collection Account..........................................................31
Collection Period...........................................................33
Commission..................................................................57
Company.....................................................................25
Controlled Foreign Corporation..............................................43
Cutoff Date..................................................................2
Deferral Period.............................................................11
Definitive Certificates.....................................................28
Definitive Notes............................................................28
Definitive Securities.......................................................28
Depositaries................................................................27
Depositary..................................................................19
Distribution Date...........................................................20
DTC.........................................................................27
DTC's Nominee...............................................................19
Eligible Deposit Account....................................................32
Eligible Institution........................................................32
Eligible Investments........................................................31
Eligible Lender Trustee......................................................2
ERISA.......................................................................55
Event of Default............................................................21
Excess Cashflow Rights.......................................................4
Family Contribution..........................................................7
FASIT.......................................................................44
FASIT Provisions............................................................44
Federal Assistance...........................................................8
Federal Consolidation Loan...............................................5, 13
Federal Guarantee Agreements.................................................4
Federal Guarantee Payments...................................................5
Federal Guarantors...........................................................4
Federal PLUS Loans...........................................................5
Federal SLS Loans............................................................5
Federal Stafford Loans.......................................................5
Federal Student Loans........................................................4
Federal Supplemental Loans to Students.......................................5
Federal Tax Counsel.........................................................41
Federal Unsubsidized Stafford Loans..........................................5
FFELP........................................................................4
Fixed Rate Securities.......................................................26
Floating Rate Securities....................................................26
Forbearance Period..........................................................11
foreign person..............................................................43
Funding Period...............................................................4
Grace Period................................................................11
Graduate Loans...............................................................4
grantor trust certificateholders............................................50
grantor trust certificates..................................................50
Guarantee Agreements.........................................................5
Guarantee Payments...........................................................5
Guarantors...................................................................4
Higher Education Act.........................................................4
Indenture...................................................................19
Indenture Trustee...........................................................19
Index Shortfall Carryover...................................................22
Indirect Participants.......................................................27
Initial Pool Balance........................................................38
Insolvency Event............................................................18
Interest Period.............................................................45
Interest Rate...............................................................20
Interest Reset Period.......................................................26
Interest Subsidy Payments....................................................8
Investment Earnings.........................................................32
IRS.........................................................................41
Issuer.......................................................................2
Loan Sale Agreement..........................................................3
Loan Servicing Agreement....................................................17
Monthly Rebate Fee..........................................................14
New Withholding Regulations.................................................44
Note Pool Factor............................................................19
Notes.......................................................................19
OID.........................................................................42
OID Regulations.............................................................42
Participants................................................................20
Parties in Interest.........................................................55
Pass-Through Rate...........................................................25
Plans.......................................................................55
Pool Balance................................................................19
Pool Factor.................................................................19
Post-Graduate Loans..........................................................4
Pre-Funding Account.........................................................31
Pre-Funding Amount..........................................................35
prepayments.................................................................18
Private Guarantee Agreements.................................................5
Private Guarantee Payments...................................................5
Private Guaranteed Loans.....................................................4
Private Guarantors...........................................................4
Private Student Loans.......................................................14
Private Unguaranteed Loans...................................................4
Programs.....................................................................4
PTCE........................................................................55
Purchase Amount.............................................................30
Registration Statement......................................................57
Related Documents...........................................................24
related person..............................................................43
Reserve Account.............................................................34
Revolving Period.............................................................4
Rules.......................................................................28
Secretary...................................................................14
Securities..................................................................25
Securities Act..............................................................57
Seller.......................................................................3
Senior Certificates.........................................................52
Senior Class Percentage.....................................................52
Servicer.....................................................................3
Servicer Default............................................................37
Servicing Fee...............................................................33
Shortfall Amount............................................................53
Short-Term Note.............................................................43
Special Allowance Payments...................................................7
Spread......................................................................26
Spread Multiplier...........................................................26
Stripped Certificates.......................................................51
Student Loans................................................................2
Subordinate Certificates....................................................52
Subordinate Class Percentage................................................52
tax matters partner.........................................................48
Transfer and Servicing Agreements...........................................30
Trust........................................................................2
Trust Accounts..............................................................31
Trust Agreement..............................................................2
Trust Stripped Bond.........................................................52
Trust Stripped Coupon.......................................................52
UCC.........................................................................39
Undergraduate Loans..........................................................4
Underwriting Agreements.....................................................56
Unmet Need...................................................................7
<PAGE>
ACE Securities Corp. Student Loan
Trust [ ]-[ ]
$[ ]
Class A-1 Floating Rate
Asset-Backed Senior Notes
$[ ]
Class A-2 Floating Rate
Asset-Backed Senior Notes
ACE Securities Corp.,
Depositor
PROSPECTUS SUPPLEMENT
Deutsche Banc Alex. Brown
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses expected to be incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting compensation, are as follows:
SEC Registration Fee $*
Trustee's Fees and Expenses (including counsel fees) *
Printing and Engraving Costs *
Rating Agency Fees *
Legal Fees and Expenses *
Blue Sky Fees and Expenses *
Accounting Fees and Expenses *
Miscellaneous *
-
Total *
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are made, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person is or was
an officer or director of such corporation, or is or was serving at the request
of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director actually and reasonably
incurred.
The By-laws of the Registrant provide for indemnification of officers
and directors to the full extent permitted by the Delaware General Corporation
Law.
The transaction documents for each series of Securities will provide
either that the Registrant and the partners, directors, officers, employees and
agents of the Registrant, or that the Servicer or Master Servicer and the
partners, directors, officers, employees and agents of the Servicer or Master
Servicer, will be entitled to indemnification by the applicable Trust and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the transaction documents, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of his or its duties thereunder or by
reason of reckless disregard of his or its obligations and duties thereunder.
The Underwriting Agreement for each series of Securities will
generally provide that each underwriter will indemnify the Registrant, each of
its directors, each of its officers who signs the Registration Statement, and
each person who controls the Registrant within the meaning of either the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, against claims, damages, or liability, to which the Registrant may
become subject, under the Securities Act or the Exchange Act, or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of material fact furnished by the underwriter for the preparation of a
prospectus, or included in any computational materials, term sheets or similar
documents delivered to prospective investors by the underwriter (other than any
such untrue statement that is based on materials previously provided to the
underwriter by the Registrant).
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement+
3.1 Restated Certificate of Incorporation of ACE Securities
Corp.**
4.1.1 Form of Indenture (Owner Trust, Fixed Rate Notes, Auto
Receivables)**
4.1.2 Form of Indenture (Owner Trust, Fixed Rate Notes, Auto
Securities)**
4.1.3 Form of Master Indenture (Credit Card or Dealer Floorplan
Securities)**
4.1.4 Form of Indenture Supplement, including form of Notes
(Credit Card or Dealer Floorplan Securities)**
4.1.5 Form of Indenture between the Trust and the Indenture
Trustee (Owner Trust, Student Loan Securities)**
4.1.6 Form of Indenture between the Trust and the Indenture
Trustee (Owner Trust, Equipment Securities)**
4.2 Form of Pooling and Servicing Agreement (Mortgage)+
4.2.1 Form of Pooling and Servicing Agreement (Grantor Trust,
Fixed Rate Certificates, Auto Receivables)**
4.2.2 Form of Transfer and Servicing Agreement (Credit Card or
Dealer Floorplan Securities)**
4.2.3 Form of Loan Sale Agreement among the Seller, the Depositor,
the Trust and the Eligible Lender Trustee (Student Loan) **
4.2.4 Form of Loan Servicing Agreement among the Servicer, the
Trust and the Eligible Lender Trustee (Student Loan)**
4.2.5 Form of Administration Agreement among the Trust, the
Indenture Trustee and the Administrator (Student Loan)**
4.2.6 Form of Pooling and Servicing Agreement. (Equipment)**
4.3 Form of Indenture (Mortgage)+
4.3.1 Form of Administration Agreement (Credit Card or Dealer
Floorplan Securities)**
4.4 Form of Trust Agreement (Mortgage)+
4.4.1 Form of Trust Agreement. (Owner Trust, Auto Receivables)**
4.4.2 Form of Trust Agreement. (Owner Trust, Auto Securities)**
4.4.3 Form of Trust Agreement. (Grantor Trust, Auto Securities)**
4.4.4 Form of Trust Agreement (Credit Card or Dealer Floorplan
Securities)**
4.4.5 Form of Trust Agreement among the Depositor, the Seller and
the Eligible Lender Trustee (Owner Trust, Student Loan
Securities)** 4.4.6 Form of Trust Agreement among the
Depositor, the Seller and the Trustee (Owner Trust,
Equipment Securities)**
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities
offered**
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax
matters. (included in Exhibit 5.1)**
10.1.1 Form of Receivables Purchase Agreement. (Auto Loan
Receivables)**
10.2.1 Form of Sale and Servicing Agreement. (Owner Trust, Auto
Loan Receivables)**
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in
Exhibits 5.1 and 8.1)**
24.1 Powers of Attorney of directors and officers of ACE
Securities Corp. (included in the signature pages to this
Registration Statement)
25.1 Statement of Eligibility and Qualification of Indenture
Trustee**
+ Incorporated herein by reference to the Registrant's Registration Statement
on Form S-3 (Reg. No. 333-56213), filed with the Commission on June 5,
1999.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
A. Undertaking in respect of Rule 415 offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (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 of such information in the Registration Statement; provided,
however, that paragraphs (i) and (iii) do not apply if the information required
to be included in the post-effective amendment is contained in periodic reports
filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that are incorporated by reference
in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. Undertaking in respect of filings incorporating subsequent Exchange Act
documents by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes and
Certificates in the denominations and registered in the names as required by the
Underwriter to permit prompt delivery to each purchaser.
C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, 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 of 1933, as amended, 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 of 1933, as amended, and will be
governed by the final adjudication of such issue.
D. Undertakings for registration statement permitted by Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to
be part of this Registration Statement as of the time it was declared effective;
and
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, 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 that time
shall be deemed to be the initial BONA FIDE offering thereof.
E. Undertaking in respect of qualification of Indentures under the Trust
Indenture Act of 1939.
The Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act of 1939 in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act of 1939.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Charlotte, North Carolina on the 6th day of September, 2000.
ACE SECURITIES CORP.
By: /S/ DOUGLAS K. JOHNSON
------------------------
Douglas K. Johnson
President
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint Douglas K. Johnson, Evelyn Echevarria and Juliana
C. Johnson or any of them (with full power to each of them to act alone), his or
her true and lawful attorney-in-fact and agent with full power of substitution,
for him or her and on his or her behalf to sign, execute and file this
Registration Statement and any and all amendments (including, without
limitation, post-effective amendments and any amendments increasing the amount
of securities for which registration is being sought) to this Registration
Statement, with all exhibits and any and all documents to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he or she might or
could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ DOUGLAS K. JOHNSON President and Director September 6, 2000
-------------------------------
Douglas K. Johnson (Principal Executive
Officer)
/S/ EVELYN ECHEVARRIA Director and Secretary September 6, 2000
-------------------------------
Evelyn Echevarria
/S/ JULIANA C. JOHNSON Treasurer and Director September 6, 2000
------------------------------- (Principal Financial and
Juliana C. Johnson Accounting Officer)
<PAGE>
EXHIBIT INDEX
1.1 Form of Underwriting Agreement+
3.1 Restated Certificate of Incorporation of ACE Securities
Corp.**
4.1.1 Form of Indenture (Owner Trust, Fixed Rate Notes, Auto
Receivables)**
4.1.2 Form of Indenture (Owner Trust, Fixed Rate Notes, Auto
Securities)**
4.1.3 Form of Master Indenture (Credit Card or Dealer Floorplan
Securities)**
4.1.4 Form of Indenture Supplement, including form of Notes
(Credit Card or Dealer Floorplan Securities)**
4.1.5 Form of Indenture between the Trust and the Indenture
Trustee (Owner Trust, Student Loan Securities)**
4.1.6 Form of Indenture between the Trust and the Indenture
Trustee (Owner Trust, Equipment Securities)**
4.2 Form of Pooling and Servicing Agreement (Mortgage)+
4.2.1 Form of Pooling and Servicing Agreement (Grantor Trust,
Fixed Rate Certificates, Auto Receivables)**
4.2.2 Form of Transfer and Servicing Agreement (Credit Card or
Dealer Floorplan Securities)**
4.2.3 Form of Loan Sale Agreement among the Seller, the Depositor,
the Trust and the Eligible Lender Trustee (Student Loan) **
4.2.4 Form of Loan Servicing Agreement among the Servicer, the
Trust and the Eligible Lender Trustee (Student Loan)**
4.2.5 Form of Administration Agreement among the Trust, the
Indenture Trustee and the Administrator (Student Loan)**
4.2.6 Form of Pooling and Servicing Agreement. (Equipment)**
4.3 Form of Indenture (Mortgage)+
4.3.1 Form of Administration Agreement (Credit Card or Dealer
Floorplan Securities)**
4.4 Form of Trust Agreement (Mortgage)+
4.4.1 Form of Trust Agreement. (Owner Trust, Auto Receivables)**
4.4.2 Form of Trust Agreement. (Owner Trust, Auto Securities)**
4.4.3 Form of Trust Agreement. (Grantor Trust, Auto Securities)**
4.4.4 Form of Trust Agreement (Credit Card or Dealer Floorplan
Securities)**
4.4.5 Form of Trust Agreement among the Depositor, the Seller and
the Eligible Lender Trustee (Owner Trust, Student Loan
Securities)**
4.4.6 Form of Trust Agreement among the Depositor, the Seller and
the Trustee (Owner Trust, Equipment Securities)**
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities
offered**
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax
matters. (included in Exhibit 5.1)**
10.1.1 Form of Receivables Purchase Agreement. (Auto Loan
Receivables)**
10.2.1 Form of Sale and Servicing Agreement. (Owner Trust, Auto
Loan Receivables)**
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in
Exhibits 5.1 and 8.1)**
24.1 Powers of Attorney of directors and officers of ACE
Securities Corp. (included in the signature pages to this
Registration Statement)
25.1 Statement of Eligibility and Qualification of Indenture
Trustee**
+ Incorporated herein by reference to the Registrant's Registration Statement
on Form S-3 (Reg. No. 333-56213), filed with the Commission on June 5,
1999.
** To be filed by amendment.
