<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1999
REGISTRATION NO. 333-84129
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HOUSEHOLD AUTO RECEIVABLES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 36-4220459
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
</TABLE>
--------------------------
1111 TOWN CENTER DRIVE
LAS VEGAS, NEVADA 89134
(Address of principal executive offices of Registrant)
--------------------------
PATRICK D. SCHWARTZ, ESQ.
ASSOCIATE GENERAL COUNSEL AND ASSISTANT SECRETARY
HOUSEHOLD INTERNATIONAL, INC.
2700 SANDERS ROAD
PROSPECT HEIGHTS, ILLINOIS 60070
(847) 564-6301
(Name, Address, telephone number, including area code, of agent for service)
--------------------------
CHRISTOPHER J. DI ANGELO, ESQ.
DEWEY BALLANTINE LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 259-8000
--------------------------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement as determined by
market conditions.
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, 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 number of the earlier effective registration
statement for the same offering. / /
If this Form is filed as a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(1)(2)
<S> <C> <C> <C> <C>
Auto Receivables Asset Backed
Securities....................... $3,000,000,000 100% $3,000,000,000 $792,000
</TABLE>
(1) Pursuant to Rule 457(a) the filing fee has been calculated based upon a bona
fide estimate of the maximum offering price for the securities.
(2) On July 29, 1999 and December 21, 1999 wire transfers were sent to the
Commission in the amount of $278 and $791,722 respectively.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(
a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(
a) MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1999)
HOUSEHOLD AUTOMOTIVE TRUST
SERIES NOTES
HOUSEHOLD AUTO RECEIVABLES CORPORATION, SELLER
HOUSEHOLD FINANCE CORPORATION, SERVICER
------------------
THE TRUST WILL ISSUE-
- classes of notes which are to be offered by this prospectus supplement;
and
- Certain interests in the trust which are to be held by the seller are not
offered by this prospectus supplement but serve as credit support to the
notes offered by this prospectus supplement.
THE NOTES-
- Are backed by a pledge of assets of the trust. The assets of the trust
securing the notes will include a pool of non-prime retail installment sales
contracts secured by new and used automobiles, light duty trucks and vans;
- Receive monthly distributions on the [17th] day of each month beginning on
;
- Represent debt obligations of Household Automotive Trust ; and
- Currently have no trading market.
CREDIT ENHANCEMENT FOR THE NOTES WILL CONSIST OF-
- A reserve account that can be used to pay shortfalls in payments on the
notes;
- Overcollateralization resulting from the excess of principal value of the
initial auto loans over the aggregate principal amount of the notes; and
- [A financial guarantee insurance policy issued by [Name of
Insurer]unconditionally or irrevocably guaranteeing timely payment of
interest and principal.]
- --------------------------------------------------------------------------------
WE SUGGEST THAT YOU READ THE SECTION ENTITLED "RISK FACTORS" ON PAGE 4 OF THE
PROSPECTUS AND ON PAGE 10 OF THIS PROSPECTUS SUPPLEMENT AND CONSIDER THESE
FACTORS BEFORE MAKING A DECISION TO INVEST IN THESE SECURITIES.
These notes are auto receivable asset-backed notes and are secured only by the
assets of the trust. The notes are not obligations of any other person or
entity.
Neither these notes nor the auto loans will be insured or guaranteed by any
governmental agency or instrumentality.
Retain this prospectus supplement for future reference. This prospectus
supplement may not be used to consummate sales of securities unless accompanied
by the prospectus.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
FINAL INITIAL PUBLIC
ISSUANCE INTEREST SCHEDULED OFFERING UNDERWRITING PROCEEDS
AMOUNT RATE PAYMENT DATE PRICE(1) DISCOUNT TO SELLER(2)
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Class A-1 Notes
- ---------------------------------------------------------------------------------------------------------------------
Class A-2 Notes
- ---------------------------------------------------------------------------------------------------------------------
Class A-3 Notes
- ---------------------------------------------------------------------------------------------------------------------
Class A-4 Notes
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from .
(2) Before expenses, estimated to be .
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[UNDERWRITERS]
The date of this Prospectus Supplement is
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of 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 SEC at Judiciary Plaza, 450 Fifth
Street, NW, Room 1024, Washington, DC 20549. You can also copy and inspect these
reports, proxy statements and other information at the following regional
offices of the SEC:
<TABLE>
<S> <C>
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, New York 10048 Chicago, Illinois 60661
</TABLE>
All reports we file with the SEC after the date of this prospectus supplement
but before the offering of the notes ends are considered to be part of this
prospectus supplement. Information contained in those reports updates and
supercedes the information in this prospectus supplement. We will provide you
with copies of these reports, at no cost, if you write to: Household Finance
Corporation, 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention:
Secretary.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
The consolidated financial statements of [Name of Insurer] are included in, or
are exhibits to, the following documents which have been filed with the SEC:
(a) Annual Report on Form 10-K for the year ended , and
(b) Quarterly Report on form 10-Q for the period ended .
We will provide you with copies of these financial statements, at no cost, if
you write us at: Household Financial Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Secretary.
This prospectus supplement supplements a prospectus that is part of a
registration statement filed by the seller with the SEC (Registration
No. 333- ).
You should rely only on the information provided in this prospectus supplement
and the accompanying prospectus. We have not authorized anyone else to provide
you with different information. You should not assume that the information in
this prospectus supplement or in the prospectus is accurate as of any date other
than the date on the cover page of this prospectus supplement.
You can find definitions of the technical cashflow terms used in this prospectus
supplement in the Glossary beginning on page S-43 in this prospectus supplement.
We include cross-references in this prospectus supplement to captions in these
materials where you can find further discussions. The following table of
contents provides the pages on which these captions are located.
In this prospectus, the terms "we", "us" and "our" refer to Household Auto
Receivables Corporation.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Where You Can Find More Information... S-2
Summary of the Terms of the Notes..... S-4
Risk Factors.......................... S-8
Use of Proceeds....................... S-10
The Trust............................. S-10
The Trust Assets...................... S-10
Yield and Prepayment Considerations... S-18
[The Insurer]......................... S-22
Description of the Notes.............. S-24
[The Policy].......................... S-27
Material Federal Income Tax
Consequences........................ S-29
State and Local Tax Considerations.... S-31
ERISA Considerations.................. S-31
Underwriting.......................... S-32
Legal Matters......................... S-32
Glossary.............................. S-33
Report Of Independent Public
Accountants......................... F-1
</TABLE>
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE NOTES
- - This summary highlights select information from this prospectus supplement and
does not contain all of the information that you need to consider in making
your investment decision. This summary provides general, simplified
descriptions of matters which, in some cases, are highly technical and
complex. To understand all of the terms of the offering of the notes,
carefully read both this entire prospectus supplement and the attached
prospectus each in its entirety.
- - This summary provides an overview of calculations, cash flows and other
information to aid your understanding. To understand all of the terms of the
offering, we suggest that you carefully read this entire document and, in
particular, the full description of these calculations, cash flows and other
information in this prospectus supplement.
SERIES NOTES
The trust will issue the notes offered by this prospectus in book-entry form
through the facilities of the Depository Trust Company.
TRUST
Household Automotive Trust . The trust will be a Delaware business trust
formed under the laws of the State of Delaware. The address of the trust is in
care of [Name of Owner Trustee] at [address].
SELLER
Household Auto Receivables Corporation. The seller has purchased the auto loans
from Household Automotive Finance Corporation and will sell them to the trust.
The seller will also own interests in the trust. The address of the seller is
1111 Town Center Drive, Las Vegas, Nevada 89134.
SERVICER
Household Finance Corporation. The servicer is responsible for servicing the
auto loans and has subcontracted with the subservicer to perform the servicing
responsibilities. The address of the servicer is 2700 Sanders Road, Prospect
Heights, Illinois 60070.
SUBSERVICER
Household Automotive Finance Corporation. The auto loans were originated by
automobile dealers that have no affiliation with the subservicer and were
purchased by the subservicer under its various financing programs. The
subservicer will service the auto loans in accordance with policies established
in consultation with the servicer. The address of the subservicer is
11452 El Camino Real, San Diego, California 92130.
[INSURER]
[Name of Insurer], a [New York] Financial Guaranty Insurance Company.
OWNER TRUSTEE
[Name of the Owner Trustee]. The address of the owner trustee is [address].
INDENTURE TRUSTEE
[Name of Indenture Trustee]. The address of the indenture trustee is [address].
THE TRUST ASSETS
The trust will pledge assets to secure payments on the notes. The pledged assets
will include a pool of auto loans, cash on deposit in a collection account and a
reserve account and other assets as described in detail elsewhere in this
prospectus supplement.
AUTO LOANS
- - On the closing date, the seller will assign to the trust a pool of auto loans.
[On or before , the seller will assign additional auto loans to the
trust. The trust will purchase these auto loans from monies in the pre-funding
account.]
On the closing date [or the subsequent transfer date] the trust will pledge the
auto loans to the indenture trustee as collateral for the notes. As of
the aggregate PRINCIPAL BALANCE of the pool of auto loans pledged as
collateral was $ . Payments
S-4
<PAGE>
on the notes will be made from payments on the pledged auto loans and payments
received under applicable insurance policies.
- - As of :
-- The weighted average contract rate of the auto loans is approximately
%;
-- The weighted average remaining term of the auto loans, that is the period
starting after the cut-off date and including each auto loan's scheduled
maturity, is approximately months; and
-- The weighted average original term of the auto loans is approximately
months.
- - The auto loans will consist of non-prime retail installment sales contracts
secured by new and used automobiles, light duty trucks and vans which were
purchased from automobile dealers under the subservicer's financing program.
The subservicers finance programs target automobile purchasers with below
average credit who have difficulty obtaining credit from traditional lending
sources.
- - No auto loans will be more than [30] days delinquent as of .
- - Each auto loan requires the borrower to make fixed, level payments that will
fully pay the balance of the amount borrowed by its maturity date.
- - We will pay the notes from payments on the auto loans and amounts recovered
when financed vehicles are repossessed and sold, after deducting expenses.
CUT-OFF DATE
The opening of business on .
PAYMENT DATE
The [17th] day of each month if the [seventeenth] is a business day. If the
[seventeenth] is not a business day, the payment date will be the following day
that is a business day. The first payment date will be .
DETERMINATION DATE
The earliest of the fifth calendar day or the third business day before a
payment date. The servicer will calculate and instruct the trust and the
indenture trustee as to the amounts to be paid on the notes on the next payment
date.
RECORD DATE
The last business day preceding a payment date unless the notes are no longer
book-entry notes. If the notes are definitive notes, the record date is the last
business day of the month preceding a payment date.
CLOSING DATE
On or about .
DENOMINATIONS
The trust will issue the notes in minimum denominations of $100,000 and integral
multiples of $1,000. One note of each class may be issued in another
denomination.
PRIORITY OF DISTRIBUTIONS
Each month, the trust will distribute the amounts received on the auto loans and
any other collections available as property of the trust as follows:
INTEREST DISTRIBUTIONS
On each payment date, interest that accrued during the interest accrual period
is payable at the applicable note interest rate. The note rate for each class is
listed on the cover page of this prospectus. Interest on the Class A-1 and
Class A-2 Notes will be calculated on the basis of a 360-day year and the actual
number of days elapsed in the interest accrual period. Interest on the
Class A-3 and Class A-4 Notes will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Amounts paid to holders of the notes will be shared by the Class A-1,
Class A-2, Class A-3 and Class A-4 noteholders in proportion to the interest due
on each class.
PRINCIPAL DISTRIBUTIONS
On each payment date, the trust will pay principal in reduction of the
outstanding principal balance of the notes.
Principal payments will be an amount generally equal to a percentage of the
decrease in the principal value of the auto loans between the first and last day
of a calendar month. These principal payments will be paid
S-5
<PAGE>
to the Class A-1, Class A-2, Class A-3 and Class A-4 Notes, sequentially,
beginning with the Class A-1 Notes, in each case, until the respective
outstanding principal amount of each class is paid in full.
OVERCOLLATERALIZATION
The overcollateralization amount is the amount by which the POOL BALANCE exceeds
the outstanding principal balance of the notes. The overcollateralization amount
will be available to absorb any losses that noteholders would otherwise incur.
As of the closing date, the overcollateralization will be equal to $ or
of the POOL BALANCE as of .
RESERVE ACCOUNT
The owner trustee will hold a reserve account. An initial deposit of
$ will be placed in the reserve account on the closing date. The servicer
will deposit collections received from the auto loans into the reserve account
on each payment date after interest and principal payments on the notes and
payment of certain fees and expenses have been made.
The servicer will continue to make such deposits on each payment date until the
balance in the reserve account is the lesser of:
(i) greater of
(a) [ ]% of the PRINCIPAL BALANCE of the auto loans at the end of last
day of the calendar month preceding the current payment date,
and
(b) $ ,
and
(ii) the outstanding principal amount of the notes.
We will use funds in the reserve account to pay shortfalls in amounts due to the
noteholders and if Household Finance Corporation is no longer the servicer, to
pay any fees due to the servicer.
[PRE-FUNDING FEATURE]
- - [The trustee will hold $ of the proceeds of the notes in a pre-funding
account which the trust will use to purchase additional auto loans. The
subservicer will acquire these additional auto loans under the same purchase
criteria as the auto loans in the trust on the closing date.
- - The trust will purchase these additional auto loans on or before .
OPTIONAL REDEMPTION
On any payment date when the outstanding principal balance of the notes is less
than or equal to $ , which is 10% of the original principal balance of the
notes as of , the servicer or the seller may purchase the auto loans
from the trust. This will redeem the notes. If redemption occurs, we will pay
you a final distribution equaling the entire unpaid principal balance of the
notes plus any accrued and unpaid interest.
SCHEDULED MATURITY DATES
If the notes have not already been paid in full, we will pay the outstanding
principal amount of the notes in full on the following payment dates:
<TABLE>
<CAPTION>
------------------
<S> <C>
Class A-1.................
Class A-2.................
Class A-3.................
Class A-4.................
</TABLE>
Final payment on the notes will probably be earlier than the scheduled maturity
date stated above for each class of notes.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes:
- - Dewey Ballantine LLP, special tax counsel to the trust and counsel to the
underwriters, is of the opinion that the notes will be treated as debt and the
trust will not be treated as an association or publicly traded partnership
taxable as a corporation. By your acceptance of a note, you agree to treat the
notes as debt.
- - Interest on the notes will be taxable as ordinary income when received by a
holder on the cash method of accounting and when accrued by a holder on the
accrual method of accounting.
- - Dewey Ballantine LLP has prepared the discussion under "Material Federal
Income Tax Consequences" in this prospectus supplement and on the prospectus
S-6
<PAGE>
and is of the opinion that the discussion accurately states all material
federal income tax consequences of the purchase, ownership and disposition of
the notes to their original purchaser.
ERISA CONSIDERATIONS
Subject to the important considerations described under "ERISA Considerations"
in this prospectus supplement, pension, profit-sharing and other employee
benefit plans may purchase notes. You should consult with your counsel regarding
the applicability of the provisions of the Employee Retirement Income Security
Act of 1974, as amended, before purchasing a note.
RATINGS
- - The trust will not issue the notes unless they have been assigned the ratings
stated below:
- - You should know that the ratings could be lowered, qualified or withdrawn by
the rating agencies.
<TABLE>
<CAPTION>
-------------------
<S> <C> <C>
RATING
-------------------
CLASS [AGENCY 1] [AGENCY 2]
- ------------------------ -------- --------
A-1.....................
A-2.....................
A-3.....................
A-4.....................
</TABLE>
S-7
<PAGE>
RISK FACTORS
WE RECOMMEND YOU CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO INVEST IN THE NOTES.
GEOGRAPHIC CONCENTRATION OF AUTO LOANS MAY ADVERSELY AFFECT THE NOTES.
Adverse economic conditions or other factors particularly affecting any state or
region where a high concentration of auto loans is located could adversely
affect the notes. As of , approximately % and % of the auto
loans (based on the PRINCIPAL BALANCE and mailing address of the borrowers) were
located in and , respectively. The location of the auto
loans by state, based upon borrower address, is set out in the table beginning
on page 19 of this prospectus supplement.
AN EVENT OF DEFAULT UNDER THE INDENTURE MAY CAUSE PREPAYMENT OR CHANGES IN THE
PRIORITY OF PAYMENT.
If an event of default occurs, the indenture trustee may, or if so directed by
noteholders of two-thirds of the outstanding principal of the notes, will, order
the trust to immediately repay the notes. If this occurs, the notes of all
classes will first, receive distributions of interest, and second, distributions
of principal.
The following are events of default under the indenture:
- failure to pay principal or interest within five days of the date a
payment was due;
- breaches under the agreements governing the series notes; and
- the trust's insolvency or bankruptcy.
[THE COMPANY MAY BE UNABLE TO ORIGINATE ENOUGH AUTO LOANS TO USE ALL MONEYS IN
THE PRE-FUNDING ACCOUNT AND THEREFORE YOU MAY BE EXPOSED TO REINVESTMENT
RISK].
[The ability of the subservicer to 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 the subservicer does not originate sufficient additional auto loans, the
money remaining in the pre-funding account as of will not be used to
acquire additional loans and a mandatory redemption of a portion of the notes
could result.
If a mandatory redemption occurs, you will receive a principal prepayment. You
will bear the risk of reinvesting any prepayment.]
[RATINGS ON NOTES ARE DEPENDENT UPON THE INSURER'S CREDITWORTHINESS.]
[The ratings of the notes will depend primarily on the creditworthiness of the
insurer as the provider of the financial guarantee insurance policy relating to
the notes. There is a risk that if the insurer's financial strength ratings are
reduced, the rating agencies may reduce the notes' ratings.]
S-8
<PAGE>
YEAR 2000 COMPLIANCE MAY CAUSE DELAYS IN PAYMENTS TO YOU.
The servicer and subservicer are in the process of addressing issues arising
from the year 2000 issue that could impact the timely payment of principal and
interest on the notes. The year 2000 issue is the result of prior computer
programs being written using two digits to define the applicable year. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Any such occurrence could result in
major computer system failure or miscalculations. Although the servicer and
subservicer reasonably believe that their servicing systems will be year 2000
compliant prior to the year 2000, they are presently engaged in various
procedures to determine if their computer systems and software, and those of
their material suppliers, customers and agents will be year 2000 compliant.
In the event that the servicer or the subservicer, or any of their suppliers,
customers or agents do not successfully and timely achieve year 2000 compliance,
the servicer's performance of its obligations under the sale and servicing
agreement could be adversely affected. This could result in delays in processing
payments on the auto loans and could cause a delay in payments to you.
S-9
<PAGE>
USE OF PROCEEDS
The net proceeds received by the trust from the sale of the notes will be used
to pay Household Auto Receivables Corporation the purchase price for the auto
loans, [to fund the initial deposit in the reserve account], [to deposit the
pre-funded amount into the pre-funding account;] and .
THE TRUST
GENERAL
The trust, Household Automotive Trust , will be a Delaware business trust
formed under the laws of the State of Delaware under a TRUST AGREEMENT, dated as
of between the seller and the owner trustee for the purpose of
engaging in the transactions described in this prospectus supplement. The trust
will not engage in any activity other than (1) acquiring, holding and managing
the auto loans and the other assets of the trust, (2) issuing notes in private
and public offerings, including the issuance of the notes, (3) making payments
on the notes and (4) engaging in other activities in connection with the notes.
The trust's principal offices are in [Wilmington], Delaware, in care of [Name of
Owner Trustee] as owner trustee, at the address listed below under "-The Owner
Trustee."
THE OWNER TRUSTEE
[Name of Owner Trustee], which will be the owner trustee under the trust
agreement, is a Delaware [banking corporation] and its principal offices are
located at [address]. 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 as stated in the trust agreement and the sale
and servicing agreement, to be dated as of , among the trust, the
seller, the servicer and the indenture trustee.
THE INDENTURE TRUSTEE
[Name of the Indenture Trustee] will be the indenture trustee under an
indenture, dated as of , among the trust and [Name of the Indenture
Trustee], as indenture trustee. [Name of the Indenture Trustee] is a [New York]
banking corporation, the principal offices of which are located at [address].
THE TRUST ASSETS
GENERAL
The trust assets consist of the following:
- the auto loans;
- all amounts paid or payable under the auto loans after the [initial or
subsequent] cut-off date;
- security interests in the financed vehicles granted by the borrowers;
- an assignment of the subservicer's rights against automobile dealers under
agreements between the subservicer and the dealers;
- an assignment of the right to receive proceeds from claims on loss,
physical damage, credit life, disability, theft, mechanical breakdown, or
similar insurance policies covering the financed vehicles or the
borrowers;
- all funds on deposit from time to time in the collection account [, the
pre-funding account] and the reserve account;
S-10
<PAGE>
- an assignment of all rights and benefits under the receivables purchase
agreement which consists of a receivables purchase agreement, dated as of
between the seller and the subservicer and all supplements thereto;
- all documents related to the auto loans, including the original contracts,
documents evidencing insurance, original credit applications and original
certificates of title or copies of applications therefor;
- a share of the preferred stock of the seller; and
- all proceeds from the trust assets.
The auto loans were originated by dealers in accordance with the subservicer's
requirements, have been assigned by the dealers to the subservicer, and evidence
the indirect financing made available to the borrowers by the subservicer.
Dealer agreements may provide for repurchase or recourse against the dealer in
the event of a breach of a representation or warranty by the dealer.
All of the auto loans were sold by the subservicer to the seller under the
receivables purchase agreement and by the seller to the trust under the sale and
servicing agreement. The auto loans were originated by dealers and purchased by
the subservicer in the ordinary course of the subservicer's business in
accordance with its finance programs and underwriting standards.
The files relating to the auto loans will be held by the subservicer as
custodian for the indenture trustee.
ELIGIBILITY CRITERIA OF THE [INITIAL] AUTO LOANS
The auto loans were selected according to several criteria.
Each auto loan:
- was originated by a dealer located in the United States to a borrower who
was a resident of the United States with a mailing address in the United
States,
- has a contractual annual percentage rate, or APR, of not less than
[ ]% or more than [ ]%,
- provides for level monthly payments which provide interest at the APR and
fully amortize the original PRINCIPAL BALANCE over an original term no
greater than [72] months,
- is not more than [30] days past due as of the cut-off date,
- is attributable to the purchase of a new or used automobile, light duty
truck or van,
- as of the cut-off date has a remaining term of not more than [72] months
and
- had an original PRINCIPAL BALANCE of at least $[3,000] and not more than
$[30,000]. No selection procedures adverse to the noteholders were
utilized in selecting the auto loans to be conveyed to the trust.
[ADDITIONAL AUTO LOANS]
[During the funding period, the seller will purchase the subsequent auto loans
from the subservicer and then sell them to the trust. The seller will sell the
subsequent auto loans to the trust on the subsequent transfer dates. The trust
will use the funds in the pre-funding account to purchase the subsequent auto
loans.
The trust's obligation to purchase the subsequent auto loans is subject to the
following conditions:
(a) as of each loan's subsequent cut-off date, each subsequent auto loan
and/or subsequent financed vehicle must satisfy the auto loan eligibility
criteria specified under "Eligibility Criteria" above regarding the
initial auto loans;
(b) [the insurer, if there is no insurer default, has approved the
subsequent auto loans transfer to the trust];
S-11
<PAGE>
(c) Neither the subservicer nor the seller has selected the subsequent auto
loans in a manner that either of them believes is adverse to the
interests of [the insurer or] the noteholders;
(d) The subservicer and the seller will deliver certain opinions of counsel
regarding the validity of the subsequent auto loan transfer; and
(e) [Name of Rating Agency] must confirm that the ratings on the notes have
not been withdrawn or reduced because of the subsequent auto loans
transfer to the trust.
Because the subsequent auto loans may be originated after the initial auto
loans, the auto loan pool's characteristics after the transfer of subsequent
auto loans to the pool may vary from the initial pool.
In addition, the trust's obligation to purchase the subsequent auto loans is
subject to the condition that the auto loans in the trust, including the
subsequent auto loans to be transferred, meet the following criteria:
(a) the auto loans weighted average annual percentage rate is not less than
%;
(b) the auto loan's weighted average remaining term on the subsequent
cut-off date is not greater than months; and
(c) not more than % of the obligors on the auto loans reside in and .
The criteria in clauses (a) and (b) will be based:
- on the characteristics of the initial auto loans on the initial cut-off
date and
- the auto loans, including the subsequent auto loans, on the related
subsequent cut-off date.
The criteria in clause (c) will be based on the obligor's mailing addresses on:
- the initial auto loans on the initial cut-off date and
- the subsequent auto loans on the related subsequent cut-off dates.
Except for the above described criteria, there are no required characteristics
for the subsequent auto loans. Therefore, following the transfer of subsequent
auto loans to the trust, the aggregate characteristics of the entire pool of
auto loans included in the trust may vary in the following respects:
- composition of the auto loans;
- geographic distribution;
- distribution by remaining PRINCIPAL BALANCE;
- distribution by APR;
- distribution by remaining term; and
- distribution of the auto loans secured by new and used vehicles.]
S-12
<PAGE>
COMPOSITION OF THE [INITIAL]AUTO LOANS
Presented below is a description of the material characteristics of the auto
loans as of the cut-off date:
<TABLE>
<CAPTION>
--------------
<S> <C>
TOTAL POOL OF
THE
[INITIAL] AUTO
LOANS
-------
Original pool balance.......................................
Number of auto loans........................................
Average principal balance(1)................................
Range of principal balances...............................
Average original principal balance(2).......................
Range of original principal balance.......................
Weighted average APR(3).....................................
Range of original APRs....................................
Weighted average original term(3)...........................
Range of original terms...................................
Weighted average remaining term(3)..........................
Range of remaining terms..................................
Weighted average months of seasoning(3).....................
Range of months of seasoning..............................
Number of auto loans more than 30 days delinquent...........
</TABLE>
(1) Pool balance as of the cut-off date divided by total number of auto loans.
(2) Aggregate amount financed divided by total number of auto loans.
(3) Weighted by principal balance as of the cut-off date.
S-13
<PAGE>
COMPOSITION OF THE [INITIAL] AUTO LOANS BY PRINCIPAL BALANCE
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF % OF POOL BY
AUTO AUTO PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE LOANS LOANS OUTSTANDING BALANCE
- ----------------------------------------------- ------ --- ------- ---
$ 3,000 to 4,000............................... % $ %
4,001 to 5,000...............................
5,001 to 6,000...............................
6,001 to 7,000...............................
7,001 to 8,000...............................
8,001 to 9,000...............................
9,001 to 10,000..............................
10,001 to 11,000..............................
11,001 to 12,000..............................
12,001 to 13,000..............................
13,001 to 14,000..............................
14,001 to 15,000..............................
15,001 to 16,000..............................
16,001 to 17,000..............................
17,001 to 18,000..............................
18,001 to 19,000..............................
19,001 to 20,000..............................
20,001 to 21,000..............................
21,001 to 22,000..............................
22,001 to 23,000..............................
23,001 to 24,000..............................
24,001 to 25,000..............................
25,001 to 26,000..............................
26,001 to 27,000..............................
27,001 to 28,000..............................
28,001 to 29,000..............................
29,001 to 30,000..............................
------ --- ------- ---
Total........................................ % $ %
====== === ======= ===
</TABLE>
S-14
<PAGE>
COMPOSITION BY APR OF THE [INITIAL] AUTO LOANS
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF % OF POOL BY
AUTO AUTO PRINCIPAL PRINCIPAL
APR RANGE LOANS LOANS OUTSTANDING BALANCE
- ----------------------------------------------- ------- --- ------- ---
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.................................
20.00 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.................................
26.00 to 27.00.................................
------- --- ------- ---
Total........................................ % $ %
======= === ======= ===
</TABLE>
COMPOSITION [OF THE INITIAL AUTO LOANS] BY INTEREST ACCRUAL METHOD
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER % OF % OF POOL BY
OF AUTO AUTO PRINCIPAL PRINCIPAL
INTEREST ACCRUAL METHOD LOANS LOANS OUTSTANDING OUTSTANDING
- -------------------------------------------- ------- --- ------- ---
Actuarial................................... % $ %
Simple Interest.............................
------- --- ------- ---
Total..................................... % $ %
======= === ======= ===
</TABLE>
S-15
<PAGE>
COMPOSITION OF THE [INITIAL] AUTO LOANS] BY STATE OF RESIDENCE
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C> <C> <C> <C>
NUMBER % OF % OF POOL BY
OF AUTO AUTO PRINCIPAL PRINCIPAL
LOCATION OF MAILING ADDRESS OF BORROWER LOANS LOANS OUTSTANDING BALANCE
- ----------------------------------------------- ------ ------ ------- ------
Alabama........................................ % $ %
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..................................
Wisconsin......................................
Wyoming........................................
------ ------ ------- ------
Total...................................... % $ %
====== ====== ======= ======
</TABLE>
S-16
<PAGE>
COMPOSITION BY REMAINING TERM OF THE [INITIAL] AUTO LOANS
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C> <C> <C> <C>
NUMBER % OF % OF POOL BY
OF AUTO AUTO PRINCIPAL PRINCIPAL
REMAINING TERM RANGE (IN MONTHS) LOANS LOANS OUTSTANDING BALANCE
- ----------------------------------------------- ------ ------ ------- ------
18 to 23....................................... % $ %
24 to 29.......................................
30 to 35.......................................
36 to 41.......................................
42 to 47.......................................
48 to 53.......................................
54 to 59.......................................
60 to 65.......................................
66 to 71.......................................
72.............................................
------ ------ ------- ------
Total...................................... % $ %
====== ====== ======= ======
</TABLE>
COMPOSITION OF THE [INITIAL] AUTO LOANS BY TYPE OF FINANCED VEHICLE
<TABLE>
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER % OF % OF POOL BY
OF AUTO AUTO PRINCIPAL PRINCIPAL
TYPE OF FINANCING LOANS LOANS OUTSTANDING OUTSTANDING
- -------------------------------------------- ------ ------ ------- ------
New......................................... % $ %
Used........................................
------ ------ ------- ------
Total................................... % $ %
====== ====== ======= ======
</TABLE>
THE RESERVE ACCOUNT
An initial deposit of $ , which is [ ]% of the POOL BALANCE as of the
cut-off date, will be placed in the reserve account. The reserve account will be
increased on each payment date by the deposit in the reserve account of amounts
remaining after payments to noteholders and any fees until the amount on deposit
in the reserve account equals the TARGETED RESERVE ACCOUNT BALANCE. Amounts in
the reserve account on any payment date, after giving effect to all withdrawals
from the reserve account in excess of the Targeted Reserve Account Balance that
payment date will be paid, first to the servicer for any servicing fees and
supplemental servicing fees then due, and any remainder to the seller.
Funds will be withdrawn from the reserve account on each payment date to pay any
servicing fee then payable to a servicer other than Household Finance
Corporation, and to make required distributions on the notes to the extent funds
are not otherwise available. See "Description of the Notes--Payment Priorities".
THE PREFERRED STOCK
The trust assets include one share of preferred stock of the seller. The
preferred stock has a par value of $1.00 and is designated the Class SV
Preferred Stock. Issuance of the preferred stock to the trust is intended to
prevent the seller from instituting bankruptcy and will have no impact on the
bankruptcy remoteness of the trust. Under the Articles of Incorporation of the
seller, the rights of the holders of the preferred stock are limited to
(a) voting in the event the seller desires to institute proceedings to be
adjudicated insolvent, consent to the institution of any bankruptcy or
insolvency case or petition, make an assignment for the benefit of creditors, or
admit in writing its inability to pay its debts as they become due, and
(b) receiving $1.00 upon liquidation of the seller. The unanimous affirmative
vote of the holders of the preferred stock is required to approve any of the
seller's bankruptcy initiatives. Holders of the
S-17
<PAGE>
preferred stock of the seller have no other rights, including the right to
receive dividends or to vote on any other matter.
Under the trust's pledge of its interest in the trust assets, the indenture
trustee has the exclusive authority to vote the interest of the trust in the
preferred stock. In the indenture, the indenture trustee covenants that it will
not consent to any of the seller's bankruptcy initiatives. Because unanimous
consent of the holders of the preferred stock is required to approve any of the
seller's bankruptcy initiatives, the holders of the notes will be able to
unilaterally prevent the implementation of the seller's bankruptcy initiatives.
YIELD AND PREPAYMENT CONSIDERATIONS
All the auto loans are prepayable at any time. If prepayments are received on
the auto loans, the actual weighted average life of the auto loans may be
shorter than the scheduled weighted average life, since the scheduled weighted
average life assumes that payments will be made as scheduled, and that no
prepayments occur. For this purpose, the term prepayments also includes
liquidations due to default, as well as receipt of proceeds from credit life,
credit disability, and casualty insurance policies. Weighted average life means
the average amount of time during which each dollar of principal of an auto loan
is outstanding.
The rate of prepayments on the auto loans may be influenced by a variety of
economic, social, and other factors, including the fact that a borrower may not
sell or transfer a financed vehicle without the consent of the subservicer. The
subservicer believes that the actual rate of prepayments will result in a
substantially shorter weighted average life than the scheduled weighted average
life of the auto loans. If a note is purchased at a premium, and the actual rate
of prepayments exceed the rate of prepayments anticipated at the time the note
was purchased, the actual yield to maturity of the note will be less than the
yield anticipated at the time of purchase. If a note is purchased at a discount,
and the rate of prepayments is less than the rate of prepayments anticipated at
the time the note was purchased, the actual yield to maturity will be less than
the yield anticipated at the time of purchase. Any reinvestment risks, which is
the risk that a noteholder will not be able to reinvest amounts received in
payment on the notes at interest rates that are greater than or equal to the
note rate, resulting from a faster or slower incidence of prepayment of auto
loans will be borne by the noteholders.
The rate of payment of principal of each class of notes will depend on the rate
of payment, including prepayments, of the PRINCIPAL BALANCE of the auto loans.
As a result, final payment of each class of notes could occur significantly
earlier than the final scheduled payment date for the class.
Prepayments on auto loans can be measured relative to a prepayment standard or
model. The model used in this prospectus supplement, the absolute prepayment
model, or ABS, represents an assumed rate of prepayment each month relative to
the original number of auto loans in a pool. ABS further assumes that all the
auto loans are the same size and amortize at the same rate and that each auto
loan in each month of its life will either be paid as scheduled or be prepaid in
full. For example, in a pool of auto loans originally containing 10,000 auto
loans, a 1% ABS rate means that 100 auto loans 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 auto loans.
The table captioned "Percent of Initial Note Principal Balance at Various ABS
Percentages", also called the ABS Table, has been prepared on the basis of the
following assumptions:
- the auto loans prepay in full at the specified constant percentage of ABS
monthly, with no defaults, losses or repurchases;
- each scheduled monthly payment on the auto loans is made on the last day
of each month and each month has 30 days;
- the initial principal amount of each class of notes are as stated on the
cover page;
- interest accrues during each interest period at the following assumed
coupon rates: Class A-1 Notes, %; Class A-2 Notes, %; Class A-3
Notes, %; and Class A-4 Notes, %;
S-18
<PAGE>
- payments on the notes are made on the th day of each month whether or not
a business day;
- the notes are purchased on the closing date;
- [the entire pre-funded amount is used to purchase subsequent auto loans;]
- the scheduled monthly payment for each auto loan has been calculated on
the basis of the assumed characteristics presented in the table below, and
each auto loan will amortize in amounts sufficient to repay the PRINCIPAL
BALANCE of the auto loans by its indicated remaining term to maturity; and
- the seller or the servicer exercises its clean-up call redemption.
The ABS Table also assumes that (1) the auto loans have been aggregated into
hypothetical pools with all of the auto loans within each pool having the
following characteristics, and (2) that the level of scheduled monthly payment
for each of the pools, which is based on its aggregate PRINCIPAL BALANCE, gross
APR, original number of scheduled payments and remaining number of scheduled
payments as of the cut-off date, will be calculated so that each pool will be
fully amortized by the end of its remaining term to maturity.
<TABLE>
<CAPTION>
---------------------------------------------------
<S> <C> <C> <C> <C>
REMAINING
AGGREGATE TERM SEASONING
PRINCIPAL TO MATURITY (IN
POOL BALANCE APR (IN MONTHS) MONTHS)
- ---------------------------------------------- -------- ----- --- ---
1............................................. $ %
2.............................................
3.............................................
4.............................................
5.............................................
</TABLE>
The ABS Table indicates, based on the assumptions described above, the
percentages of the initial principal amount of each class of 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 auto loans will differ from the
assumptions used in constructing the ABS Table. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the auto loans will prepay at a constant level
of ABS until maturity or that all of the auto loans will prepay at the same
level of ABS. Moreover, the diverse terms of auto loans could produce slower or
faster principal distributions than indicated in the ABS Table at the various
constant percentages of ABS specified, even if the original and remaining terms
to maturity of the auto loans are as assumed. Any difference between the
assumptions and the actual characteristics and performance of the auto loans,
including actual prepayment experience or losses, will affect the percentages of
initial balances outstanding over time and the weighted average lives of each
class of notes.
S-19
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A-1 NOTES CLASS A-2 NOTES CLASS A-3 NOTES
----------------------------------------- ----------------------------------------- -------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5% 0.5% 1.0%
- --------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Weighted Average Life
in Years(2)........
<CAPTION>
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A-4 NOTES
-----------------------------------------
------------------- -----------------------------------------
PAYMENT DATE 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- --------------------- -------- -------- -------- -------- -------- --------
Weighted Average Life
in Years(2)........
</TABLE>
(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 payment date, (2) adding the results
and (3) dividing the sum by the initial principal amount of the notes of
that class.
S-20
<PAGE>
DELINQUENCY AND LOSS INFORMATION OF THE SUBSERVICER
Presented below is information concerning the subservicer's delinquency and loss
experience for its servicing portfolio of auto loans for new and used
automobiles, light duty trucks and vans originated or acquired under its finance
programs. Delinquency is recognized on a contractual basis only. Installment
payments must equal or exceed 90% of the scheduled payment due for a contract to
be considered current.
The information has not been adjusted to eliminate the effect of the significant
growth in the size of the subservicer's portfolio or changes to its underwriting
or charge-off policies during the periods shown. In response to competitive and
market conditions, the subservicer's underwriting policies have changed in
various respects over the periods presented. The subservicer does not believe
these changes had a material impact on the historical delinquency and loss
experience presented below.
In the fourth quarter of 1997 the subservicer began charging off non-securitized
auto loans at the earlier of: (1) the date an auto loan becomes 150 days
delinquent and (2) 90 days after a vehicle has been repossessed if it remains
unsold. Prior to that change, and continuing for all auto loans securitized
prior to 1998, auto loans were charged off (1) at 120 days delinquent and
(2) 60 days after a vehicle was repossessed if it remained unsold. The impact of
these changes did not have a material impact on the delinquency and loss
experience as reported for years-ended 1997 and 1998 and for the months
ended , 1999. It is also not expected that the change in the charge-off
policy will have a material impact on the delinquency or loss rates in the
future.
If adjustments were made for the growth of the portfolio, loss and delinquency
as percentages of auto loans serviced for each period would be higher than those
shown. The tables below present all auto loan data for contracts purchased by
the subservicer, including auto loans managed in states which are not
represented in the pool consisting of the auto loans. Following the merger in
which Household International, Inc. acquired ACC Consumer Finance Corporation,
the subservicer assumed management and servicing responsibilities for a
portfolio of auto loans purchased or acquired by another Household subsidiary.
None of the auto loans held by this entity are included in the auto loans or the
performance results presented in the following tables.
HISTORICAL DELINQUENCY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------
[YEAR] [YEAR] [YEAR] [YEAR] [YEAR]
--------------------- --------------------- --------------------- --------------------- ---------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Principal...............
Outstanding.............
Delinquencies(1)(2)
31-60 Days..............
61-90 Days..............
Over 90 Days............
Subtotal................
Repossession on
hand(3)...............
Total Delinquencies and
Repossession on
hand..................
<CAPTION>
---------------------------------
<S> <C> <C> <C>
MONTHS ENDED
YEAR
ENDED
DECEMBER 31, [YEAR]
--------- ---------------------
--------- ---------------------
PERCENT DOLLARS PERCENT
--------- --------- ---------
Principal...............
Outstanding.............
Delinquencies(1)(2)
31-60 Days..............
61-90 Days..............
Over 90 Days............
Subtotal................
Repossession on
hand(3)...............
Total Delinquencies and
Repossession on
hand..................
</TABLE>
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) Delinquencies include bankruptcies. Bankruptcies represent approximately
% of outstanding principal for each period presented.
(3) Amounts shown under "repossession on hand" represent the expected net
realizable value for repossessed vehicles that have not been sold.
S-21
<PAGE>
HISTORICAL NET LOSS EXPERIENCE
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------
[YEAR] [YEAR] [YEAR] [YEAR] [YEAR] [YEAR]
--------- --------- --------- --------- --------- -----------
Principal outstanding............. $ $ $ $ $ $
Average principal amount
outstanding..................... $ $ $ $ $ $
Number of contracts outstanding...
Average number of contracts
outstanding.....................
Number of repossessions...........
Number of repossessions as a
percent of average number of
contracts outstanding,
annualized......................
Net losses(1)..................... $ $ $ $ $ $
Net losses as a percent of average
principal amount outstanding,
annualized......................
</TABLE>
(1) Net losses are net of recoveries and include PRINCIPAL BALANCE at time of
charge-off. In the case of repossession, net losses include the remaining
balance at the time of repossession less liquidation proceeds for disposed
vehicles, or the NADA wholesale value for vehicles repossessed but not sold.
Net losses do not include repossessions that are less than 150 days
delinquent and are not charged off.
The seller expects that the delinquency, loss and repossession experience for
the auto loans will be generally consistent with the information provided in the
above tables. However, as the subservicer's portfolio matures and the rate of
growth slows, which is likely, it can be expected that the delinquency, loss and
repossession percentages for the portfolio will increase, and may increase
significantly. This is because a higher portion of the portfolio will consist of
contracts proceeding through a typical delinquency and loss pattern. The amount
of these increases cannot be estimated. There is no assurance that delinquency,
credit loss and repossession experience for auto loans in the future, or the
experience of the trust, will be similar to that described above. 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
vans.
[THE INSURER]
[The following information has been obtained from [Name of Insurer] and has not
been verified by the seller or the underwriters. No representations or warranty
is made by the seller or the underwriters with respect thereto.
GENERAL
[Name of Insurer] is a monoline insurance company incorporated in under the
laws of the State of . The insurer is licensed to engage in the financial
guaranty insurance business in [all 50 states, the District of Columbia and
Puerto Rico].
The insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's
securities--thereby enhancing the credit rating of those securities--in
consideration for the payment of a premium to the insurer. The insurer and its
subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are generally supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow
S-22
<PAGE>
or market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities consist largely
of general obligation bonds, special revenue bonds and other special obligations
of state and local governments. The insurer insures both newly issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy the insurer's underwriting criteria.
The principal executive offices of the insurer are located at [address], and its
telephone number at that location is .
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the insurer are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the insurer reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the insurer as
a risk management device and to comply with certain statutory and rating agency
requirements; it does not alter or limit the insurer's obligations under any
financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY
The insurer's insurance financial strength is rated " " by [Rating Agency]. The
insurer's financial strength is rated " " by [Rating Agency]. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies herein.
CAPITALIZATION
The following table sets forth the capitalization of the insurer and its
wholly-owned subsidiaries on the basis of generally accepted accounting
principles as of :
<TABLE>
<CAPTION>
----------
<S> <C>
[DATE]
--------
(UNAUDITED)
(IN
THOUSANDS)
Deferred Premium Revenue (net of prepaid reinsurance
premiums)................................................. $
Surplus Notes...............................................
Minority Interest...........................................
Shareholder's Equity:
Common Stock..............................................
Additional Paid-In Capital................................
Accumulated Other Comprehensive Income (net of deferred
income taxes)...........................................
Accumulated Earnings......................................
Total Shareholder's Equity................................
Total Deferred Premium Revenue, Surplus Notes, Minority
Interest and Shareholder's Equity......................... $
</TABLE>
For further information concerning the insurer, see the consolidated financial
statements of the insurer and subsidiaries, and the notes thereto, incorporated
by reference herein. The insurer's financial statements are included as exhibits
to the annual report on Form 10-K and quarterly reports on Form 10-Q filed with
the Securities and Exchange Commission by [Name of Insurer] and may be reviewed
at the EDGAR website maintained by the Securities and Exchange Commission.
Copies of the statutory quarterly and annual statements filed with the [State of
New York Insurance Department] by the insurer are available upon request to the
[State of New York Insurance Department].
S-23
<PAGE>
INSURANCE REGULATION
The insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of [New York], its state of
domicile. In addition, the insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of [New York], the insurer is subject to
[Article 69 of the New York Insurance Law] which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ("single risks")
and the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the [New York Insurance Law], applicable
to non-life insurance companies such as the insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liabilities for borrowings.]
DESCRIPTION OF THE NOTES
GENERAL
The notes will be issued according to the terms of the indenture. The base
indenture and a form of the series supplement to the base indenture
have been filed as exhibits to the registration statement of which this
prospectus supplement is a part. The base indenture as supplemented by the
series supplement is referred to as the "indenture". The following
summary describes terms of the notes and the indenture.
The notes will be issued only in fully registered form, in denominations of
$ and integral multiples of $ . The notes will be secured by
the trust assets pledged by the trust to the indenture trustee according to the
indenture. Replacement notes, if issued, will be transferable and exchangeable
at the corporate trust office of the indenture trustee. No service charge will
be made for any registration, exchange or transfer of notes, but the indenture
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
The payment date is the [17th] day of each month, or if that day is not a
BUSINESS DAY, the next succeeding BUSINESS DAY.
PAYMENTS OF INTEREST
Interest on each class of notes will be payable monthly on each payment date,
commencing on , in an amount equal to interest accrued during the
applicable interest period, as defined below, at the applicable note rate on the
outstanding principal balance for the applicable class of notes. The per annum
rate of interest accruing on each class of notes is referred to as the note rate
for the respective classes of notes. The note rates for the Class A-1,
Class A-2, Class A-3 and Class A-4 Notes will be %, %, %, and
%, respectively.
Interest on the outstanding principal balance of the notes of each class in
respect of any payment date will accrue from, and including, the preceding
payment date, or in the case of the first payment date, from the closing date,
through, and including, the day preceding the payment date. Each of these
periods is an interest period. Interest on the Class A-1 and Class A-2 Notes
will be calculated on the basis of a 360-day year and the actual number of days
elapsed in an applicable interest period. Interest on the Class A-3 and
Class A-4 Notes will be calculated on the basis of a 360-day year consisting of
twelve 30-day months. The amount of interest payable on the Class A-3 and
Class A-4 Notes for the initial interest period will be computed on the basis of
actual number of days elapsed in the 30-day month. Interest for any payment date
due but not paid on the payment date shall bear interest, to the extent
permitted by applicable law, at the applicable note rate until paid. Failure to
pay interest in full on any payment date after expiration of the applicable
grace period is an event of default under the indenture.
On each payment date, AVAILABLE FUNDS remaining after making the distributions
referred to in items (1) and (2) under "Description of the Notes--Payment
Priorities" will be allocated pro rata to the CLASS A INTEREST DISTRIBUTABLE
AMOUNT of each of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes.
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PAYMENTS OF PRINCIPAL
On each payment date, principal payments will be due and payable on the notes in
an amount generally equal to the PRINCIPAL DISTRIBUTABLE AMOUNT for the payment
date to the extent of funds available therefor.
On each payment date the CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT will be used to
reduce the principal balance of the Class A-1 Notes until the Class A-1 Notes
have been paid in full. On each payment date after the payment date on which the
Class A-1 Notes have been paid in full, the CLASS A PRINCIPAL DISTRIBUTABLE
AMOUNT will be used to reduce the principal balance of the Class A-2 Notes until
the Class A-2 Notes have been paid in full. On each payment date after the
payment date on which the Class A-2 Notes have been paid in full, the CLASS A
PRINCIPAL DISTRIBUTABLE AMOUNT will be used to reduce the principal balance of
the Class A-3 Notes until the Class A-3 Notes have been paid in full. On each
payment date after the payment date on which the Class A-3 Notes have been paid
in full, the CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT will be used to reduce the
principal balance of the Class A-4 Notes until the Class A-4 Notes have been
paid in full. On a payment date on which the Class A-1, Class A-2, Class A-3 or
Class A-4 Notes are paid in full, the CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT may
also be allocable to payments of the class of Class A Notes next entitled to
distributions in respect of principal.
OVERCOLLATERALIZATION
The overcollateralization is the difference between the POOL BALANCE and the
AGGREGATE NOTE PRINCIPAL BALANCE. On the closing date, the overcollateralization
will be equal to $ or % of the POOL BALANCE as of the cut-off date.
The overcollateralization will be available to absorb losses that would
otherwise be allocated to noteholders.
PAYMENT PRIORITIES
On or prior to each payment date, the servicer will instruct the indenture
trustee to make the following distributions in the following order of priority:
(1) from the AVAILABLE FUNDS, to the servicer, any supplemental servicing
fees for the applicable COLLECTION PERIOD and if Household Finance
Corporation is no longer acting as servicer, the servicing fee for the
applicable COLLECTION PERIOD;
(2) from the AVAILABLE FUNDS, to the indenture trustee and the owner
trustee, any accrued and unpaid trustees' fees, but only to the extent
these fees have not been previously paid by the servicer;
(3) from the AVAILABLE FUNDS, to the holders of the Class A Notes, the
CLASS A INTEREST DISTRIBUTABLE AMOUNT;
(4) from the AVAILABLE FUNDS, the CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT
will be paid to the Class A-1, Class A-2, Class A-3 and Class A-4 Notes,
sequentially, beginning with the Class A-1 Notes, in each case, until the
respective outstanding principal amount of the Class A-1, Class A-2,
Class A-3 and Class A-4 Notes are paid in full;
(5) from the AVAILABLE FUNDS, to the reserve account, the RESERVE ACCOUNT
DEPOSIT AMOUNT, if necessary, required to increase the amount in the
reserve account to its then required level;
(6) from the AVAILABLE FUNDS, if Household Finance Corporation is acting as
the servicer, the servicing fee for the applicable COLLECTION PERIOD; and
(7) any remainder to the seller.
If the notes are accelerated following the occurrence of an event of default,
after payment of the amounts specified in items (1) and (2) above all AVAILABLE
FUNDS, all amounts on deposit in the reserve account and the proceeds of any
sale, liquidation or other disposition of the trust assets will be applied as
follows:
first, to pay all amounts due and unpaid on the Class A Notes for interest,
ratably without preference or priority;
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second, to pay all amounts due and unpaid on the Class A Notes for
principal, ratably without preference or priority; and
third, to pay all remaining amounts to the seller.
[Amounts on deposit in the reserve account on any payment date, after giving
effect to all distributions made on the payment date and the related payment
date, in excess of the targeted reserve account balance for the payment date may
be released first, to the servicer to pay any servicing fees and supplemental
servicing fees that are due, and any remainder may be released to the seller.]
[Amounts available under the insurance policy are available to pay the note
principal only in two circumstances:
- to reduce, after taking into account all reductions funded from other
sources, the aggregate principal balance of the notes to the collateral
balance--i.e., the sum of the POOL BALANCE plus the pre-funded amount--in
the event that the note principal balance would otherwise exceed the
collateral balance; and
- to pay off each class's principal on its scheduled maturity date, to the
extent that the class is not paid off on or prior to the scheduled
maturity date from other sources.]
[MANDATORY REDEMPTION]
[If any portion of the pre-funded amount remains on deposit in the pre-funding
account at the end of the funding period, each class of notes will be redeemed
in part on the mandatory redemption date. Each class' note prepayment amount of
the remaining pre-funded amount on that date will be an amount equal to that
class' pro rata share, based on the respective current principal amount of each
class of notes. However, if the aggregate remaining amount in the pre-funding
account is $100,000 or less, that amount will be applied exclusively to reduce
the outstanding principal balance of the class of notes then entitled to receive
principal distributions.]
MATURITY DATES; OPTIONAL REDEMPTION
Each class of notes will mature on the earlier of the date the class of notes is
paid in full or the respective scheduled maturity date for the class. The
Class A-1 scheduled maturity date is , the Class A-2 scheduled
maturity date is , the Class A-3 scheduled maturity date is
and the Class A-4 scheduled maturity date is . The payment
date occurring on is also referred to as the final scheduled payment
date. In the event there are insufficient funds to retire any class of notes by
its respective scheduled maturity date in each case, subject to a five day grace
period, an event of default will occur. In addition, the trust will pay the
notes in full on the payment date following exercise by the seller or the
servicer of the option to purchase the auto loans from the trust. This will
cause a redemption of the notes. The option may be exercised on or after the
payment date on which the AGGREGATE NOTE PRINCIPAL BALANCE is reduced to an
amount less than or equal to $ , which is % of the original aggregate
principal balance of the notes. The redemption price will be equal to the sum of
the AGGREGATE NOTE PRINCIPAL BALANCE and accrued and unpaid interest through the
day preceding the call date.
REPORTS TO NOTEHOLDERS
With each distribution to the noteholders, the indenture trustee will prepare
and forward to each noteholder a statement, which will include the following
information for that payment date:
(1) the amount of the distribution allocable to interest on each class of
the notes;
(2) the amount of the distribution allocable to principal on each class of
the notes;
(3) the aggregate outstanding principal amount for each class of notes, in
each case, after giving effect to all payments reported under (2) above
for that payment date;
(4) the CLASS A INTEREST CARRYOVER SHORTFALL and the CLASS A PRINCIPAL
CARRYOVER SHORTFALL, if any, and the change in those amounts from the
preceding statement;
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(5) the amount of the servicing fee paid to the servicer for the prior
COLLECTION PERIOD; and
(6) the TARGETED RESERVE ACCOUNT BALANCE and the amount on deposit in the
reserve account at the end of the payment date.
The information furnished under (1) through (4) above will be expressed as a
dollar amount per $ in face amount of notes.
EVENTS OF DEFAULT; SERVICER TERMINATION
The notes are subject to certain events of default as described in the
prospectus under "The Trust Agreement--Events of Defaults; Rights Upon Event of
Default." In addition, the servicer is subject to servicer termination events as
described in the prospectus supplement under "The Trust Agreements--Servicer
Termination Events."
[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 notes, the insurer will deliver the
policy to the indenture trustee for the benefit of each noteholder. Under the
policy, the insurer will unconditionally and irrevocably guarantee to the
indenture trustee, on each distribution date, for the benefit of each noteholder
the full and complete payment of (i) SCHEDULED PAYMENTS (as defined below) on
the notes and (ii) 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, 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 required to be made on the notes
during the term of the policy in accordance with the original terms of the notes
when issued and without regard to any subsequent amendment or modification of
the notes or the indenture that has not been consented to by the insurer.
Payment of claims on the policy made in respect of SCHEDULED PAYMENTS will be
made by the insurer following RECEIPT (as defined below) by the insurer of the
appropriate notice for payment on the later to occur of (i) 12:00 noon, New York
City time, on the third BUSINESS DAY following RECEIPT of such notice for
payment, and (ii) 12:00 noon, New York City time, on the date on which such
payment was due on the 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 such 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 (i) the [fourth] BUSINESS DAY following RECEIPT by the insurer from the
indenture trustee of (A) a certified copy of the ORDER of the court or other
governmental body that exercised jurisdiction to the effect that the noteholder
is required to return SCHEDULED PAYMENTS made with respect to the notes during
the term of the policy because such payments were avoidable as preference
payments under applicable bankruptcy law, (B) a certificate of the noteholder
that the ORDER has been entered and is not subject to any stay and (C) an
assignment duly executed and delivered by the noteholder, in such form as is
reasonably required by the insurer and provided to the noteholder by the
insurer, irrevocably assigning to the insurer all rights and claims of the
noteholder relating to or arising under the notes against the trust or otherwise
with respect to such preference payment, or (ii) the date of RECEIPT (as defined
below) 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 such
date of RECEIPT, the insurer shall have RECEIVED (as defined below) written
notice from the indenture trustee that such items were to be delivered on such
date and such date was specified in such notice. Such payment shall be disbursed
to the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the ORDER and not to the indenture trustee or any noteholder directly
(unless a noteholder has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the ORDER,
in which case such payment shall be disbursed to the indenture trustee for
distribution to such noteholder upon proof of such payment reasonably
satisfactory to the insurer). In connection with the foregoing, the insurer
shall have the rights provided pursuant to
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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 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 deemed 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 , , ,
and 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 such funds are properly applied by the
indenture trustee.
The insurer shall be subrogated to the rights of each 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 thereby 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. [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-l Notes be rated by [Rating
Agency] and by [Rating Agency], and that the Class A-2 Notes, the Class A-3
Notes and the Class A-4 Notes be rated by [Rating Agency] and by [Rating
Agency]. The ratings by the rating agencies of the notes will be (i) with
respect to the Class A-1 Notes, without regard to the policy in the case of S&P
[Rating Agency] and substantially based on the policy in the case of [Rating
Agency] and (ii) with respect to all other classes of notes, based on the
issuance of the policy. To the extent that such ratings are based on the policy,
such ratings apply to distributions due on the distribution dates, and not to
distributions due on the distribution dates. A rating is not a recommendation to
purchase, hold or sell notes. In the event that the rating initially assigned to
any of the 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 notes. Any reduction or withdrawal of a rating may have an
adverse effect on the liquidity and market price of the notes.]
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
considerations to investors of the purchase, ownership and disposition of the
notes. The discussion is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to change. The discussion below does not
purport to deal with all federal tax considerations applicable to all categories
of investors. Some holders, including insurance companies, tax-exempt
organizations, financial institutions or broker dealers, taxpayers subject to
the alternative minimum tax, and holders that will hold the notes as other than
capital assets, may be subject to special rules that are not discussed below. It
is recommended that investors consult their own tax advisors in determining the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of the notes.
TAX CHARACTERIZATION OF THE TRUST
Dewey Ballantine LLP is our tax counsel, and is of the opinion that, assuming
the parties will comply with the terms of the governing agreements, the trust
will not be an association, or publicly traded partnership, taxable as a
corporation for federal income tax purposes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The seller agrees, and the noteholders
will agree by their purchase of notes, to treat the notes as debt for all
federal, state and local income tax purposes. There are no regulations,
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the notes. In general, whether instruments such as the notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction under which they are issued rather than merely
upon the form of the transaction or the manner in which the instruments are
labeled.
The Internal Revenue Service and the courts have stated various factors to be
taken into account in determining, for federal income tax purposes, whether or
not an instrument constitutes indebtedness and whether a transfer of property is
a sale because the transferor has relinquished substantial incidents of
ownership in the property or whether the transfer is a borrowing secured by the
property.
On the basis of its analysis of the above factors as applied to the facts and
its analysis of the economic substance of the contemplated transaction, tax
counsel is of the opinion that, for federal income tax purposes, the notes will
be treated as indebtedness, and not as an ownership interest in the auto loans,
nor as an equity interest in the trust or in a separate association taxable as a
corporation or other taxable entity.
If the notes are characterized as indebtedness, interest paid or accrued on a
note will be treated as ordinary income to the noteholders and principal
payments on a note will be treated as a return of capital to the extent of the
noteholder's basis in the note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the notes when earned, even if
not paid, unless it is determined to be uncollectible. The trust will report to
noteholders of record and the IRS regarding the interest paid and original issue
discount, if any, accrued on the notes to the extent required by law.
Although, as described above, it is the opinion of tax counsel that, for federal
income tax purposes, the notes will be characterized as debt, this opinion is
not binding on the IRS and thus no assurance can be given that this
characterization will prevail. If the IRS successfully asserted that one or more
of the notes did not represent debt for federal income tax purposes, the
noteholders would likely be treated as owning an interest in a partnership and
not an interest in an association or publicly traded partnership, taxable as a
corporation. If the noteholders were treated as owning an equitable interest in
a partnership, the partnership itself would not be subject to federal income
tax; rather each partner would be taxed individually on their respective
distributive share of the partnership's income, gain, loss, deductions and
credits. The amount, timing and characterization of types of income and
deductions for a noteholder would differ if the notes were held to constitute
partnership interests, rather than indebtedness. Since the seller and the trust
will treat the notes as indebtedness for federal income tax purposes, the
servicer will not attempt to satisfy the tax reporting requirements that would
apply under this alternative characterization of the notes.
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Investors that are foreign persons should consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of the notes. See "TAXATION OF CERTAIN
FOREIGN INVESTORS" below.
ORIGINAL ISSUE DISCOUNT. It is anticipated that the notes will not have any
original issue discount or OID, other than possibly OID within a DE MINIMIS
exception and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Internal Revenue Code, generally will not apply to the notes. OID
will be considered DE MINIMIS if it is less than 0.25% of the principal amount
of a note multiplied by its expected weighted average life.
MARKET DISCOUNT. A subsequent purchaser who buys a note for less than its
principal amount may be subject to the MARKET DISCOUNT rules of section 1276
through 1278 of the Code. If a subsequent purchaser of a note disposes of the
note, including some nontaxable dispositions such as a gift, any gain upon the
sale or other disposition will be recognized as ordinary income to the extent of
any accrued for the period that the purchaser holds the note. Similarly, if a
subsequent purchase receives a principal payment, the amount of that principal
payment will be treated as ordinary income to the extent of any market discount
accrued for the period that the purchaser holds the note. The holder may instead
elect to include market discount in income as it accrues on all debt instruments
acquired in the year of acquisition of the notes and thereafter. Market discount
generally will equal the excess, if any, of the then current unpaid PRINCIPAL
BALANCE of the note over the purchaser's basis in the note offered immediately
after the purchaser acquired the note. In general, market discount on a note
will be treated as accruing over the term of the note in the ratio of interest
for the current period over the sum of the current interest and the expected
amount of all remaining interest payments, or at the election of the holder,
under a constant yield method. At the request of a holder of a note, information
will be made available that will allow the holder to compute the accrual of
market discount under the first method described in the preceding sentence.
The market discount rules also provide that a holder who incurs or continues
indebtedness to acquire a note at a market discount may be required to defer the
deduction of all or a portion of the interest on the indebtedness until the
corresponding amount of market discount is included in income.
However, market discount on a note will be considered to be zero if it is less
than a DE MINIMIS amount, which is 0.25% of the remaining PRINCIPAL BALANCE of
the note multiplied by its expected weighted average remaining life. If OID or
market discount is DE MINIMIS, the actual amount of discount must be allocated
to the remaining principal distributions on the notes and, when each
distribution is received, capital gain equal to the discount allocated to the
distribution will be recognized.
MARKET PREMIUM. A subsequent purchaser who buys a note for more than its
principal amount generally will be considered to have purchased the note at a
premium. The holder may amortize the premium, using a constant yield method,
over the remaining term of the note and, except as future regulations may
otherwise provide, may apply the amortized amounts to reduce the amount of
interest reportable for the note over the period from the purchase date to the
date of maturity of the note. The amortization of the premium on an obligation
that provides for partial principal payments prior to maturity should be
governed by the methods described above for accrual of market discount on such
an obligation. A holder that elects to amortize premium must reduce his tax
basis in the obligation by the amount of the aggregate deductions, or interest
offsets, allowable for amortization of premium. If a debt instrument purchased
at a premium is redeemed in full prior to its maturity, a purchaser who has
elected to amortize premium should be entitled to a deduction for any remaining
unamortized premium in the taxable year of redemption.
SALE OR REDEMPTION OF NOTES. If a note is sold or retired, the seller will
recognize gain or loss equal to the difference between the amount realized on
the sale and the holder'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 included in the seller's gross income in respect of the
note, and by any market discount which the taxpayer elected to include in income
or was required to include in income, and reduced by payments other than
payments of qualified stated interest in respect of the note received by the
seller and by any amortized premium. Similarly, a holder who receives a payment
other than a payment of qualified stated interest in respect of a note, either
on the date on which the payment is scheduled to be made or as a prepayment,
will recognize gain equal to any excess, of the amount of the payment over his
adjusted
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basis in the note allocable thereto. A noteholder who receives a final payment
which is less than his adjusted basis in the note will generally recognize a
loss in the amount of the shortfall on the last day of his taxable year.
Generally, this gain or loss realized by an investor who holds a note as a
CAPITAL ASSET within the meaning of Internal Revenue Code Section 1221 should be
capital gain or loss, except as described above in respect of market discount
and except that a loss attributable to accrued but unpaid interest may be an
ordinary loss.
TAXATION OF FOREIGN INVESTORS. Interest payments including OID, if any, on the
notes made to a FOREIGN PERSON, which is a nonresident alien individual, foreign
corporation or other non-United States person generally will be PORTFOLIO
INTEREST. This interest is not subject to United States tax if the payments are
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and if the trust or other person who would
otherwise be required to withhold tax from these payments is provided with an
appropriate statement that the beneficial owner of the note identified on the
statement is a foreign person.
BACKUP WITHHOLDING. Distributions of interest and principal as well as
distributions of proceeds from the sale of the notes may be subject to the
BACKUP WITHHOLDING TAX under Section 3406 of the Internal Revenue Code at a rate
of 31% if recipients of the distributions fail to furnish to the payor their
taxpayer identification numbers and other required information, or otherwise
fail to establish an exemption from tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against the
recipient's federal income tax. Furthermore, penalties may be imposed by the IRS
on a recipient of distributions that is required to supply information but that
does not do so in the proper manner.
STATE AND LOCAL TAX CONSIDERATIONS
Potential noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential noteholders should
consult their own tax advisors as to the various state and local tax
consequences of an investment in the notes.
ERISA CONSIDERATIONS
The notes may be purchased by ERISA plans as described in the prospectus under
"ERISA Considerations--ERISA Considerations regarding Securities which are the
Notes." The notes should be treated as indebtedness without substantial equity
features for purposes of the plan assets regulation. This determination is based
in part on the traditional debt features of the notes, including the reasonable
expectation of purchasers of notes that the notes will be repaid when due, as
well as the absence of conversion rights, warrants and other typical equity
features. The debt treatment of the notes for ERISA purposes could change if the
trust incurred losses. As described in the prospectus, the acquisition or
holding of the notes by or on behalf of an employee benefit plan could still
result in a prohibited transaction if the acquisition or holding of the notes by
or on behalf of the plan were deemed to be a prohibited loan to a party in
interest with respect to the plan. Accordingly, each purchaser and each
transferee using the assets of a plan subject to ERISA or Section 4975 of the
Internal Revenue Code to acquire the notes will be deemed to have represented
that the acquisition and continued holding of the notes will be covered by a
Department of Labor class exemption.
Any plan fiduciary considering the purchase of a note may wish to consult with
its counsel as to the potential applicability of ERISA and the Internal Revenue
Code to the investment. Moreover, each plan fiduciary may wish to determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the notes is appropriate for the plan, taking
into account the overall investment policy of the benefit plan and the
composition of the plan's investment portfolio.
The sale of notes to a plan is in no respect a representation by us or the
underwriters 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.
S-31
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement dated
among the seller, Household Finance Corporation and the underwriters
named below, the seller has agreed to sell to the underwriters and each of the
underwriters has agreed to purchase, the principal amount of the notes stated
opposite its name below.
<TABLE>
<CAPTION>
-----------------------------------------
<S> <C> <C> <C> <C>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT AMOUNT
OF OF OF OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITERS NOTES NOTES NOTES NOTES
- ----------------------------------------------------- -------- -------- -------- --------
[List of Underwriters]...............................
</TABLE>
The underwriters propose to offer the notes in part directly to purchasers at
the initial public offering prices stated on the cover page of this prospectus
and in part to securities dealers at prices less concessions not to exceed %,
%, % and % of the respective principal balance of the Class A-1, Class A-2,
Class A-3 and Class A-4 Notes. The underwriters may allow, and the dealers may
reallow, concessions not to exceed % of the respective principal balance of
each class of the notes to brokers and dealers.
The seller and Household Finance Corporation have agreed to indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act of 1933, as amended.
In connection with this offering the underwriters may over-allot or effect
transactions which stabilize or maintain the market prices of the notes at
levels above those which might otherwise prevail in the open market. This
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Some legal matters relating to the notes will be passed upon for the seller by
John W. Blenke, Vice President--Corporate Law and Assistant Secretary of
Household International, Inc., the parent company of the servicer, the
subservicer and the seller, and by Dewey Ballantine LLP, New York, New York,
special counsel to the seller. Some legal matters will also be passed upon for
the underwriters by Dewey Ballantine LLP. As of the date of this prospectus
supplement, Mr. Blenke is a full-time employee and an officer of Household
International, Inc. and beneficially owns, and holds options to purchase, shares
of common stock of Household International, Inc.
S-32
<PAGE>
GLOSSARY
ADDITIONAL CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT means, for any payment date,
the excess of (1) the aggregate of the PRINCIPAL BALANCE of all auto loans which
became LIQUIDATED AUTO LOANs during the immediately preceding COLLECTION PERIOD
over (2) the sum of (x) the aggregate amount of NET LIQUIDATION PROCEEDS
received by the trustee during the immediately preceding COLLECTION PERIOD and
(y) EXCESS INTEREST for that payment date. The ADDITIONAL CLASS A PRINCIPAL
DISTRIBUTABLE AMOUNT shall in no event be less than zero.
AGGREGATE NOTE PRINCIPAL BALANCE means, as of any date, the aggregate
outstanding principal amount of all the notes on that date.
AGGREGATE OPTIMAL NOTE PRINCIPAL BALANCE means, for any payment date, the
excess, if any, of (x) the POOL BALANCE as of the end of the prior COLLECTION
PERIOD over (y) the Targeted Overcollateralization Amount for that payment date.
AMOUNT FINANCED means, for an auto loan, the aggregate amount advanced under the
auto loan toward the financed vehicle's purchase price and related costs,
including amounts advanced for accessories, insurance premiums, service, car
club and warranty contracts, other items customarily financed as part of retail
automobile installment sale contracts or promissory notes and related costs.
AVAILABLE FUNDS means, for any COLLECTION PERIOD, the sum of (1) the COLLECTED
FUNDS for that COLLECTION PERIOD, (2) all purchase amounts deposited in the
collection account during that COLLECTION PERIOD, (3) income on investments held
in the collection account, (4) the proceeds of any liquidation of the assets of
the trust, (5) the lesser of (a) the excess of the aggregate amount determined
under items (1)-(4) of "Payment Priorities" as stated beginning on page S-32,
over the amount on deposit in the collection account and (b) the reserve account
balance; provided that for any payment date on which amounts are payable on the
Class A-1 Notes under clause (2) of the definition of CLASS A PRINCIPAL
DISTRIBUTABLE AMOUNT, or clause (3) of that definition to the extent the amount
represents amounts not paid under clause (2) on a prior payment date, AVAILABLE
FUNDS shall not include amounts withdrawn from the reserve account necessary to
make that payment to the extent the withdrawal would result in the reserve
account balance being less than $ .
CLASS A INTEREST CARRYOVER SHORTFALL means, for any payment date and each class
of Class A Notes, the sum of: (1) excess of (a) the applicable CLASS A INTEREST
DISTRIBUTABLE AMOUNT for the preceding payment date, over (b) the amount
actually paid as interest to the noteholders on the preceding payment date, PLUS
(2) interest on that excess, to the extent permitted by law, at a rate per annum
equal to the applicable class A note rate from the preceding payment date to but
excluding the current payment date.
CLASS A INTEREST DISTRIBUTABLE AMOUNT means, for any payment date and each class
of Class A Notes, an amount equal to the sum of: (1) the aggregate amount of
interest accrued on the Class A Notes at the applicable class A note rate from
and including the preceding payment date (or, in the case of the initial payment
date, from and including the closing date) to but excluding the current payment
date PLUS (2) the applicable CLASS A INTEREST CARRYOVER SHORTFALL for the
current payment date.
CLASS A MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT means, (1) for any payment date
prior to the payment date on which the principal balance of the Class A-1 Notes
is reduced to zero, 100% of the PRINCIPAL DISTRIBUTABLE AMOUNT, (2) for the
payment date on which the principal balance of the Class A-1 Notes is reduced to
zero, the sum of (x) 100% of the PRINCIPAL DISTRIBUTABLE AMOUNT for that portion
of the PRINCIPAL DISTRIBUTABLE AMOUNT required to reduce the principal balance
of the Class A-1 Notes to zero, plus (y) the excess of the amount described in
clause (3) of this definition for that payment date over the amount described in
clause (2) (taking into account payment of the principal balance of the
Class A-1 Notes on that payment date), (3) for any payment date after the
payment date on which the principal balance of the Class A-1 Notes is reduced to
zero until the payment date on which the principal balance of the Class A Notes
is reduced to zero, the excess of aggregate outstanding principal balance of the
Class A Notes over (y)(A) the outstanding POOL BALANCE as of the end of the
prior COLLECTION PERIOD minus (B) the TARGETED OVERCOLLATERALIZATION AMOUNT for
that payment date.
S-33
<PAGE>
CLASS A PRINCIPAL CARRYOVER SHORTFALL means, for any payment date after the
payment date on which the PRINCIPAL BALANCE of the Class A-1 Notes is reduced to
zero, the excess of the CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT for the preceding
payment date over the amount that was actually distributed in respect of
principal of the Class A Notes on the preceding payment date.
CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT means, for any payment date, the sum of:
(1) the CLASS A MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT for the payment date,
(2) the ADDITIONAL CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT, if any, for the
payment date, and (3) the CLASS A PRINCIPAL CARRYOVER SHORTFALL for the payment
date; HOWEVER, (1) the sum of clauses (1), (2) and (3) shall not exceed the
outstanding principal amount of the Class A Notes, and (2) on the final
scheduled payment date, the CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT will include
the amount, to the extent of the remaining AVAILABLE FUNDS, necessary (after
giving effect to other amounts having a higher payment priority on prior payment
date) to reduce the outstanding principal amount of the Class A Notes to zero.
COLLECTED FUNDS means, for any COLLECTION PERIOD, the amount of funds in the
collection account representing collections (excluding amounts representing
administrative charges, annual fees, taxes, assessments, credit insurance
charges or similar items) on the auto loans during the COLLECTION PERIOD,
including all NET LIQUIDATION PROCEEDS collected during the COLLECTION PERIOD
(but excluding any purchase amounts).
COLLECTION PERIOD means, for any payment date other than the first payment date,
the calendar month preceding the month in which the payment date occurs, and in
the case of the first payment date, the period from the cut-off date through
.
CRAM DOWN LOSS means, with respect to an auto loan, if a court of appropriate
jurisdiction in an insolvency proceeding issues a final order reducing the
amount owed on the auto loan or otherwise modifying or restructuring the
scheduled payments to be made on the auto loan, an amount equal to (1) the
excess of the PRINCIPAL BALANCE of the auto loan immediately prior to the order
over the PRINCIPAL BALANCE of the auto loan as reduced and/or (2) if the court
issues an order reducing the effective rate of interest on the auto loan, the
excess of the PRINCIPAL BALANCE of the auto loan immediately prior to the order
over the net present value--using as the discount rate the higher of the APR on
the auto loan or the rate of interest, if any, specified by the court in the
order--of the scheduled payments as so modified or restructured. A CRAM DOWN
LOSS shall be deemed to have occurred on the date of the order's issuance.
DETERMINATION DATE means, with respect to any payment date, the earlier of the
fifth calendar day or the third BUSINESS DAY prior to the payment date.
EXCESS INTEREST means, for a payment date, the excess of (1) interest
collections on the auto loans during the preceding COLLECTION PERIOD over
(2) amounts payable on the payment date under clauses (1) through (3) of
"Payment Priorities".
LIQUIDATED AUTO LOAN MEANS an auto loan which (1) 90 days have elapsed since the
financed vehicle was repossessed, (2) the servicer has determined in good faith
that all amounts it expects to recover have been received, (3) ten percent or
more of a scheduled payment shall have become 150 or more days delinquent, or in
the case of a borrower who is subject to bankruptcy proceedings, 210 or more
days delinquent or (4) the financed vehicle has been sold and the proceeds
received.
MAXIMUM RESERVE ACCOUNT DEPOSIT AMOUNT means, for any payment date, an amount
equal to that portion of COLLECTED FUNDS representing interest collections on
the auto loans and NET LIQUIDATION PROCEEDS for the applicable COLLECTION PERIOD
less the sum of: the servicing fee paid to any servicer other than Household
Finance Corporation, the fees due to the trustee, and owner trustee, to the
extent not paid by the servicer, the CLASS A INTEREST DISTRIBUTABLE AMOUNT, the
aggregate PRINCIPAL BALANCES of all auto loans which became LIQUIDATED AUTO
LOANs during the COLLECTION PERIOD, plus the aggregate amount of CRAM DOWN
LOSSES during the COLLECTION PERIOD.
NET LIQUIDATION PROCEEDS means, with respect to LIQUIDATED AUTO LOANs,
(1) proceeds from the disposition of the underlying financed vehicle securing
the LIQUIDATED AUTO LOANs, minus the servicer's reasonable out-of-pocket costs,
including repossession and resale expenses not already deducted from the
proceeds, and any amounts required by law
S-34
<PAGE>
to be remitted to the borrower, (2) any insurance proceeds, or (3) other monies
received from the borrower or otherwise.
POOL BALANCE means, as of any date of determination, the aggregate PRINCIPAL
BALANCES of the auto loans, unless otherwise specified, as of the close of
business on the preceding business day.
PRINCIPAL AMOUNT AVAILABLE means, for any payment date, the amount remaining in
the collection account after the payment of the amounts listed in (1) through
(3) of "Payment Priorities", MINUS the RESERVE ACCOUNT DEPOSIT AMOUNT for the
payment date.
PRINCIPAL BALANCE means, with respect to any auto loan, as of any date, the
AMOUNT FINANCED minus (a) that portion of all amounts received on or prior to
the date and allocable to principal in accordance with the terms of the auto
loan, and (b) any CRAM DOWN LOSS in respect of the auto loan. The PRINCIPAL
BALANCE of a LIQUIDATED AUTO LOAN or a purchased receivable shall be zero.
PRINCIPAL DISTRIBUTABLE AMOUNT means, for any payment date, the lesser of
(A) the PRINCIPAL AMOUNT AVAILABLE and (B) the excess, if any, of (1) the
AGGREGATE NOTE PRINCIPAL BALANCE immediately prior to the payment date over
(2) the AGGREGATE OPTIMAL NOTE PRINCIPAL BALANCE for the payment date.
RESERVE ACCOUNT DEPOSIT AMOUNT means, for any payment date, the lesser of:
(x) the MAXIMUM RESERVE ACCOUNT DEPOSIT AMOUNT for that payment date and
(y) the RESERVE ACCOUNT SHORTFALL AMOUNT for that payment date.
RESERVE ACCOUNT SHORTFALL AMOUNT means, for any payment date, the excess of:
(x) the TARGETED RESERVE ACCOUNT BALANCE for that payment date and (y) the
amount on deposit in the reserve account as of the beginning of that payment
date.
TARGETED CREDIT ENHANCEMENT AMOUNT means, for any payment date, % of the
outstanding POOL BALANCE as of the end of the applicable COLLECTION PERIOD.
TARGETED OVERCOLLATERALIZATION AMOUNT means, for any payment date, the excess
(but not less than zero), if any, of: (1) the TARGETED CREDIT ENHANCEMENT AMOUNT
over (2) the TARGETED RESERVE ACCOUNT BALANCE.
TARGETED RESERVE ACCOUNT BALANCE means, for any payment date, the lesser of:
(1) the greater of (a) % of the outstanding POOL BALANCE as of the end of
the applicable COLLECTION PERIOD, and (b) $ ( % of the POOL BALANCE as
of the cut-off date) and (2) the AGGREGATE NOTE PRINCIPAL BALANCE.
S-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Household Automotive Trust
We have audited the accompanying balance sheet of Household Automotive Trust as
of . This financial statement is the responsibility of the trust's
management. Our responsibility is to express an opinion on the balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Household Automotive Trust as of
, in conformity with generally accepted accounting principles.
[Accountant]
F-1
<PAGE>
HOUSEHOLD AUTOMOTIVE TRUST
BALANCE SHEET
<TABLE>
<CAPTION>
--------
<S> <C>
ASSETS
Cash........................................................ $
-------
Total assets................................................ $
=======
LIABILITIES AND TRUST PRINCIPAL
Interest in the trust....................................... $
-------
Total liabilities and trust principal....................... $
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-2
<PAGE>
HOUSEHOLD AUTOMOTIVE TRUST
NOTES TO FINANCIAL STATEMENT
1. NATURE OF OPERATIONS:
Household Automotive Trust , was formed in the State of Delaware on
[ ], . The trust has been inactive since that date.
The trust was organized to engage exclusively in the following business and
financial activities: to acquire motor vehicle retail installment sale contracts
from Household Auto Receivables Corporation; to issue and sell notes
collateralized by its assets; and to engage in any lawful act or activity and to
exercise any power that is incidental and is necessary or convenient to the
foregoing.
2. CAPITAL CONTRIBUTION:
Household Auto Receivables Corporation purchased, for $ , a 100% beneficial
ownership interest in the trust.
F-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HOUSEHOLD AUTOMOTIVE
TRUST
SERIES
HOUSEHOLD
FINANCE
CORPORATION,
SERVICER
[UNDERWRITERS]
UNTIL ALL DEALERS THAT EFFECT TRANSACTIONS IN THE NOTES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS AND
A PROSPECTUS SUPPLEMENT. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1999)
HOUSEHOLD AUTOMOTIVE TRUST
SERIES CERTIFICATES
HOUSEHOLD AUTO RECEIVABLES CORPORATION, SELLER
HOUSEHOLD FINANCE CORPORATION, SERVICER
------------------
THE TRUST WILL ISSUE-
- Two classes of certificates, which are offered by this prospectus
supplement; and
- Additional interests in the trust which are to be held by the seller are not
offered by this prospectus supplement but serve as credit support to the
certificates offered by this prospectus supplement.
THE CERTIFICATES-
- Represent beneficial ownership interests in the assets of the trust. The
assets of the trust securing the certificates will include a pool of
non-prime auto loans secured by new and used automobiles, light trucks and
vans;
- Receive monthly distributions on the [17th] day of each month beginning on
; and
- Currently have no trading market.
CREDIT ENHANCEMENT-
- For the Class A Certificates, the overcollateralization, the reserve account
and the Class B Certificates;
- For the Class B Certificates, the overcollateralization and the reserve
account; and
- [For the Class A Certificates [and the Class B Certificates] a financial
guarantee insurance policy issued by [Name of Insurer] unconditionally or
irrevocably guaranteeing timely payment of interest and principal.]
- --------------------------------------------------------------------------------
WE SUGGEST THAT YOU READ THE SECTION ENTITLED "RISK FACTORS" ON PAGE 4 OF THE
PROSPECTUS AND ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND CONSIDER THESE
FACTORS BEFORE MAKING A DECISION TO INVEST IN THESE CERTIFICATES.
These certificates are auto loan asset-backed certificates which represent
beneficial ownership interests in the trust. The certificates are not interests
in or obligations of any other person or entity.
Neither these certificates nor the auto loans will be insured or guaranteed by
any governmental agency or instrumentality.
Retain this prospectus supplement for future reference. This prospectus
supplement may not be used to consummate sales of certificates unless
accompanied by the prospectus relating to the offering of these certificates.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
FINAL INITIAL PUBLIC
ISSUANCE INTEREST SCHEDULED OFFERING UNDERWRITING PROCEEDS
AMOUNT RATE PAYMENT DATE PRICE(1) DISCOUNT TO SELLER(2)
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Class A Certificates
- ---------------------------------------------------------------------------------------------------------------------
Class B Certificates
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from .
(2) Before expenses, estimated to be .
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[UNDERWRITERS]
The date of this Prospectus Supplement is
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of 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 SEC at Judiciary Plaza, 450 Fifth
Street, NW, Room 1024, Washington, DC 20549. You can also copy and inspect these
reports, proxy statements and other information at the following regional
offices of the SEC:
<TABLE>
<S> <C>
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, New York 10048 Chicago, Illinois 60661
</TABLE>
All reports we file with the SEC after the date of this prospectus supplement
but before the offering of the certificates ends are considered to be part of
this prospectus supplement. Information contained in those reports updates and
supercedes the information in this prospectus supplement. We will provide you
with copies of these reports, at no cost, if you write to: Household Finance
Corporation, 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention:
Secretary.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
[The consolidated financial statements of [Name of Insurer] are included in, or
are exhibits to, the following documents which have been filed with the SEC:
(a) Annual Report on Form 10-K for the year ended , and
(b) Quarterly Report on Form 10-Q for the period ended .
We will provide you with copies of these financial statements, at no cost, if
you write us at: Household Financial Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Secretary.]
This prospectus supplement supplements a prospectus that is part of a
registration statement filed by the seller with the SEC (Registration
No. 333- ).
You should rely only on the information provided in this prospectus supplement
and the accompanying prospectus. We have not authorized anyone else to provide
you with different information. You should not assume that the information in
this prospectus supplement or in the prospectus is accurate as of any date other
than the date on the cover page of this prospectus supplement.
You can find definitions of the technical cashflow terms used in this prospectus
supplement in the Glossary beginning on page S-43 in this prospectus supplement.
We include cross-references in this prospectus supplement to captions in these
materials where you can find further discussions. The following table of
contents provides the pages on which these captions are located.
In this prospectus, the terms "we", "us" and "our" refer to Household Auto
Receivables Corporation.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Where You Can Find More Information... S-2
Summary............................... S-4
Risk Factors.......................... S-8
Use of Proceeds....................... S-10
The Trust............................. S-10
The Trustee........................... S-10
The Trust Assets...................... S-10
Yield and Prepayment Considerations... S-17
[The Insurer]......................... S-19
Description of the Certificates....... S-22
Credit Enhancement.................... S-25
Material Federal Income Tax
Consequences........................ S-27
ERISA Considerations.................. S-31
Underwriting.......................... S-32
Legal Matters......................... S-32
Glossary.............................. S-33
</TABLE>
S-3
<PAGE>
SUMMARY
- - This summary highlights select information from this prospectus supplement and
does not contain all of the information that you need to consider in making
your investment decision. This summary provides general, simplified
descriptions of matters which, in some cases, are highly technical and
complex. To understand all of the terms of the offering of the certificates,
carefully read both this entire prospectus supplement and the attached
prospectus each in its entirety.
- - This summary provides an overview of calculations, cash flows and other
information to aid your understanding. To understand all of the terms of the
offering, we suggest that you carefully read this entire document and, in
particular, the full description of these calculations, cash flows and other
information in this prospectus supplement.
SERIES CERTIFICATES
The trust will issue the certificates offered by this prospectus supplement in
book-entry form through the facilities of the Depository Trust Company.
TRUST
Household Automotive Trust . The trust will be a New York common law trust. The
address of the trust is in care of [Name of Trustee] at [address].
SELLER
Household Auto Receivables Corporation. The seller has purchased the auto loans
from Household Automotive Finance Corporation and will sell them to the trust.
The seller will also own interests in the trust. The address of the seller is
1111 Town Center Drive, Las Vegas, Nevada 89134.
SERVICER
Household Finance Corporation. The servicer is responsible for servicing the
auto loans and has subcontracted with the subservicer to perform the servicing
responsibilities. The address of the servicer is 2700 Sanders Road, Prospect
Heights, Illinois 60070.
SUBSERVICER
Household Automotive Finance Corporation. The auto loans were originated by
automobile dealers that have no affiliation with the subservicer and were
purchased by the subservicer under its various financing programs. The
subservicer will service the auto loans in accordance with policies established
in consultation with the servicer. The address of the subservicer is 11452 El
Camino Real, San Diego, California 92130.
INSURER
[Name of Insurer], a [New York] financial guaranty insurance company.
TRUSTEE
[Name of Trustee]. The address of the trustee is [address].
THE TRUST ASSETS
The trust's assets will include a pool of auto loans, cash on deposit in a
collection account and other assets as described in detail elsewhere in this
prospectus supplement.
AUTO LOANS
- - On the closing date, the seller will assign to the trust a pool of auto loans.
- - [On or before , the seller will assign additional auto loans to the
trust. The trust will purchase these auto loans with monies in the pre-funding
account.]
- - The trust will hold the auto loans as collateral for the certificates.
- - As of the aggregate PRINCIPAL BALANCE of the pool of auto loans
pledged as collateral was $ .
- -As of :
The weighted average contract rate of the auto loans is approximately %;
S-4
<PAGE>
The weighted average remaining term of the auto loans, that is the period
starting after the cut-off date and including each auto loan's scheduled
maturity, is approximately months; and
The weighted average original term of the auto loans is approximately months.
- The auto loans will consist of non-prime retail installment sales
contracts secured by new and used automobiles, light duty trucks and vans
which were purchased from automobile dealers under the subservicer's
financing program. The subservicers finance programs target automobile
purchasers with below average credit who have difficulty obtaining credit
from traditional lending sources.
- No auto loans will be more than [30] days delinquent as of .
- Each auto loan requires the borrower to make fixed, level payments that
will fully pay the balance of the amount borrowed by its maturity date.
- We will pay the certificates from payments on the auto loans and amounts
recovered when financed vehicles are repossessed and sold, after deducting
expenses.
CUT-OFF DATE
The opening of business on .
PAYMENT DATE
The [17th] day of each month if the [seventeenth] is a business day. If the
[seventeenth] is not a business day, the payment date will be the following day
that is a business day. The first payment date will be .
DETERMINATION DATE
The earliest of the fifth calendar day or the third business day before a
payment date. The servicer will calculate and instruct the trust and the trustee
as to the amounts to be paid on the certificates on the next payment date.
RECORD DATE
The last business day preceding a payment date unless the certificates are no
longer book-entry certificates. If the certificates are definitive certificates,
the record date is the last business day of the month preceding a payment date.
CLOSING DATE
On or about .
DENOMINATIONS
The trust will issue the certificates in minimum denominations of $100,000 and
integral multiples of $1,000. One certificate may be issued in another
denomination.
DISTRIBUTIONS
Each month, the trust will distribute the amounts received on the auto loans and
any other collections available as property of the trust as follows:
INTEREST DISTRIBUTIONS
On each payment date, interest that accrued during the interest accrual period
is payable at the applicable certificate pass-through rate. The pass-through
rate for the certificates is listed on the cover page of this prospectus
supplement. Interest on the certificates will be calculated on the basis of a
360-day year consisting of twelve thirty day months.
Amounts paid to holders of the certificates will be shared in proportion to
their interest in the trust.
PRINCIPAL DISTRIBUTIONS
On each payment date, the trust will pay principal in reduction of the
outstanding principal balance of the certificates.
Principal payments will be an amount generally equal to a percentage of the
decrease in the PRINCIPAL BALANCE of the auto loan pool during the prior
calendar month. These principal payments will be allocable between the Class A
Certificates and the Class B Certificates PRO RATA, and paid to the individual
Certificateholder in proportion to their percentage interest, until the
outstanding principal amount of that class is paid in full.
S-5
<PAGE>
PRIORITY OF DISTRIBUTIONS
On each payment date the AVAILABLE FUNDS will be paid out in the following order
of priority:
<TABLE>
<S> <C>
FIRST, if someone other than Household
Finance Corporation is the
servicer, the servicing fee;
SECOND, the trustee's fee, to the extent
not paid by the servicer;
THIRD, Class A Certificate interest;
FOURTH, Class A Certificate principal;
FIFTH, Class B Certificate interest;
SIXTH, Class B Certificate principal
SEVENTH, to fund the reserve account;
EIGHTH, if Household Finance Corporation is
the servicer, the servicing fee;
and
NINTH, to the seller.
</TABLE>
SUBORDINATION OF CLASS B CERTIFICATES
The Class B Certificates are subordinate to the Class A Certificates. On each
payment date the Class A Certificateholders will be entitled to receive the full
amount of the interest and principal due to them before any interest or
principal payments will be made to the Class B Certificateholders.
OVERCOLLATERALIZATION
The overcollateralization amount is the amount by which the POOL BALANCE exceeds
the outstanding principal balance of the certificates. The overcollateralization
amount will be available to absorb any losses that certificateholders would
otherwise incur. As of the closing date, the overcollateralization will be equal
to $ or of the POOL BALANCE as of .
RESERVE ACCOUNT
The [trustee] will hold a reserve account. We will use funds in the reserve
account to pay shortfalls in amounts due to the certificateholders of both
classes.
An initial deposit of $ will be placed in the reserve account on the
closing date. The servicer will deposit collections received from the auto loans
into the reserve account on each payment date after interest and principal
payments on the certificates and payment of certain fees and expenses have been
made.
The servicer will continue to make such deposits on each payment date until the
balance in the reserve account is the lesser of:
(i) greater of
(a) % of the PRINCIPAL BALANCE of the auto loans at the end of last day
of the calendar month preceding the current payment date,
and
(b) $ ,
and
(ii) the outstanding principal amount of the certificates.
We will use funds in the reserve account to pay shortfalls in amounts due to the
certificateholders and if Household Finance Corporation is no longer the
servicer, to pay any fees due to the servicer.
[PRE-FUNDING FEATURE]
- - [The trustee will hold $ of the proceeds of the certificates in a
pre-funding account which the trust will use to purchase additional auto loans
from the seller. The subservicer will acquire these additional auto loans
under the same purchase criteria as the auto loans in the trust on the closing
date.
- - The trust will purchase these additional auto loans on or before .]
OPTIONAL REDEMPTION
On any payment date when the outstanding principal balance of the auto loans is
less than or equal to $ , which is 10% of the original principal
balance of the auto loans as of , the servicer or the seller may purchase
the auto loans from the trust under a clean-up call. This will redeem the
certificates. If redemption occurs, we will pay you a final distribution
equaling the entire unpaid principal balance of the certificates plus any
accrued and unpaid interest.
S-6
<PAGE>
SCHEDULED MATURITY DATES
If the certificates have not already been paid in full, we will pay the
outstanding principal amount of the certificates in full on the following
payment dates:
Class A:
Class B:
Final payment on the certificates will probably be earlier than the scheduled
maturity date stated above.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes:
In the opinion of Dewey Ballantine LLP, the trust will be treated as a grantor
trust for federal income tax purposes and will not be subject to federal income
tax. Owners of beneficial interests in the certificates will report their pro
rata share of all income earned on the auto loans, other than amounts if any,
treated as STRIPPED COUPONS. Subject to certain limitations, such owners who are
individuals, trusts or estates, may deduct their pro rata share of reasonable
servicing and other fees.
ERISA CONSIDERATIONS
Subject to the important considerations described under "ERISA Considerations"
in this prospectus supplement, pension, profit-sharing and other employee
benefit plans may purchase the Class A Certificates. The Class B Certificates
are not eligible for purchase by ERISA plans. You should consult with your
counsel regarding the applicability of the particular provisions of ERISA,
before purchasing a Class A Certificate.
RATINGS
- - The trust will not issue the certificates unless they have been assigned the
ratings stated below:
<TABLE>
<CAPTION>
-------------------
<S> <C> <C>
RATING
-------------------
[AGENCY1] [AGENCY2]
-------- --------
Class A Certificates....
Class B Certificates....
</TABLE>
- - You should know that the ratings could be lowered, qualified or withdrawn by
the rating agencies.
S-7
<PAGE>
RISK FACTORS
WE RECOMMEND YOU CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO INVEST IN THE CERTIFICATES OFFERED BY THIS PROSPECTUS
SUPPLEMENT.
GEOGRAPHIC CONCENTRATION OF AUTO LOANS MAY ADVERSELY AFFECT THE CERTIFICATES.
Adverse economic conditions or other factors particularly affecting any state or
region where a high concentration of auto loans is located could adversely
affect the certificates. As of , approximately % and % of
the auto loans (based on the PRINCIPAL BALANCE and mailing address of the
borrowers) were located in and , respectively. The
location of the auto loans by state, based upon borrower address, is set out in
the table beginning on page S-19 of this prospectus supplement.
THE CLASS B CERTIFICATES ARE SUBORDINATED CERTIFICATES, AND THE RISK OF LOSS OR
DELAY IN DISTRIBUTIONS IS GREATER THAN ON THE CLASS A CERTIFICATES.
Distributions of interest and principal on the Class B Certificates will be
subordinated in priority of payment to interest and principal due on the
Class A Certificates. Consequently, the Class B Certificateholders will not
receive any distributions on a payment date unless the full amount of interest
and principal due on the Class A Certificates on that payment date has been
distributed to the Class A Certificateholders. This subordination has the effect
of increasing the likelihood of payment on the Class A Certificates and
therefore decreasing the likelihood of payment on the Class B Certificates.
[THE SUBSERVICER MAY BE UNABLE TO ORIGINATE ENOUGH AUTO LOANS TO USE ALL MONEYS
IN THE PRE-FUNDING ACCOUNT AND THEREFORE YOU MAY BE EXPOSED TO REINVESTMENT
RISK].
[The ability of the subservicer to 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 the subservicer does not originate sufficient additional auto loans, the
money remaining in the pre-funding account as of will not be used to
acquire additional loans and a mandatory redemption of a portion of the
certificates could result.
If a mandatory redemption occurs then you will receive a principal prepayment.
You will bear the risk of reinvesting any prepayment.]
[RATINGS ON CERTIFICATES ARE DEPENDENT UPON THE INSURER'S CREDITWORTHINESS.]
[The ratings of the certificates will depend primarily on the creditworthiness
of the insurer as the provider of the financial guarantee insurance policy
relating to the certificates. There is a risk that if the insurer's financial
strength ratings are reduced, the rating agencies may reduce the certificates'
ratings.]
S-8
<PAGE>
YEAR 2000 COMPLIANCE MAY CAUSE DELAYS IN PAYMENTS TO YOU.
The servicer and subservicer are in the process of addressing issues arising
from the year 2000 issue that could impact the timely payment of principal and
interest on the certificates. The year 2000 issue is the result of prior
computer programs being written using two digits to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. Any such occurrence could
result in major computer system failure or miscalculations. Although the
servicer and subservicer reasonably believe that their servicing systems will be
year 2000 compliant prior to the year 2000, they are presently engaged in
various procedures to determine if their computer systems and software, and
those of their material suppliers, customers and agents will be year 2000
compliant.
In the event that the servicer or the subservicer, or any of their suppliers,
customers or agents do not successfully and timely achieve year 2000 compliance,
the servicer's performance of its obligations under the sale and servicing
agreement could be adversely affected. This could result in delays in processing
payments on the auto loans and could cause a delay in payments to you.
S-9
<PAGE>
USE OF PROCEEDS
The net proceeds received by the trust from the sale of the certificates will be
used to pay Household Auto Receivables Corporation the purchase price for the
auto loans, [to fund the initial deposit in the reserve account][to deposit the
pre-funded amount into the pre-funding account], and .
THE TRUST
GENERAL
The trust, Household Automotive Trust , will be a New York common law trust
formed under a POOLING AND SERVICING AGREEMENT, dated as of between
the seller, the servicer and the trustee for the purpose of engaging in the
transactions described in this prospectus supplement. The trust will not engage
in any activity other than (1) acquiring, holding and managing the auto loans
and the other assets of the trust, (2) issuing certificates in private and
public offerings, including the issuance of the certificates, (3) making
payments on the certificates and (4) engaging in other activities in connection
with the certificates.
THE TRUSTEE
[Name of the Trustee] will be the trustee under the pooling and servicing
agreement. [Name of the Trustee] is a [New York] banking corporation, the
principal offices of which are located at [address].
THE TRUST ASSETS
GENERAL
The trust assets consist of the following:
- the auto loans;
- all amounts paid or payable under the auto loans after the [initial or
subsequent] cut-off date;
- security interests in the financed vehicles granted by the borrowers;
- an assignment of the subservicer's rights against automobile dealers under
agreements between the subservicer and the dealers;
- an assignment of the right to receive proceeds from claims on loss,
physical damage, credit life, disability, theft, mechanical breakdown, or
similar insurance policies covering the financed vehicles or the
borrowers;
- all funds on deposit from time to time in the collection account [and the
pre-funding account];
- an assignment of all rights and benefits under the receivables purchase
agreement which consists of a master receivables purchase agreement, dated
as of between the seller and the subservicer and all supplements
thereto;
- all documents related to the auto loans, including the original contracts,
documents evidencing insurance, original credit applications and original
certificates of title or copies of applications therefor;
- a share of the preferred stock of the seller; and
- all proceeds from the trust assets.
The auto loans were originated by dealers in accordance with the subservicer's
requirements, have been assigned by the dealers to the subservicer, and evidence
the indirect financing made available to the borrowers by the subservicer.
Dealer agreements may provide for repurchase or recourse against the dealer in
the event of a breach of a representation or warranty by the dealer.
S-10
<PAGE>
All of the auto loans were sold by the subservicer to the seller under the
receivables purchase agreement and by the seller to the trust under the sale and
servicing agreement. The auto loans were originated by dealers and purchased by
the subservicer in the ordinary course of the subservicer's business in accord
with its finance programs and underwriting standards. The files relating to the
auto loans will be held by the subservicer as custodian for the trustee.
ELIGIBILITY CRITERIA OF THE INITIAL AUTO LOANS
The auto loans were selected according to several criteria.
Each auto loan:
- was originated by a dealer located in the United States to a borrower who
was a resident of the United States with a mailing address in the United
States,
- has a contractual annual percentage rate, or APR, of not less than
[ ]% or more than [ ]%,
- provides for level monthly payments which provide interest at the APR and
fully amortize the original PRINCIPAL BALANCE over an original term no
greater than [72] months,
- is not more than [30] days past due as of the cut-off date,
- is attributable to the purchase of a new or used automobile, light duty
truck or van,
- as of the cut-off date has a remaining term of not more than [72] months
and
- had an original PRINCIPAL BALANCE of at least $[3,000] and not more than
$[30,000].
- No selection procedures adverse to the certificateholders were utilized in
selecting the auto loans to be conveyed to the trust.
[ADDITIONAL AUTO LOANS]
[During the funding period, the seller will purchase the subsequent auto loans
from the subservicer and then sell them to the trust. The seller will sell the
subsequent auto loans to the trust on the subsequent transfer dates. The trust
will use the funds in the pre-funding account to purchase the subsequent auto
loans.
The trust's obligation to purchase the subsequent auto loans is subject to the
following conditions:
- as of each loan's subsequent cut-off date, each subsequent auto loan
and/or subsequent financed vehicle must satisfy the auto loan eligibility
criteria specified under "Eligibility Criteria" above regarding the
initial auto loans;
- [the insurer, if there is no insurer default, has approved the subsequent
auto loans transfer to the trust];
- Neither the subservicer nor the seller has selected the subsequent auto
loans in a manner that either of them believes is adverse to the interests
of [the insurer or] the certificateholders;
- The subservicer and the seller will deliver certain opinions of counsel
regarding the validity of the subsequent auto loan transfer; and
- [Name of rating agency] must confirm that the ratings on the certificates
have not been withdrawn or reduced because of the subsequent auto loans
transfer to the trust.
Because the subsequent auto loans may be originated after the initial auto
loans, the auto loan pool's characteristics after the transfer of subsequent
auto loans to the pool may vary from the initial pool.
In addition, the trust's obligation to purchase the subsequent auto loans is
subject to the condition that the auto loans in the trust, including the
subsequent auto loans to be transferred, meet the following criteria:
(a) the auto loans' weighted average annual percentage rate is not less than
%;
S-11
<PAGE>
(b) the auto loans' weighted average remaining term on the subsequent
cut-off date is not greater than months; and
(c) not more than % of the obligors on the auto loans reside in and .
The criteria in clauses (a) and (b) will be based:
- on the characteristics of the initial auto loans on the initial cut-off
date and
- the auto loans, including the subsequent auto loans, on the related
subsequent cut-off date.
The criteria in clause (c) will be based on the obligor's mailing addresses on:
- the initial auto loans on the initial cut-off date and
- the subsequent auto loans on the related subsequent cut-off dates.
Except for the above described criteria, there are no required characteristics
for the subsequent auto loans. Therefore, following the transfer of subsequent
auto loans to the trust, the aggregate characteristics of the entire pool of
auto loans included in the trust may vary in the following respects:
- composition of the auto loans;
- geographic distribution;
- distribution by remaining PRINCIPAL BALANCE;
- distribution by APR;
- distribution by remaining term; and
- distribution of the auto loans secured by new and used vehicles.]
COMPOSITION OF THE [INITIAL]AUTO LOANS
Presented below is a description of the material characteristics of the auto
loans as of the cut-off date:
<TABLE>
<CAPTION>
--------------
<S> <C>
TOTAL POOL OF
THE
[INITIAL] AUTO
LOANS
--------
Original pool balance.......................................
Number of auto loans........................................
Average principal balance(1)................................
Range of principal balances.................................
Average original principal balance(2).......................
Range of original principal balance.........................
Weighted average APR(3).....................................
Range of original APRs......................................
Weighted average original term(3)...........................
Range of original terms.....................................
Weighted average remaining term(3)..........................
Range of remaining terms....................................
Weighted average months of seasoning(3).....................
Range of months of seasoning................................
Number of auto loans more than 30 days delinquent...........
</TABLE>
(1) Pool balance as of the cut-off date divided by total number of auto loans.
(2) Aggregate amount financed divided by total number of auto loans.
(3) Weighted by principal balance as of the cut-off date.
S-12
<PAGE>
COMPOSITION OF THE [INITIAL] AUTO LOANS BY PRINCIPAL BALANCE
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF % OF POOL BY
AUTO AUTO PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE LOANS LOANS OUTSTANDING BALANCE
- --------------------------------------- --- --- --- ---
$ 3,000 to 4,000....................... % $ %
4,001 to 5,000.......................
5,001 to 6,000.......................
6,001 to 7,000.......................
7,001 to 8,000.......................
8,001 to 9,000.......................
9,001 to 10,000......................
10,001 to 11,000......................
11,001 to 12,000......................
12,001 to 13,000......................
13,001 to 14,000......................
14,001 to 15,000......................
15,001 to 16,000......................
16,001 to 17,000......................
17,001 to 18,000......................
18,001 to 19,000......................
19,001 to 20,000......................
20,001 to 21,000......................
21,001 to 22,000......................
22,001 to 23,000......................
23,001 to 24,000......................
24,001 to 25,000......................
25,001 to 26,000......................
26,001 to 27,000......................
27,001 to 28,000......................
28,001 to 29,000......................
29,001 to 30,000......................
--- --- --- ---
Total................................ % $ %
=== === === ===
</TABLE>
S-13
<PAGE>
COMPOSITION BY APR OF THE [INITIAL] AUTO LOANS
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF % OF POOL BY
AUTO AUTO PRINCIPAL PRINCIPAL
APR RANGE LOANS LOANS OUTSTANDING BALANCE
- ------------------------------------------------ --- --- --- ---
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..................................
20.00 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..................................
26.00 to 27.00..................................
--- --- --- ---
Total......................................... % $ %
=== === === ===
</TABLE>
COMPOSITION OF THE [INITIAL] AUTO LOANS BY INTEREST ACCRUAL METHOD
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF POOL BY
AUTO % OF AUTO PRINCIPAL PRINCIPAL
INTEREST ACCRUAL METHOD LOANS LOANS OUTSTANDING OUTSTANDING
- ---------------------------------------- --- --- --- ---
Actuarial............................... % $ %
Simple Interest.........................
--- --- --- ---
Total................................. % $ %
=== === === ===
</TABLE>
S-14
<PAGE>
COMPOSITION OF THE [INITIAL] AUTO LOANS BY STATE OF RESIDENCE
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF % OF POOL BY
AUTO AUTO PRINCIPAL PRINCIPAL
LOCATION OF MAILING ADDRESS OF BORROWER LOANS LOANS OUTSTANDING BALANCE
- ----------------------------------------------- ------ ------ ------- ------
Alabama........................................ % $ %
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..................................
Wisconsin......................................
Wyoming........................................
------ ------ ------- ------
Total...................................... % $ %
====== ====== ======= ======
</TABLE>
S-15
<PAGE>
COMPOSITION BY REMAINING TERM OF THE [INITIAL] AUTO LOANS
(AS OF THE [INITIAL] CUT-OFF DATE)
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF % OF POOL BY
AUTO AUTO PRINCIPAL PRINCIPAL
REMAINING TERM RANGE (IN MONTHS) LOANS LOANS OUTSTANDING BALANCE
- ----------------------------------------------- ------ ------ ------- ------
18 to 23....................................... % $ %
24 to 29.......................................
30 to 35.......................................
36 to 41.......................................
42 to 47.......................................
48 to 53.......................................
54 to 59.......................................
60 to 65.......................................
66 to 71.......................................
72.............................................
------ ------ ------- ------
Total...................................... % $ %
====== ====== ======= ======
</TABLE>
COMPOSITION OF [INITIAL] AUTO LOANS BY TYPE OF FINANCED VEHICLE
<TABLE>
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
OF % OF % OF POOL BY
AUTO AUTO PRINCIPAL PRINCIPAL
TYPE OF FINANCING LOANS LOANS OUTSTANDING OUTSTANDING
- -------------------------------------------- ------ ------ ------- ------
New......................................... % $ %
Used........................................
------ ------ ------- ------
Total................................... % $ %
====== ====== ======= ======
</TABLE>
THE PREFERRED STOCK
The trust assets include one share of preferred stock of the seller. The
preferred stock has a par value of $1.00 and is designated the Class SV
Preferred Stock. Issuance of the preferred stock to the trust is intended to
prevent the seller from instituting bankruptcy and will have no impact on the
bankruptcy remoteness of the trust. Under the Articles of Incorporation of the
seller, the rights of the holders of the preferred stock are limited to
(a) voting in the event the seller desires to institute proceedings to be
adjudicated insolvent, consent to the institution of any bankruptcy or
insolvency case or petition, make an assignment for the benefit of creditors, or
admit in writing its inability to pay its debts as they become due, and
(b) receiving $1.00 upon liquidation of the seller. The unanimous affirmative
vote of the holders of the preferred stock is required to approve any of the
seller's bankruptcy initiatives. Holders of the preferred stock of the seller
have no other rights, including the right to receive dividends or to vote on any
other matter.
Under the trust's pledge of its interest in the trust assets, the trustee has
the exclusive authority to vote the interest of the trust in the preferred
stock. In the pooling and servicing agreement, the trustee covenants that it
will not consent to any of the seller's bankruptcy initiatives. Because
unanimous consent of the holders of the preferred stock is required to approve
any of the seller's bankruptcy initiatives, the holders of the certificates will
be able to unilaterally prevent the implementation of the seller's bankruptcy
initiatives.
S-16
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
All the auto loans are prepayable at any time. If prepayments are received on
the auto loans, the actual weighted average life of the auto loans may be
shorter than the scheduled weighted average life, since the scheduled weighted
average life assumes that payments will be made as scheduled, and that no
prepayments occur. For this purpose, the term prepayments also includes
liquidations due to default, as well as receipt of proceeds from credit life,
credit disability, and casualty insurance policies. Weighted average life means
the average amount of time during which each dollar of principal of an auto loan
is outstanding.
The rate of prepayments on the auto loans may be influenced by a variety of
economic, social, and other factors, including the fact that a borrower may not
sell or transfer a financed vehicle without the consent of the subservicer. The
subservicer believes that the actual rate of prepayments will result in a
substantially shorter weighted average life than the scheduled weighted average
life of the auto loans. If a certificate is purchased at a premium, and the
actual rate of prepayments exceed the rate of prepayments anticipated at the
time the certificate was purchased, the actual yield to maturity of the
certificate will be less than the yield anticipated at the time of purchase. If
a certificate is purchased at a discount, and the rate of prepayments is less
than the rate of prepayments anticipated at the time the certificate was
purchased, the actual yield to maturity will be less than the yield anticipated
at the time of purchase. Any reinvestment risk, which is the risk that a
certificateholder will not be able to reinvest amounts received in payment on
the certificates at interest rates that are greater than or equal to the
certificate rate, resulting from a faster or slower incidence of prepayment of
auto loans will be borne by the certificateholders.
The rate of payment of principal of the certificates will depend on the rate of
payment, including prepayments, of the PRINCIPAL BALANCE of the auto loans. As a
result, final payment of the certificates could occur significantly earlier than
the final scheduled payment date for the class.
Prepayments on auto loans can be measured relative to a prepayment standard or
model. The model used in this prospectus supplement, the absolute prepayment
model, or ABS, represents an assumed rate of prepayment each month relative to
the original number of auto loans in a pool. ABS further assumes that all the
auto loans are the same size and amortize at the same rate and that each auto
loan in each month of its life will either be paid as scheduled or be prepaid in
full. For example, in a pool of auto loans originally containing 10,000 auto
loans, a 1% ABS rate means that 100 auto loans 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 auto loans.
The tables captioned "Percent of Initial Certificate Principal Balance at
Various ABS Percentages", also called the ABS Tables, have been prepared on the
basis of the following assumptions:
- the auto loans prepay in full at the specified constant percentage of ABS
monthly, with no defaults, losses or repurchases;
- each scheduled monthly payment on the auto loans is made on the last day
of each month and each month has 30 days;
- the initial principal amount of the certificates is as stated on the cover
page;
- interest on the certificates accrues during each interest period at the
following assumed coupon rates: Class A Certificates, %; and Class B
Certificates, %.
- payments on the certificates are made on the day of each month whether or
not a business day;
- the certificates are purchased on the closing date;
- [the entire pre-funded amount issued to purchase subsequent auto loans;]
- the scheduled monthly payment for each auto loan has been calculated on
the basis of the assumed characteristics presented in the table below, and
each auto loan will amortize in amounts sufficient to repay the PRINCIPAL
BALANCE of the auto loans by its indicated remaining term to maturity; and
- the seller or the servicer exercises its clean-up call redemption.
S-17
<PAGE>
The ABS Tables also assume that (1) the auto loans have been aggregated into
hypothetical pools with all of the auto loans within each pool having the
following characteristics, and (2) that the level of scheduled monthly payment
for each of the pools, which is based on its aggregate PRINCIPAL BALANCE, gross
APR, original number of scheduled payments and remaining number of scheduled
payments as of the cut-off date, will be calculated so that each pool will be
fully amortized by the end of its remaining term to maturity.
<TABLE>
<CAPTION>
---------------------------------------------------
<S> <C> <C> <C> <C>
REMAINING
AGGREGATE TERM SEASONING
PRINCIPAL TO MATURITY (IN
POOL BALANCE APR (IN MONTHS) MONTHS)
- ----------------------------------------------- -------- --- -------- -------
1.............................................. $ %
2..............................................
3..............................................
4..............................................
5..............................................
</TABLE>
The ABS Tables indicate, based on the assumptions described above, the
percentages of the initial principal amount of the certificates that would be
outstanding after each of the payment dates shown at various percentages of ABS
and the corresponding weighted average lives of the certificates. The actual
characteristics and performance of the auto loans 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 varying prepayment scenarios. For
example, it is very unlikely that the auto loans will prepay at a constant level
of ABS until maturity or that all of the auto loans will prepay at the same
level of ABS. Moreover, the diverse terms of auto loans could produce slower or
faster principal distributions than indicated in the ABS Tables at the various
constant percentages of ABS specified, even if the original and remaining terms
to maturity of the auto loans are as assumed. Any difference between the
assumptions and the actual characteristics and performance of the auto loans,
including actual prepayment experience or losses, will affect the percentages of
initial balances outstanding over time and the weighted average lifes of the
certificates.
S-18
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A CERTIFICATES CLASS B CERTIFICATES
----------------------------------------- -----------------------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- -------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
Weghted Average Life in Years(2)......
</TABLE>
(1) The percentages in this table have been rounded to nearest whole number.
(2) The WEIGHTED AVERAGE LIFE of a certificate is determined by (1) multiplying
the amount of each principal payment on a certificate by the number of years
from the date of the issuance of the certificates to the payment date,
(2) adding the results and (3) dividing the sum by the initial principal
amount of the certificates of that class.
DELINQUENCY AND LOSS INFORMATION OF THE SUBSERVICER
Presented below is information concerning the subservicer's delinquency and loss
experience for its servicing portfolio of auto loans for new and used
automobiles, light duty trucks and vans originated or acquired under to its
finance programs. Delinquency is recognized on a contractual basis only.
Installment payments must equal or exceed 90% of the scheduled payment due for a
contract to be considered current.
The information has not been adjusted to eliminate the effect of the significant
growth in the size of the subservicer's portfolio or changes to its underwriting
or charge-off policies during the periods shown. In response to competitive and
market conditions, the subservicer's underwriting policies have changed in
various respects over the periods presented. The subservicer does not believe
these changes had a material impact on the historical delinquency and loss
experience presented below.
In the fourth quarter of 1997 the subservicer began charging off non-securitized
auto loans at the earlier of: (1) the date an auto loan becomes 150 days
delinquent and (2) 90 days after a vehicle has been repossessed if it remains
unsold. Prior to that change, and continuing for all auto loans securitized
prior to 1998, auto loans were charged off (1) at 120 days delinquent and
(2) 60 days after a vehicle was repossessed if it remained unsold. The impact of
these changes did not have a material impact on the delinquency and loss
experience as reported for years-end 1997 and 1998 and for the months ended
. It is also not expected that the change in the charge-off policy
will have a material impact on the delinquency or loss rates in the future.
If adjustments were made for the growth of the portfolio, loss and delinquency
as percentages of auto loans serviced for each period would be higher than those
shown. The tables below present all auto loan data for auto loans purchased by
the subservicer, including auto loans managed in states which are not
represented in the pool consisting of the auto loans. Following the merger in
which Household International, Inc. acquired ACC Consumer Finance Corporation,
the subservicer assumed management and servicing responsibilities for a
portfolio of auto loans purchased or acquired by another Household
International, Inc. subsidiary. None of the auto loans held by this entity are
included in the auto loans or the performance results presented in the following
tables.
S-19
<PAGE>
HISTORICAL DELINQUENCY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
[YEAR] [YEAR] [YEAR] [YEAR] [YEAR]
------------------- ------------------- ------------------- ------------------- -------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Principal............
Outstanding
Delinquencies(1)(2)...
31-60 Days.........
61-90 Days.........
Over 90 Days.......
Subtotal.........
Repossession on
hand(3)............
Total Delinquencies
and Repossession on
hand...............
<CAPTION>
-------------------
<S> <C> <C>
MONTHS
ENDED
-------------------
[YEAR]
-------------------
DOLLARS PERCENT
-------- --------
Principal............
Outstanding
Delinquencies(1)(2)
31-60 Days.........
61-90 Days.........
Over 90 Days.......
Subtotal.........
Repossession on
hand(3)............
Total Delinquencies
and Repossession on
hand...............
</TABLE>
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) Delinquencies include bankruptcies. Bankruptcies represent approximately %
of outstanding principal for each period presented.
(3) Amounts shown under "repossession on hand" represent the expected net
realizable value for repossessed vehicles that have not been sold.
HISTORICAL NET LOSS EXPERIENCE
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, MONTHS
---------------------------------------------------- ENDED
[YEAR] [YEAR] [YEAR] [YEAR] [YEAR] ,
-------- -------- -------- -------- -------- --------
Principal outstanding......................... $ $ $ $ $ $
Average principal amount outstanding.......... $ $ $ $ $ $
Number of contracts outstanding...............
Average number of contracts outstanding.......
Number of repossessions.......................
Number of repossessions as a percent of
average number of contracts outstanding,
annualized..................................
Net losses(1)................................. $ $ $ $ $ $
Net losses as a percent of average principal
amount outstanding, annualized..............
</TABLE>
(1) Net losses are net of recoveries and include PRINCIPAL BALANCE at time of
charge-off. In the case of repossession, net losses include the remaining
balance at the time of repossession less liquidation proceeds for disposed
vehicles, or the NADA wholesale value for vehicles repossessed but not sold.
Net losses do not include repossessions that are less than 150 days
delinquent and are not charged off.
S-20
<PAGE>
The seller expects that the delinquency, loss and repossession experience for
the auto loans will be generally consistent with the information provided in the
above tables. However, as the subservicer's portfolio matures and the rate of
growth slows, which is likely, it can be expected that the delinquency, loss and
repossession percentages for the portfolio will increase, and may increase
significantly. This is because a higher portion of the portfolio will consist of
contracts proceeding through a typical delinquency and loss pattern. The amount
of these increases cannot be estimated. There is no assurance that delinquency,
credit loss and repossession experience for auto loans in the future, or the
experience of the trust, will be similar to that described above. 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
vans.
[THE INSURER]
[The following information has been obtained from [Name of Insurer] and has not
been verified by the seller or the underwriters. No representations or warranty
is made by the seller or the underwriters with respect thereto.
GENERAL
[Name of Insurer] is a monoline insurance company incorporated in under
the laws of the State of . The insurer is licensed to engage in the
financial guaranty insurance business in [all 50 states, the District of
Columbia and Puerto Rico].
The insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's
securities--thereby enhancing the credit rating of those securities--in
consideration for the payment of a premium to the insurer. The insurer and its
subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are generally supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments. The
insurer insures both newly issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the insurer's
underwriting criteria.
The principal executive offices of the insurer are located at [address], and its
telephone number at that location is .
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the insurer are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the insurer reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the insurer as
a risk management device and to comply with certain statutory and rating agency
requirements; it does not alter or limit the insurer's obligations under any
financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY
The insurer's insurance financial strength is rated " " by [Rating Agency].
The insurer's financial strength is rated " " by [Rating Agency]. The
insurer's claims-paying ability is rated " " by [Rating Agency]. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies herein.
S-21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the insurer and its
wholly-owned subsidiaries on the basis of generally accepted accounting
principles as of :
<TABLE>
<CAPTION>
----------
<S> <C>
[DATE]
-------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance
premiums)................................................. $
Surplus Certificates........................................
Minority Interest...........................................
Shareholder's Equity:
Common Stock..............................................
Additional Paid-In Capital................................
Accumulated Other Comprehensive Income (net of deferred
income taxes)...........................................
Accumulated Earnings......................................
Total Shareholder's Equity................................
Total Deferred Premium Revenue, Surplus Certificates,
Minority Interest and Shareholder's Equity................ $
</TABLE>
For further information concerning the insurer, see the consolidated financial
statements of the insurer and subsidiaries, and the certificates thereto,
incorporated by reference herein. The Insurer's financial statements are
included as exhibits to the annual report on Form 10-K and quarterly reports on
Form 10-Q filed with the Securities and Exchange Commission by [Name of Insurer]
and may be reviewed at the EDGAR website maintained by the Securities and
Exchange Commission. Copies of the statutory quarterly and annual statements
filed with the [State of New York Insurance Department] by the insurer are
available upon request to the [State of New York Insurance Department].
INSURANCE REGULATION
The insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of [New York], its state of
domicile. In addition, the insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of [New York], the insurer is subject to
[Article 69 of the New York Insurance Law] which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ("single risks")
and the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the [New York Insurance Law], applicable
to non-life insurance companies such as the insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liabilities for borrowings.]
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued according to the terms of the pooling and
servicing agreement. The pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus supplement is a
part. The following summary describes terms of the certificates and the pooling
and servicing agreement.
The certificates will be issued only in fully registered form, in denominations
of $ and integral multiples of $ . The certificates will represent
beneficial ownership interests in the assets of the trust. Replacement
certificates, if issued, will be transferable and exchangeable at the corporate
trust office of the trustee. No service
S-22
<PAGE>
charge will be made for any registration, exchange or transfer of certificates,
but the trustee may require payment of a sum sufficient to cover any tax or
other governmental charge.
The payment date is the [17th] day of each month, or if that day is not a
BUSINESS DAY, the next succeeding BUSINESS DAY.
The class A certificateholders are entitled to receive, on each payment date,
the CLASS A PERCENTAGE of the PRINCIPAL DISTRIBUTABLE AMOUNT plus interest at
the class A pass-through rate on the class A PRINCIPAL BALANCE. Subject to the
prior rights of the class A certificateholders, the class B certificateholders
are entitled receive, on each payment date, the CLASS B PERCENTAGE of the
PRINCIPAL DISTRIBUTABLE AMOUNT plus interest at the class B pass-through rate on
the class B PRINCIPAL BALANCE.
The certificates represent beneficial ownership interests in the trust. The
Class A Certificates will evidence in the aggregate an undivided ownership
interest of approximately %, which is the CLASS A PERCENTAGE of the trust and
the Class B Certificates will evidence in the aggregate an undivided ownership
interest of approximately %, which is the CLASS B PERCENTAGE of the trust.
PAYMENTS OF INTEREST
Interest on the certificates will be payable monthly on each payment date,
commencing on , in an amount equal to interest accrued during the
applicable interest period, as defined below, at the certificate rate on the
outstanding principal balance for certificates. The per annum rate of interest
accruing on the certificates of each class is referred to as the pass-through
rate for that class certificates. The pass-through rate for the Class A
Certificates is %, and the pass-through rate for the Class B Certificates is
%.
Interest on the certificates for a payment date will accrue from, and including,
the preceding payment date, or in the case of the first payment date, from the
closing date, through, and including, the day preceding the payment date. Each
of these periods is an interest period. Interest on the certificates will be
calculated on the basis of a 360-day consisting of twelve thirty day months.
Interest for any payment date due but not paid on the payment date will bear
interest, to the extent permitted by applicable law, at the applicable
pass-through rate until paid.
PAYMENTS OF PRINCIPAL
On each payment date, principal payments will be distributed on the certificates
in an amount generally equal to a percentage of the decease in the PRINCIPAL
BALANCE of the auto loan pool during the prior calendar month to the extent of
funds available. These principal payments will be allocable between the Class A
Certificates and the Class B Certificates PRO RATA, and will be paid to the
certificateholders in proportion to their percentage interest, until the
outstanding principal amount of that class is paid in full.
PAYMENT PRIORITIES
You can find definitions of the technical cashflow terms used in this section in
the Glossary beginning on page S-43 of this prospectus supplement.
On or prior to each payment date, the servicer will instruct the trustee to make
the following distributions in the following order of priority:
(1) from the AVAILABLE FUNDS, to the servicer, any supplemental servicing
fees for the COLLECTION PERIOD and if Household Finance Corporation is no
longer acting as servicer, the servicing fee for the COLLECTION PERIOD;
(2) from the remaining AVAILABLE FUNDS, to the trustee, any accrued and
unpaid trustee's fees, but only to the extent these fees have not been
previously paid by the servicer;
(3) from the remaining AVAILABLE FUNDS, the CLASS A INTEREST DISTRIBUTABLE
AMOUNT will be paid to the class A certificateholders;
S-23
<PAGE>
(4) from the remaining AVAILABLE FUNDS, the CLASS A PRINCIPAL DISTRIBUTABLE
AMOUNT will be paid to the class A certificateholders, until the
outstanding principal amount of the Class A Certificates is paid in full;
(5) from the remaining AVAILABLE FUNDS, the CLASS B INTEREST DISTRIBUTABLE
AMOUNT will be paid to the class B certificateholders;
(6) from the remaining AVAILABLE FUNDS, the CLASS B PRINCIPAL DISTRIBUTABLE
AMOUNT will be paid to the Class B Certificateholders until the
outstanding PRINCIPAL BALANCE of the Class B Certificates is reduced to
zero.
(7) from the remaining AVAILABLE FUNDS, to the reserve account, the RESERVE
ACCOUNT DEPOSIT AMOUNT, if necessary, required to increase the amount in
the reserve account to its then required level;
(8) from the remaining AVAILABLE FUNDS, if Household Finance Corporation is
acting as the servicer, the servicing fee for the prior COLLECTION
PERIOD; and
(9) any remainder to the seller.
[Amounts on deposit in the reserve account on any payment date, after giving
effect to all distributions made on the payment date and the related payment
date, in excess of the TARGETED RESERVE ACCOUNT BALANCE for the payment date may
be released first, to the servicer to pay any servicing fees and supplemental
servicing fees that are due, and any remainder may be released to the seller.]
[Amounts available under the insurance policy are available to pay the
certificate principal only in two circumstances:
- to reduce, after taking into account all reductions funded from other
sources, the aggregate principal balance of the certificates to the
collateral balance--i.e., the sum of the POOL BALANCE plus the pre-funded
amount--in the event that the certificate principal balance would
otherwise exceed the collateral balance; and
- to pay off each class's principal on its final scheduled distribution
date, to the extent that the class is not paid off on or prior to the
final scheduled distribution date from other sources.]
[MANDATORY REDEMPTION]
[If any portion of the pre-funded amount remains on deposit in the pre-funding
account at the end of the funding period, each class of certificates will be
redeemed in part on the mandatory redemption date. Each class' certificate
prepayment amount of the remaining pre-funded amount on that date will be an
amount equal to that class' pro rata share, based on the respective current
principal amount of each class of certificates. However, if the aggregate
remaining amount in the pre-funding account is $100,000 or less, that amount
will be applied exclusively to reduce the outstanding principal balance of the
class of certificates then entitled to receive principal distributions.]
MATURITY DATES; OPTIONAL REDEMPTION
Each class of certificates will mature on the earlier of the date the class of
certificates is paid in full or the respective scheduled maturity date for the
class. The class A scheduled maturity date is and the class B
scheduled maturity date is . The payment date occurring on
is also referred to as the final scheduled payment date. In the event
there are insufficient funds to retire either class of certificates by its
respective scheduled maturity date in each case, subject to a five day grace
period, an event of default will occur. In addition, the trust will pay the
certificates in full on the payment date following exercise by the seller or the
servicer of the option to purchase the auto loans from the trust. This will
cause a redemption of the certificates. The option may be exercised on or after
the payment date on which the AGGREGATE CERTIFICATE PRINCIPAL BALANCE is reduced
to an amount less than or equal to $ , which is % of the original
AGGREGATE CERTIFICATE PRINCIPAL BALANCE. The redemption price will be equal to
the sum of the AGGREGATE CERTIFICATE PRINCIPAL BALANCE and accrued and unpaid
interest through the day preceding the call date.
S-24
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
With each distribution to the certificateholders, the trustee will prepare and
forward to each certificateholder a statement, which will include the following
information for that payment date:
(1) the amount of the distribution allocable to interest on each class of
the certificates;
(2) the amount of the distribution allocable to principal on each class of
the certificates;
(3) the aggregate outstanding principal amount for each class of
certificates, in each case, after giving effect to all payments reported
under (2) above for that payment date;
(4) the CLASS A INTEREST CARRYOVER SHORTFALL and the Class A Principal
Carryover Shortfall, if any, and the change in those amounts from the
preceding statement;
(5) the amount of the servicing fee paid to the servicer for the prior
COLLECTION PERIOD; and
(6) the TARGETED RESERVE ACCOUNT BALANCE and the amount on deposit in the
reserve account at the end of the payment date.
The information furnished under (1) through (4) above will be expressed as a
dollar amount per $ in face amount of certificates.
CREDIT ENHANCEMENT
SUBORDINATION OF THE CLASS B CERTIFICATES
The rights of the Class B Certificateholders to receive distributions generally
will be subordinated to the rights of the Class A Certificateholders in the
event of defaults and delinquencies on the auto loans. The protection afforded
to the Class A Certificateholders through subordination will be effected by the
preferential right of the Class A Certificateholders to receive current
distributions of interest and principal, before any interest or principal is
payable to the Class B Certificateholders.
THE RESERVE ACCOUNT
An initial deposit of $ , which is [ ]% of the POOL BALANCE as of the
cut-off date, will be placed in the reserve account. The reserve account will be
increased on each payment date by the deposit in the reserve account of amounts
remaining after payments to the certificateholders and any fees until the amount
on deposit in the reserve account equals the TARGETED RESERVE ACCOUNT BALANCE
after first determining whether any servicing fees or supplemental servicing
fees are due. Amounts in the reserve account on any payment date, after giving
effect to all withdrawals from the reserve account in excess of the TARGETED
RESERVE ACCOUNT BALANCE that payment date will be paid, first to the servicer
for any servicing fees and supplemental servicing fees then due, and any
remainder to the seller.
The reserve account will not be part of the trust, but will be a segregated
trust account held by the trustee. Amounts in the reserve account will be held
for the benefit of holders of the certificates of both classes. Funds in the
reserve account shall be invested in eligible investments. The Seller is
entitled to receive all investment earnings on amounts in the reserve account,
as well as any amounts in the reserve account in excess of the TARGETED RESERVE
ACCOUNT BALANCE.
Amounts in the reserve account on a payment date will be used to fund any
shortfalls in AVAILABLE FUNDS on that payment date to fund the full amounts of
the servicing fee then payable to a servicer other than Household Finance
Corporation, the CLASS A INTEREST DISTRIBUTABLE AMOUNT, the CLASS A PRINCIPAL
DISTRIBUTABLE AMOUNT, the CLASS B INTEREST DISTRIBUTABLE AMOUNT and the CLASS B
PRINCIPAL DISTRIBUTABLE AMOUNT, in that order.
OVERCOLLATERALIZATION
The overcollateralization is the difference between the POOL BALANCE and the
AGGREGATE CERTIFICATE PRINCIPAL BALANCE. On the closing date, the
overcollateralization will be equal to $ or % of the POOL BALANCE as
of the
S-25
<PAGE>
cut-off date. The overcollateralization will be available to absorb losses that
would otherwise be allocated to certificateholders.
The subordination of the class B Certificates, the reserve account and the
overcollateralization are intended to enhance the likelihood of receipt by
class A certificateholders of the full amount of principal and interest due them
and to decrease the likelihood that the class A certificateholders will
experience losses.
If on any payment date the holders of the Class A Certificates do not receive
the full amount then due them, including interest carryover shortfalls and
principal carryover shortfalls, after giving effect to any amounts withdrawn
from the reserve account, the holders of the Class B Certificates generally will
not receive any distributions. While the Class B certificateholders are entitled
to receive amounts from the reserve account their entitlement is subordinated to
the rights of the Class A certificateholders. If the reserve account becomes
depleted and the overcollateralization is exhausted, the Class B
certificateholders may experience shortfalls in the distributions due them and
incur a loss on their investment.
[THE INSURANCE 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 certificates, the insurer will deliver
the policy to the trustee for the benefit of each certificateholder. Under the
policy, the insurer will unconditionally and irrevocably guarantee to the
trustee, on each distribution date, for the benefit of each certificateholder
the full and complete payment of (i) SCHEDULED PAYMENTS (as defined below) on
the certificates and (ii) 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 trustee fails to make a claim under the policy, certificateholders
do not have the right to make a claim directly under the policy, but may sue to
compel the trustee to do so.
SCHEDULED PAYMENTS means payments which are required to be made on the
certificates during the term of the policy in accordance with the original terms
of the certificates when issued and without regard to any subsequent amendment
or modification of the certificates or the trust documents that has not been
consented to by the insurer.
Payment of claims on the policy made in respect of SCHEDULED PAYMENTS will be
made by the insurer following RECEIPT (as defined below) by the insurer of the
appropriate notice for payment on the later to occur of (i) 12:00 noon, New York
City time, on the third BUSINESS DAY following RECEIPT of such notice for
payment, and (ii) 12:00 noon, New York City time, on the date on which such
payment was due on the certificates.
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 such 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 (i) the [fourth] BUSINESS DAY following RECEIPT by the insurer from the
trustee of (A) a certified copy of the ORDER of the court or other governmental
body that exercised jurisdiction to the effect that the certificateholder is
required to return SCHEDULED PAYMENTS made with respect to the certificates
during the term of the policy because such payments were avoidable as preference
payments under applicable bankruptcy law, (B) a certificate of the
certificateholder that the ORDER has been entered and is not subject to any stay
and (C) an assignment duly executed and delivered by the certificateholder, in
such form as is reasonably required by the insurer and provided to the
certificateholder by the insurer, irrevocably assigning to the insurer all
rights and claims of the certificateholder relating to or arising under the
certificates against the trust or otherwise with respect to such preference
payment, or (ii) the date of RECEIPT (as defined below) by the insurer from the
trustee of the items referred to in clauses (A), (B) and (C) above if, at least
four BUSINESS DAYS prior to such date of RECEIPT, the insurer shall have
RECEIVED (as defined below) written notice from the trustee that such items were
to be delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the ORDER and not to the trustee or any
certificateholder directly (unless a certificateholder has previously paid such
amount to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the ORDER, in which case such payment shall be disbursed to
the trustee for distribution to such certificateholder upon proof of such
payment
S-26
<PAGE>
reasonably satisfactory to the insurer). In connection with the foregoing, the
insurer shall have the rights provided pursuant to the pooling and servicing
agreement, including, without limitation, the right to direct all matters
relating to any preference claim and subrogation to the rights of the trustee
and each certificateholder in the conduct of any proceeding with respect to a
preference claim.
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 trustee is not in proper form or is not properly
completed, executed or delivered, it shall be deemed not to have been RECEIVED,
and the insurer or its fiscal agent shall promptly so advise the trustee, and
the 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 , , ,
and or any other location of any successor servicer or successor 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 trustee as
provided in the policy whether or not such funds are properly applied by the
trustee.
The insurer shall be subrogated to the rights of each certificateholder 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 thereby 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. [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 Certificates be rated by [Rating
Agency] and by [Rating Agency], and that the Class B Certificates be rated by
[Rating Agency] and by [Rating Agency]. The ratings by the rating agencies of
the certificates will be (i) with respect to the Class A Certificates, without
regard to the policy in the case of [Rating Agency]and substantially based on
the policy in the case of [Rating Agency] and (ii) with respect to the Class B
Certificates, based on the issuance of the policy. To the extent that such
ratings are based on the policy, such ratings apply to distributions due on the
distribution dates, and not to distributions due on the distribution dates. A
rating is not a recommendation to purchase, hold or sell certificates. In the
event that the rating initially assigned to any of the certificates 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 certificates. Any reduction or withdrawal of a rating may have an adverse
effect on the liquidity and market price of the certificates.]
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the purchase, ownership and disposition of the certificates.
This summary is based upon laws, regulations, rulings and decisions currently in
effect, all of which are subject to change. The discussion does not deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. In addition, this summary is generally
limited to investors who will hold the certificates as "CAPITAL ASSETS" which
generally means property held for investment, within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended, referred to in
this prospectus supplement as the CODE. Investors should consult their own tax
advisors to determine the federal, state, local and other tax consequences of
the purchase, ownership and disposition of the certificates. Prospective
investors should
S-27
<PAGE>
know that no rulings have been or will be sought from the IRS regarding any of
the federal income tax consequences discussed below, and no assurance can be
given that the IRS will not take contrary positions.
TAX STATUS OF THE TRUST
In the opinion of Dewey Ballantine LLP, special tax counsel to the seller, the
trust will be classified as a grantor trust under subpart E, part I of
subchapter J of Chapter 1 of Subtitle A of the Code and not as an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes. Certificateholders will be treated as the owners of the trust, except
as described below.
GENERAL
For purposes of federal income tax, the certificateholders will each be deemed
to have acquired a fixed portion of the interest due on each auto loan. These
fixed portions of interest will be treated as "STRIPPED COUPONS" within the
meaning of the Code. Accordingly, for federal income tax purposes, each
certificateholder will be treated as owning its pro rata percentage interest in
the principal of each auto loan and such interest in each auto loan will be
treated as a "STRIPPED BOND" within the meaning of Section 1286 of the Code.
INCOME ON THE AUTO LOANS
Each certificateholder will be required to report on its federal income tax
return, in a manner consistent with its method of accounting, its pro rata
allocable share of the entire gross income of the trust, including interest or
finance charges earned on the auto loans, and any gain or loss upon collection
or disposition of the auto loans. In computing its federal income tax liability,
a certificateholder will be entitled to deduct, consistent with its method of
accounting, its pro rata allocable share of reasonable fees and expenses that
are paid or incurred by the trust as provided in Section 162 or 212 of the Code.
If a certificateholder is an individual, estate or trust the deduction for its
pro rata share of such fees will be allowed only to the extent that all of its
miscellaneous itemized deductions, including its share of such fees, exceed 2%
of its adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer whose adjusted gross income exceeds a specified amount will be reduced
by the lesser of (1) 3% of the excess, if any, of adjusted gross income over
such amount, or (2) 80% of the amount of itemized deductions otherwise allowable
for such year. As a result, such investors holding certificates, directly or
indirectly through a pass-through entity, may have aggregate taxable income in
excess of the aggregate amount of cash received on such certificates with
respect to interest at the certificate rate. A certificateholder using the cash
method of accounting must take into account its pro rata share of income and
deductions as and when collected by or paid by the trust. A certificateholder
using the accrual method of accounting must take into account its pro rata share
of income and deductions as and when such amounts become due to or payable by
the trust.
A certificateholder will not be subject to the market discount rules discussed
below regarding the stripped auto loans, but instead will be subject to the
original issue discount rules contained in the Code. A certificateholder will be
required to include any original issue discount in income as it accrues,
regardless of whether cash payments are received, using a method reflecting a
constant rate of interest on the auto loans.
STRIPPED BONDS AND STRIPPED COUPONS
Although the tax treatment of stripped bonds is not entirely clear, based on
guidance by the IRS, each purchaser of a certificate will be treated as the
purchaser of a stripped bond or stripped coupon which generally should be
treated as a single debt instrument issued on the day it is purchased for
purposes of calculating any original issue discount. Generally, under Treasury
regulations, if the discount on a stripped bond certificate is larger than a de
minimis amount, as calculated for purposes of the original issue discount rules
of the Code, that stripped bond certificate will be considered to have been
issued with original issue discount. See "--Accrual of Original Issue Discount."
S-28
<PAGE>
ACCRUAL OF ORIGINAL ISSUE DISCOUNT
In determining whether a certificateholder has purchased its interest in the
auto loans or any auto loan at a discount, a portion of the purchase price for a
certificate may be allocated to the accrued interest on the auto loans at the
time of purchase as though that accrued interest were a separate asset. This
would reduce the portion of the purchase price allocable to the
certificateholder's undivided interest in the auto loans. If the interests in
the auto loans represented by the certificates are considered to be issued with
original issue discount, the rules described in this paragraph would apply.
Generally, the owner of a stripped bond or stripped coupon issued or acquired
with original issue discount must include in gross income the sum of the DAILY
PORTIONS, as described below, of such original issue discount for each day on
which it owns a certificate, including the date of purchase but excluding the
date of disposition. In the case of an original certificateholder, the daily
portions of original issue discount for a certificate generally would be
determined as follows. A calculation will be made of the portion of original
issue discount that accrues with respect to the certificate during each
successive monthly accrual period. This will be done, in the case of each full
monthly accrual period, by adding (1) the present value of all remaining
payments to be received on the certificate under the prepayment assumption used
for the certificates and (2) any payments received during such accrual period,
and subtracting from that total the ADJUSTED ISSUE PRICE of the certificate at
the beginning of that accrual period. No representation is made that the auto
loans will prepay at any specified rate. The adjusted issue price of a
certificate at the beginning of the first accrual period is its issue price, as
determined for purposes of the original issue discount rules of the Code, and
the adjusted issue price of a certificate at the beginning of a subsequent
accrual period is the adjusted issued price at the beginning of the immediately
preceding accrual period plus the amount of original issue discount allocable to
that accrual period and reduced by the amount of any payment made at the end of
or during that accrual period. The original issue discount accruing during such
accrual period 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 monthly accrual
period, the daily portions of original issue discount must be determined
according to a reasonable method as set forth in the Treasury Regulations
regarding original issue discount.
For the certificates, the method of calculating original issue discount as
described above will cause the accrual of original issue discount to either
increase or decrease but never below zero, in any given accrual period to
reflect the fact that prepayments are occurring at a faster or slower rate than
the prepayment assumption used for the certificates.
Subsequent purchasers that purchase certificates at more than a DE MINIMIS
discount should consult their tax advisors about the proper method to accrue
such original issue discount.
PREMIUM
The purchase of a certificate at more than its adjusted principal amount will
result in the creation of a premium with respect to the interest in the
underlying auto loans represented by those certificates. In determining whether
a certificateholder has purchased its interest in the auto loans at a premium, a
portion of the purchase price for a certificate may be allocated to the accrued
interest on the auto loans at the time of purchase as though such accrued
interest were a separate asset, thus reducing the portion of the purchase price
allocable to the certificateholder's undivided interest in the auto loans. A
purchaser who does not hold the certificate for sale to borrowers or in
inventory may elect under Section 171 of the Code to amortize that premium.
Under the Code, premium is allocated among the interest payments on the auto
loans to which it relates and is considered as an offset against and thus a
reduction of such interest payments. With certain exceptions, that election
would apply to all debt instruments held or subsequently acquired by the
electing holder. If the election is not made, the premium will be deductible as
an ordinary loss only upon disposition of the certificate or pro rata as
principal is paid on the auto loans.
Holders of certificates acquired at a premium are urged to consult with their
own tax advisors regarding the proper treatment of the certificates for federal
income tax purposes.
S-29
<PAGE>
SALE OF A CERTIFICATE
If a certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale, allocable to each of the
auto loans and the certificateholder's adjusted basis in each of them. However,
amounts attributable to accrued and unpaid interest which will be treated as
ordinary income. A certificateholder's adjusted basis will equal the
certificateholder's cost for the certificate, increased by any discount
previously included in income, and decreased, but not below zero, by any
previously amortized premium and by the amount of payments previously received
on the auto loans. Any gain or loss will be capital gain or loss if the
certificate was held as a capital asset, 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 auto 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 certificates have been owned for more than one
year.
FOREIGN CERTIFICATEHOLDERS
Interest attributable to the auto loans which is received by a foreign
certificateholder will generally not be subject to the normal 30% withholding
tax imposed on those payments, provided that (1) the foreign certificateholder
does not own, directly or indirectly, 10% or more of, and is not a controlled
foreign corporation related to, the seller and (2) that holder fulfills certain
certification requirements. Under those requirements, the holder must certify,
under penalty of perjury, that it is not a UNITED STATES PERSON and provide its
name and address. For this purpose, 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, an estate the income of which is includible in
gross income for United States federal income tax purposes regardless of its
source or 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 fiduciaries have the authority to control all substantial decisions of
the trust. Gain realized upon the sale of a certificate by a foreign
certificateholder generally will not be subject to United States withholding
tax. If, however, such interest or gain is effectively connected to the conduct
of a trade or business within the United States by that foreign
certificateholder, that holder will be subject to United States federal income
tax on the certificates at regular rates. Potential investors who are not United
States persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a certificate.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The trustee will furnish or make available, within the prescribed period of time
for tax reporting purposes after the end of each calendar year, to each
certificateholder or each person holding a certificate on behalf of a
certificateholder at any time during such year, such information as the trustee
deems necessary or desirable to assist certificateholders in preparing their
federal income tax returns. Payments made on the certificates and proceeds from
the sale of the certificates will not be subject to a "BACKUP" withholding tax
of 31% unless, in general, a certificateholder fails to comply with certain
reporting procedures and is not an exempt recipient under applicable provisions
of the Code.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued NEW WITHHOLDING REGULATIONS
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The new withholding regulations
attempt to unify certification requirements and modify reliance standards. The
new withholding regulations will generally be effective for payments made after
December 31, 2000, subject to certain transition rules. Prospective investors
are urged to consult their own tax advisors regarding the new withholding
regulations.
S-30
<PAGE>
ERISA CONSIDERATIONS
CLASS A CERTIFICATES
The Class A Certificates may be purchased by ERISA plans as described in the
prospectus under "ERISA CONSIDERATIONS--ERISA CONSIDERATIONS REGARDING
SECURITIES WHICH ARE CERTIFICATES."
The Department of Labor has issued to the underwriter an individual prohibited
transaction exemption which, as described in the prospectus, generally exempts
from the application of the prohibited transaction provisions of
Section 406(a), Section 406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA
and the excise taxes imposed by Sections 4975(a) and (b) of the Internal Revenue
Code, transactions concerning the initial purchase, the holding and the
subsequent resale by employee benefit plans of certificates in pass-through
trusts that consist of receivables, loans and other obligations that meet the
conditions and requirements of the exemption. The loans covered by the
underwriter's exemption include loans such as the auto loans.
As of the initial cut-off date, there is no single auto loan included in the
trust that constitutes more than five percent of the aggregate unamortized
principal balance of the assets of the trust. Before purchasing a certificate
based on the underwriter's exemption, a fiduciary of a plan should itself
confirm (1) that such certificate constitutes a concerning CERTIFICATE for
purposes of the exemption and (2) that the conditions and other requirements set
forth in the exemption would be satisfied.
Any plan fiduciary considering the purchase of a Class A Certificate should
consult with its counsel as to the potential applicability of ERISA, the Code
and the underwriter's exemption prior to making an investment in the Class A
Certificates. Moreover, each plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the certificates is appropriate for the plan, taking into account
the overall investment policy of the plan and the composition of the plan's
investment portfolio.
The sale of the Class A Certificates to a plan is not a representation by us or
the underwriter that this investment meets all relevant legal requirements for
investments by plans generally or by any particular plan or that this investment
is appropriate for plans generally or any particular plan.
CLASS B CERTIFICATES
The Class B Certificates may not be acquired by (1) an employee benefit plan
that is subject to the provisions of ERISA, (2) a plan described in
Section 4975 (e) (1) of the Internal Revenue Code or (3) any entity whose
underlying assets include plan assets by reason of a plan's investment in the
entity. By its acceptance of a Class B Certificate, each Class B
Certificateholder will be considered to have represented and warranted that it
is not subject to these limitations. For additional information regarding
treatment of the Class B Certificates under ERISA, see "ERISA
CONSIDERATIONS--ERISA CONSIDERATIONS REGARDING SECURITIES WHICH ARE
CERTIFICATES" in the prospectus.
S-31
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement dated
among the seller, Household Finance Corporation and the underwriters
named below, the seller has agreed to sell to the underwriters and each of the
underwriters has agreed to purchase, the principal amount of the certificates
stated opposite its name below.
<TABLE>
<CAPTION>
-------------------
<S> <C> <C>
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
OF OF
CLASS A CLASS B
UNDERWRITERS CERTIFICATES CERTIFICATES
- ------------------------------------------------------------ ------ ------
[List of Underwriters]......................................
</TABLE>
The underwriters propose to offer the certificates in part directly to
purchasers at the initial public offering prices stated on the cover page of
this prospectus supplement and in part to securities dealers at prices less
concessions not to exceed % per Class A Certificate and % per Class B
Certificate. The underwriters may allow, and the dealers may reallow,
concessions to brokers and dealers which will not exceed % per Class A
Certificate and % per Class B Certificate.
The seller and Household Finance Corporation have agreed to indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act of 1933, as amended.
In connection with this offering the underwriters may over-allot or effect
transactions which stabilize or maintain the market prices of the certificates
at levels above those which might otherwise prevail in the open market. This
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Some legal matters relating to the certificates will be passed upon for the
seller by John W. Blenke, Vice President-Corporate Law and Assistant Secretary
of Household International, Inc., the parent company of Household Finance
Corporation, Household Automotive Finance Corporation and the seller, and by
Dewey Ballantine LLP, New York, New York, special counsel to the seller. Some
legal matters will also be passed upon for the underwriters by Dewey Ballantine
LLP. As of the date of this prospectus supplement, Mr. Blenke is a full-time
employee and an officer of Household International, Inc. and beneficially owns,
and holds options to purchase, shares of common stock of Household
International, Inc.
S-32
<PAGE>
GLOSSARY
AGGREGATE CERTIFICATE PRINCIPAL BALANCE means, as of any date, the aggregate
outstanding principal amount of all the certificates on that date.
AMOUNT FINANCED means, for an auto loan, the aggregate amount advanced under the
auto loan toward the financed vehicle's purchase price and related costs,
including amounts advanced for accessories, insurance premiums, service, car
club and warranty contracts, other items customarily financed as part of retail
automobile installment sale contracts or promissory notes and related costs.
AVAILABLE FUNDS means, for any COLLECTION PERIOD, the sum of (1) the COLLECTED
FUNDS for that COLLECTION PERIOD, (2) all PURCHASE AMOUNTS deposited in the
collection account during that COLLECTION PERIOD, (3) income on investments held
in the collection account, (4) the proceeds of any liquidation of the assets of
the trust, (5) the lesser of (a) the excess of the aggregate amount determined
under items (1)-(6) of "Payment Priorities" as stated beginning on page S-31,
over the amount on deposit in the collection account and (b) the reserve account
balance.
CLASS A INTEREST CARRYOVER SHORTFALL means, for any payment date, the sum of:
(1) excess of (a) the CLASS A INTEREST DISTRIBUTABLE AMOUNT for the preceding
payment date, over (b) the amount actually paid as interest to the class A
certificateholders on the preceding payment date, PLUS (2) interest on that
excess, to the extent permitted by law, at a rate per annum equal to the
Class A pass-through rate from the preceding payment date to but excluding the
current payment date.
CLASS A INTEREST DISTRIBUTABLE AMOUNT means, for any payment date, an amount
equal to the sum of: (1) the aggregate amount of interest accrued on the
Class A Certificates at the class A pass-through rate from and including the
preceding payment date, or, in the case of the initial payment date, from and
including the closing date, to but excluding the current payment date PLUS
(2) the applicable CLASS A INTEREST CARRYOVER SHORTFALL for the current payment
date.
CLASS A PERCENTAGE means %.
CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT means, for any payment date, the CLASS A
PERCENTAGE of the PRINCIPAL DISTRIBUTABLE AMOUNT.
CLASS B INTEREST DISTRIBUTABLE AMOUNT means, for any payment date, an amount
equal to the sum of: (1) the aggregate amount of interest accrued on the
Class B Certificates at the class B pass-through rate from and including the
preceding payment date, or, in the case of the initial payment date, from and
including the closing date, to but excluding the current payment date PLUS
(2) the applicable CLASS B INTEREST CARRYOVER SHORTFALL for the current payment
date.
CLASS B PERCENTAGE means %.
CLASS B PRINCIPAL DISTRIBUTABLE AMOUNT means, for any payment date, the CLASS B
PERCENTAGE of the PRINCIPAL DISTRIBUTABLE AMOUNT.
COLLECTED FUNDS means, for any COLLECTION PERIOD, the amount of funds in the
collection account representing collections (excluding amounts representing
administrative charges, annual fees, taxes, assessments, credit insurance
charges or similar items) on the auto loans during the COLLECTION PERIOD,
including all NET LIQUIDATION PROCEEDS collected during the COLLECTION PERIOD
(but excluding any PURCHASE AMOUNTS).
COLLECTION PERIOD means, for any payment date other than the first payment date,
the calendar month preceding the month in which the payment date occurs, and in
the case of the first payment date, the period from the cut-off date through
.
CRAM DOWN LOSS means, with respect to an auto loan, if a court of appropriate
jurisdiction in an insolvency proceeding issues a final order reducing the
amount owed on the auto loan or otherwise modifying or restructuring the
scheduled payments to be made on the auto loan, an amount equal to (1) the
excess of the PRINCIPAL BALANCE of the auto loan immediately prior to the order
over the PRINCIPAL BALANCE of the auto loan as reduced and/or (2) if the
S-33
<PAGE>
court issues an order reducing the effective rate of interest on the auto loan,
the excess of the PRINCIPAL BALANCE of the auto loan immediately prior to the
order over the net present value--using as the discount rate the higher of the
APR on the auto loan or the rate of interest, if any, specified by the court in
the order--of the scheduled payments as so modified or restructured. A CRAM DOWN
LOSS shall be deemed to have occurred on the date of the order's issuance.
LIQUIDATED AUTO LOAN means an auto loan which if (1) 90 days have elapsed since
the financed vehicle was repossessed, (2) the servicer has determined in good
faith that all amounts it expects to recover have been received, (3) ten percent
or more of a scheduled payment shall have become 150 or more days delinquent, or
in the case of a borrower who is subject to bankruptcy proceedings, 210 or more
days delinquent or (4) the financed vehicle has been sold and the proceeds
received.
MAXIMUM RESERVE ACCOUNT DEPOSIT AMOUNT means, for any payment date, an amount
equal to that portion of COLLECTED FUNDS representing interest collections on
the auto loans and NET LIQUIDATION PROCEEDSfor the applicable COLLECTION PERIOD
less the sum of: the servicing fee paid to any servicer other than Household
Finance Corporation, the fees due to the trustee, to the extent not paid by the
servicer, the CLASS A INTEREST DISTRIBUTABLE AMOUNT, the CLASS B INTEREST
DISTRIBUTABLE AMOUNT, the aggregate PRINCIPAL BALANCEs of all auto loans which
became LIQUIDATED AUTO LOANS during the COLLECTION PERIOD, plus the aggregate
amount of CRAM DOWN LOSSES during the COLLECTION PERIOD.
NET LIQUIDATION PROCEEDS means, with respect to LIQUIDATED AUTO LOANS,
(1) proceeds from the disposition of the underlying financed vehicle securing
the LIQUIDATED AUTO LOANS, minus the servicer's reasonable out-of-pocket costs,
including repossession and resale expenses not already deducted from the
proceeds, and any amounts required by law to be remitted to the borrower,
(2) any insurance proceeds, or (3) other monies received from the borrower or
otherwise.
POOL BALANCE means, as of any date of determination, the aggregate PRINCIPAL
BALANCEs of the auto loans, unless otherwise specified, as of the close of
business on the preceding business day.
PRINCIPAL BALANCE means, with respect to any auto loan, as of any date, the
AMOUNT FINANCED minus (a) that portion of all amounts received on or prior to
the date and allocable to principal in accordance with the terms of the auto
loan, and (b) any CRAM DOWN LOSS in respect of the auto loan. The PRINCIPAL
BALANCE of a LIQUIDATED AUTO LOAN or a purchased auto loan shall be zero.
PRINCIPAL DISTRIBUTABLE AMOUNT means, for any payment date, the product of
(1) % and (2) the excess of (a) the POOL BALANCE at the end of the second
preceding COLLECTION PERIOD, over (b) the POOL BALANCE at the end of the
immediately preceding COLLECTION PERIOD.
PURCHASE AMOUNT means, with respect to an auto loan, the PRINCIPAL BALANCE as of
the date the auto loan is purchased from the trust by the seller or the
servicer.
RESERVE ACCOUNT DEPOSIT AMOUNT means, for any payment date, the lesser of:
(x) the MAXIMUM RESERVE ACCOUNT DEPOSIT AMOUNT for that payment date and
(y) the RESERVE ACCOUNT SHORTFALL AMOUNT for that payment date.
RESERVE ACCOUNT SHORTFALL AMOUNT means, for any payment date, the excess of:
(x) the TARGETED RESERVE ACCOUNT BALANCE for that payment date over (y) the
amount on deposit in the reserve account as of the beginning of that payment
date.
TARGETED RESERVE ACCOUNT BALANCE means, for any payment date, the lesser of:
(1) the greater of (a) % of the outstanding POOL BALANCE as of the end of
the prior COLLECTION PERIOD, and (b) $ ( % of the POOL BALANCE as of
the cut-off date) and (2) the AGGREGATE CERTIFICATE PRINCIPAL BALANCE.
S-34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HOUSEHOLD AUTOMOTIVE
TRUST
SERIES
HOUSEHOLD
FINANCE
CORPORATION,
SERVICER
[UNDERWRITERS]
UNTIL ALL DEALERS THAT EFFECT TRANSACTIONS IN THE CERTIFICATES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS AND A PROSPECTUS SUPPLEMENT. THIS IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
HOUSEHOLD AUTOMOTIVE TRUSTS
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
------------------
THE SECURITIES--
- will be issued from time to time in series;
- will be issued by trusts established by Household Auto Receivables
Corporation;
- will be backed by a pool of auto loans held by the issuing trust;
- will be rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization; and
- may have the benefit of one or more forms of credit enhancement, such as
insurance policies, overcollateralization, subordination or reserve funds.
THE ASSETS--
The assets of each trust will primarily consist of a pool of auto loans, funds
on deposit in one or more accounts and forms of credit support described in this
prospectus and in the prospectus supplement.
- --------------------------------------------------------------------------------
YOU ARE ENCOURAGED TO READ THE SECTION ENTITLED "RISK FACTORS" ON PAGE 4 OF THIS
PROSPECTUS AND CONSIDER THESE FACTORS BEFORE MAKING A DECISION TO INVEST IN
THESE SECURITIES.
These securities are auto receivable asset-backed securities which represent
interests in or obligations of the trust issuing a series of securities and are
not interests in or obligations of any other person or entity.
Neither these securities nor the auto loans will be insured or guaranteed by any
governmental agency or instrumentality.
Retain this prospectus for future reference. This prospectus may not be used to
consummate sales of securities unless accompanied by the prospectus supplement
relating to the offering of these securities.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 1999
<PAGE>
IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate documents
that progressively provide more detail: (1) this prospectus, which provides
general information, some of which may not apply to a particular series of
securities, and (2) the prospectus supplement, which describes the specific
terms of your series of securities.
This prospectus by itself does not contain complete information about the
offering of your securities; the balance of that information is contained in the
prospectus supplement. We suggest that you read both this prospectus and the
prospectus supplement in full. We cannot sell the securities to you unless you
have received both this prospectus and the prospectus supplement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary of Terms...................... 1
Risk Factors.......................... 3
Trust Assets.......................... 6
The Trustee........................... 6
The Servicer.......................... 7
The Subservicer....................... 7
The Seller............................ 7
The Automobile Financing Business of
the Subservicer..................... 8
General............................. 8
Application Processing and
Purchasing Criteria............... 8
Funding Package Completion,
Verification and Funding.......... 9
Post-Funding Quality Reviews........ 9
Servicing of Contracts.............. 9
Billing and Collection Process...... 10
Repossession........................ 10
Payment Terms of the Auto Loans..... 11
Insurance........................... 11
Description of the Securities......... 12
General Payment Terms of
Securities........................ 13
Payment Date Distributions.......... 13
Determination of Principal and
Interest on the Securities........ 13
Fixed Rate Securities............... 14
Floating Rate Securities............ 14
Indexed Securities.................. 14
Scheduled Amortization Securities;
Companion Securities.............. 15
Maturity and Prepayment
Considerations.................... 15
Yield Considerations................ 15
Book-Entry Registration............. 16
Definitive Securities............... 19
Credit and Cash Flow Enhancements... 19
The Trust Documents................... 20
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Sale of Auto Loans by the
Subservicer to the Seller......... 20
Representations and Warranties of
the Subservicer................... 20
Transfer and Assignment of the Auto
Loans by the Seller to the
Trust............................. 21
Representation and Warranties of the
Seller; Repurchase Obligation..... 21
Payments on Auto Loans; Deposits to
Collection Account................ 23
Collection and Other Servicing
Procedures........................ 24
Servicing Compensation and Payment
of Expenses....................... 24
Evidence as to Compliance........... 24
Certain Matters Regarding the
Servicer and the Seller........... 25
Servicer Termination Event.......... 25
Rights Upon Servicer Termination
Event............................. 26
Certain Covenants of Each Trust..... 27
Certain Matters Regarding the
Trustee and the Trust............. 28
Limitation on Liability of the
Trustee........................... 28
Resignation of Trustee.............. 29
Legal Aspects Of The Auto Loans....... 29
Security Interest in Vehicles....... 29
Repossession........................ 30
Notice of Sale; Redemption Rights... 31
Deficiency Judgments and Excess
Proceeds.......................... 31
Consumer Protection Laws............ 31
Soldiers' and Sailors' Civil Relief
Act of 1940....................... 32
Other Limitations................... 32
Material Federal Income Tax
Considerations...................... 32
General............................. 32
Grantor Trust Securities............ 33
Debt Securities..................... 34
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Partnership Interests............... 35
FASIT Securities.................... 36
Discount and Premium................ 38
Backup Withholding.................. 41
Foreign Investors................... 41
State Tax Considerations.............. 42
ERISA Considerations.................. 42
General............................. 42
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ERISA Considerations regarding
Securities which are
Certificates...................... 42
ERISA Considerations regarding
Securities which are Notes........ 44
Consultation With Counsel........... 44
Methods of Distribution............... 45
Legal Matters......................... 45
Clearance, Settlement and Tax
Documentation Procedures............ A-1
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SUMMARY OF TERMS
This summary highlights selected information from this prospectus 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
securities, we suggest that you carefully read this entire prospectus and the
accompanying prospectus supplement.
THE TRUSTS
Each series of securities will be issued by a separate trust.
SELLER
Household Auto Receivables Corporation, a Nevada corporation. The address of the
seller is 1111 Town Center Drive, Las Vegas, Nevada 89134.
SERVICER
Household Finance Corporation, a Delaware corporation. The address of the
servicer is 2700 Sanders Road, Prospect Heights, Illinois 60010.
SUBSERVICER
Household Automotive Finance Corporation, a Delaware corporation. The address of
the subservicer is 11452 El Camino Real, Suite 400, San Diego, California 92130.
THE SECURITIES
The securities of a series may be issued in one or more classes, as specified in
the prospectus supplement. One or more classes of securities:
- - may be entitled to receive distributions only of principal, only of interest
or any combination of principal and interest;
- - may be subordinated in right to receive distributions of principal and
interest to one or more other classes of the same series throughout the life
of the securities or during specified time periods;
- - may be entitled to receive distributions only after a specified period of time
has passed, a specified amount of principal has been paid down, or a specified
percentage of credit enhancement has built up; this could take the form of a
lockout feature, in which a class receives no principal distributions for an
initial period, then receives all or a portion of the principal distributions
during a subsequent period;
- - may be entitled to receive distributions in accordance with a schedule or
formula or on the basis of collections from designated portions of the assets
in the issuing trust;
- - may be entitled to receive interest at a fixed rate or a variable rate; and
- - may have a balance that may decrease based on the amortization of auto loans
or increase based on principal collections used to purchase additional auto
loans or classes of securities.
The timing and amounts of distributions may vary among classes, over time, or
otherwise as specified in the prospectus supplement.
Interest only and principal only securities are subject to investment risks that
are a function of how quickly principal payments are received on the underlying
pool of auto loans, optional or mandatory prepayment features of the securities,
and the price paid for the securities. Investors in these types of securities
could lose their investment. The ratings assigned to these securities frequently
will not address these risks, so a substantial loss may not be inconsistent with
a high rating. These interest only and principal only securities are appropriate
investments only for sophisticated investors who are able to independently
assess the risks of their investment.
TRUST PROPERTY
Each trust will hold:
- - a pool of auto loans, each of which will be secured by new or used
automobiles, vans and light duty trucks;
- - amounts held in trust accounts; and
- - forms of credit support, if applicable.
You will find a description of the pool of auto loans in the prospectus
supplement. The seller will have purchased the auto loans from the subservicer
and will sell them to the trust. If a trust has not purchased all of the auto
loans at the time you purchase your securities, it will purchase the remainder
from the
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subservicer over a period specified in the prospectus supplement. Some trusts
may, during a specified time period, use principal collections on its auto loans
to purchase additional auto loans.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the owners
of securities against losses due to defaults on the auto loans. A series of
securities, or some of the classes within the series, may have the benefit of
one or more types of credit enhancement such as the following:
- - the use of excess interest to cover losses and to distribute as principal to
create overcollateralization;
- - the subordination of distributions on the lower classes of securities to the
required distributions of more senior classes of securities;
- - the allocation of losses on the auto loans to the lower classes of securities;
- - the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees, letters of credit and similar instruments and
arrangements;
- - swaps (including currency swaps) and other derivative instruments and interest
rate protection agreements;
- - repurchase or put obligations;
- - yield supplement agreements; and
- - other arrangements similar to those described above.
The protection against losses afforded by any credit enhancement will be limited
in the manner described in the prospectus supplement.
PRE-FUNDING FEATURE
A trust may enter into agreements with the seller, in which the seller will sell
additional auto loans to the trust after the securities are issued. The transfer
of auto loans after the date the securities are issued is known as the
pre-funding feature. Any subsequent auto loans will be required to conform to
the requirements described in the prospectus supplement. If the pre-funding
feature is used, the trustee will be required to deposit all or a portion of the
proceeds of the sale of the securities of the series in a segregated account.
The subsequent auto loans will be transferred to the trust in exchange for money
released from the segregated account. These transfers must occur within a
specified period, not to exceed one year. If a trust elects federal income
treatment as a grantor trust, the pre-funding period will be limited to three
months. If all of the monies originally deposited in the account are not used by
the end of the specified period, all remaining monies will be applied as a
mandatory prepayment of a class or classes of securities.
FEDERAL INCOME TAX CONSEQUENCES
The securities of each series will, for federal income tax purposes, constitute
one of the following:
- - interests in a trust treated as a grantor trust under applicable provisions of
the Internal Revenue Code;
- - debt secured by the underlying auto loans;
- - interests in a trust which is treated as a partnership; or
- - REGULAR INTERESTS or HIGH-YIELD INTERESTS in a trust treated as a financial
asset securitization investment conduit or, FASIT under the Internal Revenue
Code.
We suggest that you review "Material Federal Income Tax" Consequences beginning
on page 45 in this prospectus and in the prospectus supplement. In addition, you
should consult your own tax advisor concerning your investment.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing or other employee benefit plan may wish
to review with its legal advisors whether the purchase, holding or disposition
of securities could give rise to a prohibited transaction under ERISA, or the
Internal Revenue Code, and whether an exemption from the prohibited transaction
rules is available. We suggest that you review "ERISA Considerations" beginning
on page 59 in this prospectus and in the prospectus supplement.
RATING
Each class of securities offered by a prospectus supplement will be rated in one
of the four highest rating categories of at least one nationally recognized
statistical rating agency.
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RISK FACTORS
YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY PURCHASE OF ANY
CLASS OF SECURITIES. YOU SHOULD ALSO CONSIDER THE INFORMATION UNDER THE CAPTION
"RISK FACTORS" IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
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YOU MAY NOT BE ABLE TO SELL YOUR SECURITIES, AND A secondary market for these securities is
MAY HAVE TO HOLD YOUR SECURITIES TO MATURITY unlikely to develop. If it does develop, it may
EVEN THOUGH YOU MAY WANT TO SELL THEM. not provide you with sufficient liquidity of
investment or continue for the life of these
securities. The underwriters may establish a
secondary market in the securities, although no
underwriter will be obligated to do so. The
securities are not expected to be listed on any
securities exchange or quoted in the automated
quotation system of a registered securities
association.
Issuance of the securities in book-entry form may
also reduce the liquidity in the secondary trading
market, since some investors may be unwilling to
purchase securities for which they cannot obtain
definitive physical securities.
PREPAYMENTS ON THE AUTO LOANS COULD CAUSE YOU TO - The yield to maturity of the securities may be
BE PAID EARLIER THAN YOU EXPECT, WHICH MAY adversely affected by a higher or lower than
ADVERSELY AFFECT YOUR YIELD TO MATURITY. anticipated rate of prepayments on the auto
loans. If you purchase a security at a premium
based on your expectations as to its maturity
or weighted average life, and the security pays
principal more quickly than you expected, your
yield will be reduced and you may not recover
the premium you paid. In addition, if you
purchase a security at a discount based on your
expectations as to its maturity or weighted
average life, and the security pays principal
more slowly than you expected, your yield will
be lower than you anticipated.
- The yield to maturity on interest only
securities will be extremely sensitive to the rate
of prepayments on the auto loans. If the auto
loans prepay very quickly the yield on an
interest-only security could be dramatically
reduced.
- The auto loans may be prepaid in full or in
part at any time.
- We cannot predict the rate of prepayments of
the loans, which is influenced by a wide variety
of economic, social and other factors,
including prevailing interest rates, the
availability of alternative financing, local
and regional economic conditions and certain
natural disasters such as floods, hurricanes,
earthquakes and tornadoes. Therefore, we can
give no assurance as to the level of
prepayments that a trust will experience.
- One or more classes of securities of any series
may be subject to optional or mandatory redemption
in whole or in part, on or after a specified
date, or on or after the time when the
aggregate outstanding principal amount of the
auto loans or the securities is less than a
specified amount or percentage.
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- One or more classes of securities of any series
may be subject to optional or mandatory redemption
in whole or in part, on or after a specified
date, or on or after the time when the
aggregate outstanding principal amount of the
auto loans or the securities is less than a
specified amount or percentage.
- Since prevailing interest rates are subject to
fluctuation, there can be no assurance that you
will be able to reinvest these amounts at a
yield equaling or exceeding the yield on your
securities. You will bear the risk of
reinvesting unscheduled distributions resulting
from a redemption.
NON-PRIME AUTO LOAN POOLS WILL INCUR HIGHER A loan is usually considered non-prime because the
LOSSES THAN PRIME AUTO LOAN POOLS. borrower has limited income, past credit problems,
such as prior bankruptcy or a history of
delinquent payments on other debt, or a limited or
no credit history. Non-prime loans experience a
higher rate of delinquency and loss than prime
loans.
Non-prime loans frequently finance the purchase of
used vehicles. Because the value of a used vehicle
is more difficult to determine, upon sale of a
repossessed vehicle, a greater loss may be
incurred.
The added risk presented by non-prime auto loans
is considered in structuring the issuances of
securities. However, we can give no assurance that
the structure established will be adequate to
prevent losses to some or all of the
securityholders.
SECURITY INTERESTS MAY NOT BE PERFECTED, WHICH The certificates of title for the financed
COULD ALLOW OTHERS SUPERIOR RIGHTS TO THE vehicles will be held by the subservicer. The
TRUST ASSETS. certificates of title will not be endorsed or
amended to identify the secured party. Because
this will not be done, the security interests may
be defeated through fraud, forgery, negligence or
error and will not be perfected in every state. If
someone has a security interest in a vehicle that
is superior to the interest of the trustee, you
could experience delays in payments or a loss on
your investment in the securities.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY Auto lending is regulated at both the federal and
LIMIT COLLECTION OF PRINCIPAL AND INTEREST ON state levels and violations of these laws,
THE AUTO LOANS. policies and principles may limit the ability of
the servicer to collect all or part of the amounts
due on the auto loans, may entitle the borrower to
a refund of amounts previously paid and, in
addition, could subject the trust, as the owner of
the auto loan, to claims for damages and to
administrative enforcement. The occurrence of any
of the foregoing could cause losses on your
securities.
INSOLVENCY OF THE SELLER OR SUBSERVICER MAY In some circumstances, a bankruptcy of the seller
REDUCE OR DELAY PAYMENTS TO SECURITYHOLDERS. or subservicer may delay or reduce payments to
securityholders. In the event of a bankruptcy of
the subservicer or the seller, a court or
bankruptcy trustee could conclude the subservicer
or seller still owns the auto loans or that the
seller, the subservicer and the trust are all a
single entity for bankruptcy purposes. If a court
or bankruptcy trustee would reach either of these
conclusions,
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you could experience delays in payments or a loss
on your investment in the securities.
We have taken steps in structuring the
transactions contemplated by this prospectus to
minimize these bankruptcy risks. Our legal counsel
has advised us that a court would not order a
consolidation of the seller, subservicer and the
trust for bankruptcy purposes or determine that
the sale of the auto loans to the seller was
actually a pledge rather than a sale.
SECURITYHOLDERS HAVE NO RECOURSE AGAINST THE There is no recourse for losses against the
SELLER, SERVICER OR SUBSERVICER FOR LOSSES. servicer, subservicer or seller. The securities
represent obligations solely of the issuing trust.
No securities will be guaranteed by the seller,
the servicer, or the trustee. Consequently, if
payments on the auto loans, and to the extent
available, any credit enhancement, are
insufficient to pay the securities in full, you
have no rights to obtain payment from the
servicer, subservicer or seller.
INSURANCE ON VEHICLES MAY NOT BE MAINTAINED, At the time the subservicer purchases the auto
WHICH MAY LEAD TO LOSSES ON THE AUTO LOANS. loans from the dealers it requires that the
borrowers have theft and damage insurance on the
vehicles. There can be no assurance that the
borrower will maintain the insurance coverage on
the vehicle. The subservicer will not obtain
insurance coverage without the consent of the
borrower if it learns that a vehicle is uninsured.
If an uninsured loss occurs and the borrower
defaults on the auto loan at a time when the
overcollateralization or subordination provisions
are not sufficient to ensure payments are made to
securityholders, securityholders may be subject to
a delay in receiving payments or a loss on their
investment in the securities.
THE RATINGS ASSIGNED TO YOUR SECURITIES BY THE The ratings assigned to the securities will be
RATING AGENCIES MAY BE LOWERED OR WITHDRAWN AT based on, among other things, the adequacy of the
ANYTIME, WHICH MAY AFFECT YOUR ABILITY TO SELL assets of the trust and any credit enhancement for
YOUR SECURITIES. a series of securities. Any rating which is
assigned may not remain in effect for any given
period of time or may be lowered or withdrawn
entirely by the rating agencies if, in their
judgment, circumstances in the future so warrant.
Ratings may also be lowered or withdrawn because
of an adverse change in the financial or other
condition of a provider of credit enhancement or a
change in the rating of a credit enhancement
provider's long term debt at any time, which may
affect your ability to sell your securities.
INABILITY OF THE SELLER OR SERVICER TO PURCHASE If a representation and warranty concerning an
AUTO LOANS FROM THE TRUST WHEN A auto loan is breached, the transaction documents
REPRESENTATION OR WARRANTY IS BREACHED MAY require either the seller or the servicer to
CAUSE YOUR PAYMENTS TO BE REDUCED OR DELAYED. purchase the loan from the trust. If the seller or
servicer, as applicable, is unable to purchase
such auto loans and no other party is obligated to
perform or satisfy these obligations, you may
experience delays in receiving payments and
losses.
SUBORDINATION OF CERTAIN SECURITIES MAY RESULT Distributions on one or more classes of securities
IN REDUCED PAYMENTS TO THOSE SECURITIES. of a series may be subordinated in priority of
payment to distributions on one or more other
classes of securities. Subordination of a class of
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securities has the effect of increasing the
likelihood of payment on the senior classes of
securities in that series and decreasing the
likelihood of payment on that subordinated class
of securities.
CREDIT ENHANCEMENT, IF PROVIDED, WILL BE LIMITED Credit enhancement may be provided in limited
IN BOTH AMOUNT AND SCOPE OF COVERAGE, AND MAY amounts to cover some, but not all, types of
NOT BE SUFFICIENT TO COVER ALL LOSSES OR RISKS losses on the auto loans and may reduce over time
ON YOUR INVESTMENT. in accordance with a schedule or formula.
Furthermore, credit enhancement may provide only
very limited coverage as to some types of losses,
and may provide no coverage as to other types of
losses. Credit enhancement does not guarantee any
specified rate of prepayments, which is one of the
principal risks of your investment. The amount and
types of credit enhancement coverage, the
identification of any entity providing the credit
enhancement, the terms of any subordination and
any other information will be described in the
accompanying prospectus supplement.
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TRUST ASSETS
We will establish a separate trust to issue each series of securities. The
securities will be backed by the property of that issuing trust. The primary
asset of each trust will be a pool of auto loans originated by the dealers and
purchased by the subservicer according to the subservicer's agreements with the
dealers.
The property of each trust will include:
- the pool of auto loans for new and used automobiles, vans and light duty
trucks;
- any amounts in the accounts established for that trust;
- security interests in the financed vehicles;
- rights to proceeds from insurance policies covering the borrowers or the
financed vehicles; and
- contract rights against dealers and against the seller, servicer and
subservicer for breaches of representations or warranties relating to the
auto loans.
THE TRUSTEE
The trustee for each trust will be named in the accompanying prospectus
supplement. The trustee's liability in connection with the issuance and sale of
the securities is limited to the express obligations of that trustee set out in
the trust documents. A trustee may resign at any time, in which event the
servicer will be obligated to appoint a successor trustee. In addition, if the
trustee ceases to be eligible as trustee pursuant to the trust documents or it
becomes insolvent, the trustee may be removed. Any resignation or removal of a
trustee will not become effective until acceptance of the appointment by the
successor trustee.
THE SERVICER
Household Finance Corporation will act as the servicer for the auto loans. The
servicer was incorporated in Delaware in 1925, as successor to an enterprise
which was established by the same ownership in 1878. The address of its
principal executive office is 2700 Sanders Road, Prospect Heights, Illinois
60070. The servicer is a subsidiary of Household International, Inc.
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The servicer and its subsidiaries offer a diversified range of financial
services. The principal product of the servicer's consumer financial services
business is the making or purchasing of cash loans and sales finance contracts,
including home equity loans secured by first and second mortgages, auto loans
and unsecured loans to middle-income consumers in the United States. Loans are
made through branch lending offices under the brands "HFC" and "Beneficial," and
through direct mail and telemarketing efforts. The servicer also acquires
portfolios of open-end and closed-end, secured and unsecured loans.
Through banking subsidiaries, the servicer also offers both MasterCard* and
VISA* credit cards to residents throughout the United States. Through its
subsidiaries, the servicer also purchases and services revolving charge card
accounts originated by merchants. The accounts result from consumer purchases of
goods and services from the originating merchant. Closed-end sales contracts are
also directly originated.
Where permitted by law, the servicer offers credit life and credit accident,
health and disability insurance to its customers. This insurance is generally
written directly by, or reinsured with, one of the servicer's insurance
affiliates.
The servicer also operates a cooperative program with H&R Block Tax
Services, Inc. and some of its franchises and independent tax preparers to
provide loans to borrowers who electronically file their income tax returns with
the IRS and are entitled to tax refunds.
As of June 30, 1999, the servicer had approximately $ ______ billion in total
assets, approximately $______ billion in total liabilities and approximately
$______ billion in shareholder's equity. The servicer is not subject to legal
proceedings which are expected to have a material impact on its business or
financial condition, taken as a whole.
THE SUBSERVICER
The subservicer, Household Automotive Finance Corporation, is a Delaware
corporation. It was formed in a merger between a subsidiary of Household
International, Inc. and ACC Consumer Finance Corporation. The merger closed on
October 21, 1997, and ACC changed its name to Household Automotive Finance
Corporation shortly thereafter. ACC was the successor to a California
corporation also named ACC Consumer Finance Corporation which was formerly named
American Credit Corporation. The principal executive offices of the subservicer
are at 11452 El Camino Real, Suite 400, San Diego, California 92130.
The subservicer is an automobile finance company specializing in the indirect
financing of auto sales contracts to consumers with non-prime credit. Through a
subsidiary, the subservicer also offers auto loans directly to consumers. The
indirect lending program provides automobile dealers with an alternative source
of financing for those consumers who typically are not qualified to use the
dealer's traditional financing sources, such as banks. Under this program, the
subservicer purchases auto loans from originating automobile dealers.
The subservicer is licensed, where required, to purchase and service auto loans.
The subservicer is not subject to any legal proceedings which are expected to
have a material impact on its business or financial condition.
THE SELLER
The seller, Household Auto Receivables Corporation, was incorporated in the
State of Nevada on March 25, 1998. It is a wholly-owned special purpose
subsidiary of the servicer, Household Finance Corporation. The seller was
organized for the special purposes of engaging in the type of transactions
described in this prospectus and any activities which help accomplish those
purposes. Neither the servicer's nor the seller's board of directors intends to
* MasterCard and VISA are registered trademarks of MasterCard International
Incorporated and VISA, USA, Inc., respectively.
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change the business purpose of the seller. The seller's principal executive
office is at 1111 Town Center Drive, Las Vegas, Nevada 89134. As of the date of
this prospectus, the seller is not subject to any legal proceedings.
The seller has purchased or will purchase non-prime auto loan contracts secured
by new and used automobiles, light duty trucks and vans from the subservicer.
The seller will sell each auto loan to the trust at a price equal to its
principal balance.
Information with respect to the specific auto loan pool will be set out in the
prospectus supplement, including, to the extent appropriate, the composition,
the distribution by APR and by the states of origination, the portion of the
auto loan pool consisting of actuarial loans and of simple interest loans and
the portion of the auto loan pool secured by new vehicles and by used vehicles.
THE AUTOMOBILE FINANCING BUSINESS OF THE SUBSERVICER
GENERAL
The automobile financing business of the subservicer consists of (1) the
purchase of auto loans of non-prime borrowers from a network of automobile
dealers and (2) the origination through a subsidiary of the subservicer of auto
loans made directly to non-prime borrowers. NON-PRIME BORROWERS are borrowers
who are unable to obtain automobile financing from traditional sources because
of limited credit history or past credit problems including bankruptcy,
chargeoffs or other derogatory credit events. Approximately 95% of the dealers
are franchisees of major automobile manufacturers. The auto loans are secured by
new or used automobiles, light duty trucks and vans. They typically bear a
higher APR than charged by traditional sources of financing.
APPLICATION PROCESSING AND PURCHASING CRITERIA
The subservicer markets its services to dealers under several different programs
and uses a tiered pricing structure designed to price loans according to the
borrower's credit characteristics. For example, there are different programs for
borrowers with limited credit histories and for borrowers who have been the
subject of a bankruptcy that was discharged within the last five years. In
addition, borrowers meeting progressively more stringent credit criteria are
offered more favorable rates under other programs.
The subservicer's application processing is conducted in seven regional credit
centers. It focuses solely on underwriting customer applications forwarded by
dealers, typically by facsimile. Upon receipt of an application, a credit
officer reviews the application and obtains a credit history from a credit
reporting bureau. Then, a conditional underwriting decision is made in one of
two ways. If the application meets certain criteria, then the decision is made
by an automated application decision model. If not, the decision is made by a
credit officer after evaluating the credit bureau data, whether the application
meets the criteria under the subservicer's policy guidelines and its proprietary
credit scoring model. Despite deficiencies that may exist in a borrower's credit
history, the credit scoring model predicts future delinquency and credit loss
based on statistical modeling of the subservicer's historical portfolio. The
criteria under the subservicer's policy guidelines include the following
factors: the borrower's residence stability; employment stability; income level
relative to expenses; and past performance on automobile-related debt. Once a
conditional underwriting decision is made, a funding package to a centralized
funding facility. The funding package includes the application, contract, title
transfer, customer agreement to provide insurance, and other information
necessary to fund the contract.
Among other things, the contract must be fully amortizing, provide for level
payments over the term of the contract, grant a first priority security interest
in the financed vehicle to the subservicer, prohibit the sale or transfer of the
financed vehicle without the subservicer's consent, and allow for acceleration
of maturity of the contract if the vehicle is sold or transferred without this
consent. The portions of payments on contracts allocable to principal and
interest are, for payoff and deficiency purposes, determined in accordance with
the law of the state in which the contract was originated.
Currently, for new vehicles, the subservicer finances up to 110% of the dealer's
invoice price, plus taxes, license fees, insurance, any dealer handling or
documentation charges, and the cost of any service contract. For used vehicles,
the
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subservicer finances up to 115% of the value quoted in industry-accepted used
car guides (such as the Kelly Wholesale Blue Book), plus the same additions as
for new vehicles. In each case, the total amount financed does not exceed 150%
of the invoice or wholesale value as quoted in the used car guide. The maximum
amount financed does not exceed $30,000. Financing is not offered for vehicles
that are more than eight years old or that have been driven more than 90,000
miles.
The amount of the required downpayment varies by program. For qualifying
borrowers with better credit profiles, no downpayment is currently required
while other programs require a minimum downpayment of $1,000. The value of a
trade-in vehicle (as determined by industry accepted used car guides) may be
applied to the downpayment; however, manufacturer rebates may not be applied
toward the required downpayment.
FUNDING PACKAGE COMPLETION, VERIFICATION AND FUNDING
After receiving an approval from one of the subservicer's regional credit
centers, the dealers compile a set of documents that are consistent with the
subservicer's documentation requirements. Then, they send funding packages to
the subservicer's central funding group in San Diego, California. The
subservicer generally requires that funding packages include verification of the
borrower's income, an agreement of the borrower to obtain insurance and evidence
that application has been made to transfer title.
The subservicer's funding department reviews each contract and verifies the
application data and contract documentation. The funding department also
confirms or reconfirms the borrower's employment, the terms of the contract, the
source of the down payment and the equipment on the vehicle. The subservicer
requires a telephone interview of the borrower prior to funding a contract if
the borrower is a higher credit risk. The subservicer believes this process
reduces the risk of misrepresentation by dealers and/or borrowers and provides a
basis for future borrower contact.
The subservicer may return the funding package if it does not comply with the
terms of the initial approval or contains facts that were not disclosed during
the approval process. As an additional quality control check, the subservicer's
data processing systems perform an automated review of the contracts and
identify any characteristics that do not comply with the subservicer's minimum
underwriting standards.
POST-FUNDING QUALITY REVIEWS
The subservicer uses its automated systems to continue to monitor contracts
after funding. In addition, on-going quality control reviews of the
newly-purchased contracts are performed weekly for each of the subservicer's
credit underwriting centers. These reviews focus on compliance with underwriting
standards, the quality of the credit decision and the completeness of contract
documentation. On a weekly basis, reports are prepared which summarize policy
exceptions, processing errors, documentation deficiencies and credit decisions
which are considered overly aggressive by the subservicer's quality control
manager.
SERVICING OF CONTRACTS
The subservicer services all of the contracts it purchases or originates. The
subservicer's servicing generally consists of payment and pay-off processing,
collecting, insurance tracking, title tracking, responding to borrower
inquiries, investigating delinquencies, repossessing and reselling collateral,
collection reporting and credit performance monitoring. The subservicer services
all contracts in accordance with policies and procedures established by the
subservicer in consultation with the servicer, from time to time. In accordance
with these policies and procedures and reasonable commercial practice, the
subservicer may take appropriate action in its discretion, including, but not
limited to, extending payment arrangements, deferment pending a change in
circumstances, referral for repossession and/or legal action and contract
restructuring. The subservicer's current policies require that the aggregate of
all extensions on a contract may not exceed six months over the life of the
contract and two months in any contract in a consecutive twelve month period.
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An auto loan is considered contractually delinquent if less than 90% of the
required payment due from the borrower has been received by the subservicer.
Generally, auto loans that are more than 31 days delinquent may be extended once
during a six month period after the borrower makes, in one or more payments, at
least 90% of one required payment in either the current or prior month. If
partial payments are aggregated, all these payments must be made within a 30 day
period. When a loan is extended, it is no longer considered delinquent. Under
the subservicer's current policies, an auto loan will generally be charged-off
upon the earlier of:
- the elapse of 90 days since the financed vehicle was repossessed;
- a good faith determination that all amounts expected to be recovered have
been received;
- if the financed vehicle has not been repossessed, the date on which at
least 10% of a scheduled payment becomes 150 or more days delinquent, or
in the case of a borrower who is subject to bankruptcy proceedings, 210 or
more days delinquent; or
- the date on which the financed vehicle has been sold and the proceeds
received.
The delinquency and charge-off policies and collection practices discussed in
this prospectus may change over time in accordance with the business judgment of
the subservicer and the servicer, changes in applicable laws and regulations,
and other considerations.
BILLING AND COLLECTION PROCESS
The subservicer sends each borrower a monthly bill, rather than using payment
coupon books. All payments are directed to a lock-box account at a bank
affiliated with the subservicer. On a daily basis, the lock-box bank retrieves
and processes payments received and then deposits the entire amount into the
lock-box account. Borrower payment data is simultaneously electronically
transferred to the subservicer for posting to computerized records.
The subservicer's collection process aims to closely monitor contracts and
maintain frequent contact with borrowers. As part of this process, the
subservicer makes early, frequent contact with delinquent borrowers in an
attempt to identify the underlying causes of a borrower's delinquency and to
make an early collection risk assessment.
The subservicer maintains a collection software package with customized features
designed for high-intensity collection operations. The package includes a
high-penetration autodialer, which the subservicer uses to contact each borrower
whose account becomes past due. In addition to telephonic contact, the
subservicer also typically sends past due notices to borrowers when an account
becomes ten days past due. In some cases, the subservicer uses the Western Union
Quick Collection Service to collect borrowers' payments and to reduce the
incidence of bad checks. The subservicer believes that these proactive steps in
the collection process reduce its repossession rates and loss levels.
REPOSSESSION
The subservicer repossesses a vehicle when it believes that the resolution of a
delinquency is not likely generally when the borrower is 80 days delinquent, or
when the collateral is at risk. The subservicer makes these judgments based upon
discussions with borrowers, the ability or inability to locate the borrowers
and/or the vehicles, the receipt of notices of liens and other information. The
subservicer uses independent, licensed and bonded repossession agencies to
repossess vehicles as well as the services of an agency that traces SKIPS, which
are situations where neither the borrower nor the vehicle can be located, to
assist them in locating vehicles. When a vehicle is repossessed, it generally is
sold through a public auction within 60 days of repossession. The subservicer
generally uses its own staff to pursue recoveries of deficiency balances, but it
may also use outside collection agencies which share in any recoveries. If the
subservicer has reason to believe that a dealer violated any representations or
warranties made to the subservicer on a defaulted contract, the subservicer may
pursue its remedies against the dealer under the dealer agreement.
The subservicer expects that a charge-off will be incurred whenever a vehicle is
repossessed. Unless a determination is made to charge-off a contract earlier,
upon sale of a repossessed vehicle, the subservicer records a net loss equal to
the outstanding principal balance of the auto loan, less the proceeds from the
sale of the vehicle.
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If an auto loan becomes 150 days delinquent, but is not in bankruptcy, and the
subservicer has repossessed the vehicle, but not yet received the sale proceeds,
then the subservicer reports a loss equal to the outstanding principal balance
of the contract, less the estimated auction value of the vehicle and any
expected insurance recoveries. The estimated auction value is based upon
wholesale used car values published by nationally recognized firms. If a
contract becomes 150 days delinquent or 210 days delinquent, in the case of a
bankrupt borrower, and the subservicer has not repossessed the vehicle, then the
subservicer records a loss equal to the outstanding principal balance of the
contract. Any recoveries received subsequent to the contract being charged-off,
including amounts from the borrower's insurance policies or service contracts,
from dealers under a breach of the dealer agreements or from deficiency balances
recovered from borrowers, are treated as loss adjustments in the period when
these recoveries are received.
PAYMENT TERMS OF THE AUTO LOANS
Each auto loan provides for the allocation of payments according to the SIMPLE
INTEREST method or the ACTUARIAL METHOD. The scheduled payment on each auto loan
is a fixed level payment that will pay off the full amount over its term
assuming the simple interest borrower makes no early or late payments.
Payments on simple interest loans will be applied first to interest accrued
through the date immediately before the date of payment and then to unpaid
principal. Accordingly, if a borrower makes his payment before its due date, the
portion of the payment applied to interest will be less than if the payment had
been made on the due date. As a result, the portion of the payment applied to
reduce the principal balance will be correspondingly greater, and the principal
balance will pay down more rapidly than scheduled.
Conversely, if a borrower pays an installment after its due date, the portion of
the payment applied to interest will be greater than if the payment had been
made on the due date. As a consequence, the portion of the payment applied to
reduce the principal balance will be correspondingly less, and the principal
balance will pay down more slowly than scheduled, in which case a larger portion
of the principal balance may be due on the final scheduled payment date.
An actuarial loan provides for principal reduction of the loan over a series of
fixed level monthly installments. Each scheduled payment is deemed to consist of
an amount of interest equal to 1/12 of the stated annual percentage rate of
interest, commonly known as annual percentage rate or APR, of the loan
multiplied by the scheduled principal balance of the receivable and an amount of
principal equal to the remainder of the scheduled payment. No adjustment is made
in the event of early or late payments, although in the case of late payments
the borrower may be subject to a late charge.
Information with respect to the specific auto loan pool will be set out in the
prospectus supplement, including, to the extent appropriate, the composition,
the distribution by APR and by the states of residence at origination, the
portion of the auto loan pool consisting of actuarial loans and of simple
interest loans and the portion of the auto loan pool secured by new vehicles and
by used vehicles.
INSURANCE
The subservicer requires that theft and physical damage insurance policies be
maintained by the borrowers naming the subservicer as the loss payee. Currently,
the maintenance of this insurance is monitored by a third party. The subservicer
does not force-place insurance.
The subservicer maintains fidelity bond coverage insuring against losses through
wrongdoing of its officers, employees and agents.
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DESCRIPTION OF THE SECURITIES
The securities will be issued in series. The following summaries describe the
material provisions of the securities.
The securities may be offered in the form of certificates representing
beneficial ownership interests in the auto loans held by the trust or in the
form of notes representing debt secured by the auto loans held by the trust.
Each series or class of securities may have a different rate of interest, which
may be fixed or adjustable. The prospectus supplement will specify the interest
rate for each series or class of securities, or the initial interest rate and
the method for determining subsequent changes to the interest rate.
A series may include one or more classes of interest only or principal only
securities. In addition, a series may include two or more classes that differ as
to timing, sequential order, priority of payment, interest rate or amount of
distributions of principal or interest or both. Distributions of principal or
interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula, or on the basis of collections
from designated assets of the trust. A series may include one or more classes of
securities, as to which accrued interest will not be distributed but rather will
be added to the principal or notional balance of the security on each payment
date.
A series of securities may include one or more classes of securities that are
senior to one or more classes of subordinate securities in respect of
distributions of principal and interest and allocations of losses on the auto
loans.
A series of securities may have a balance that may decrease based on the
amortization of auto loans or increase based on principal collections used to
purchase additional auto loans.
Each trust may also issue classes of subordinated equity securities which will
represent the right to receive the proceeds of the trust property after all
required payments have been made to the holders of all of the senior and
subordinate notes or certificates issued by the trust, and following any
required deposits to any reserve account that may be established for the benefit
of the holders of the notes or certificates. These subordinated classes may
constitute what are commonly referred to as the RESIDUAL INTEREST, SELLER'S
INTEREST OR THE GENERAL PARTNERSHIP INTEREST, depending upon the treatment of
the trust for federal income tax purposes. These subordinated classes generally
will not have principal and interest components. Any losses suffered by the
trust will first be absorbed by the residual class of securities, or as
described in the prospectus supplement.
The prospectus supplement relating to a series of securities will describe the
following specific terms of that series:
- the aggregate principal amount, interest rate, and authorized
denominations of each class of securities;
- a statistical profile of the auto loans backing that series;
- the terms of any credit enhancement for that series;
- a description of other material assets in the trust, including any reserve
fund;
- the final scheduled distribution date of each class of securities;
- the method used to calculate the rate at which interest on each class of
securities will accrue, the time period during which interest on each
class of securities will accrue, the order of priority of the application
of interest to the respective classes and the manner of distribution of
interest among each class of securities;
- the method to be used to calculate the amount of principal required to be
applied to each class of securities of each series on each payment date,
the timing of the application of principal and the order of priority of
the application of principal to the respective classes of securities;
- additional information about the plan of distribution of the securities;
and
- the federal income tax characterization of the securities.
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GENERAL PAYMENT TERMS OF SECURITIES
Securityholders will be entitled to receive payments on their securities on
specified payment dates. Payment dates will occur monthly, quarterly or
semi-annually, as described in the prospectus supplement.
The prospectus supplement will describe a record date for each payment date, as
of which the trustee or its paying agent will fix the identity of the
securityholders for the purpose of receiving payments on that payment date. The
prospectus supplement and the agreements will describe a period, known as the
COLLECTION PERIOD, prior to each payment date. Interest accrued and principal
collected on the auto loans during a collection period will be required to be
remitted by the servicer to the trustee prior to the payment date and will be
used to distribute payments to securityholders on that payment date.
The agreements may provide that all or a portion of the principal collected on
the auto loans may be applied by the trustee to the acquisition of subsequent
auto loans 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.
None of the securities or the auto loans will be guaranteed or insured by any
governmental agency or instrumentality, the seller, the servicer, the
subservicer, the trustee, or any of their respective affiliates.
PAYMENT DATE DISTRIBUTIONS
On each payment date, distributions of principal and interest or, where
applicable, of principal only or interest only, on each class of securities will
be made either by the trustee or a paying agent appointed by the trustee, to the
persons who are registered as securityholders at the close of business on the
record date. Interest that accrues and is not payable on a class of securities
may be added to the principal balance of each security of the class.
Distributions will be made in immediately available funds, by wire transfer or
otherwise, to the account of a securityholder. If the securityholder has
notified the trustee or the paying agent, as the case may be, and the agreements
provide, payment may be in the form of a check mailed to the address of the
person entitled thereto as it appears on the register. The final payment
distribution upon retirement of the securities will be made only upon
presentation and surrender of the securities at the office or agency of the
trustee specified in the notice to securityholders of the final distribution.
DETERMINATION OF PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of principal and
interest or, principal only or interest only, on a particular series of
securities will be described in the prospectus supplement. Each class of
securities, except for principal only securities, may bear interest at a
different interest rate. Interest on the securities will be calculated either on
the basis of a 360-day year consisting of twelve 30-day months, on the basis of
the actual number of days in the interest period over 360, or on the basis of
the actual number of days in the interest period over 365.
On each payment date, the trustee or the paying agent will distribute to each
securityholder an amount equal to the percentage interest represented by the
security held by the holder multiplied by the total amount to be distributed on
that payment date on account of that class.
For a series of securities that includes two or more classes, the timing,
sequential order, priority of payment, amount of distributions in respect of
principal, any schedule or formula or other provisions applicable to the
determination of distributions among multiple classes of senior securities or
subordinate securities will be described in the prospectus supplement.
Prior to each payment date the trustee will determine the amounts of principal
and interest which will be due to securityholders on that payment date. If the
amount then available to the trustee is insufficient to cover the amount due to
securityholders, the trustee will be required to notify the credit enhancement
provider, if there is one for that series, and the credit enhancement provider,
will be required to fund the deficiency.
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FIXED RATE SECURITIES
Each class of securities may bear interest at an annual fixed rate or at a
variable or adjustable rate per annum, as more fully described below and in the
prospectus supplement. Each class of fixed rate securities will bear interest at
the applicable interest rate specified in the prospectus supplement.
FLOATING RATE SECURITIES
Each class of floating rate securities will bear interest for each related
interest period at a rate per annum determined by reference to an interest rate
index, commonly known as the BASE RATE, plus or minus a spread, if any, or
multiplied by a spread multiplier, in each case as specified in the prospectus
supplement. The SPREAD is the percentage above or below the base rate at which
interest will be calculated that may be specified in the prospectus supplement
as being applicable to such class, and the SPREAD MULTIPLIER is the percentage
that may be specified in the prospectus supplement as being applicable to such
class.
The prospectus supplement will designate a base rate for a given floating rate
security based on the London interbank offered rate, commonly called LIBOR,
eurodollar synthetic forward rates, commercial paper rates, federal funds rates,
U.S. Government treasury securities rates, negotiable certificates of deposit
rates or another rate as set forth in the prospectus supplement.
As specified in the prospectus supplement, floating rate securities may also
have either or both of the following, in each case expressed as an annual rate:
(1) a maximum limitation, or ceiling, on the rate at which interest may accrue
during any interest period, which may be an available funds cap rate and (2) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. The interest rate on either type of security will not be
higher than the maximum rate permitted by applicable law.
Each trust that issues a class of floating rate securities will appoint and
enter into agreements with a calculation agent to calculate interest rates on
each class of floating rate securities. The prospectus supplement will set forth
the identity of the calculation agent for each such class of floating rate
securities which may be the trustee for the series. All determinations of
interest by the calculation agent will, in the absence of manifest error, be
conclusive for all purposes and binding on the holders of floating rate
securities of a given class.
The trust may also include a derivative arrangement for any series or any class
of securities. A derivative arrangement may include a guaranteed rate agreement,
a maturity liquidity facility, a tax protection agreement, an interest rate cap
or floor agreement, an interest rate or currency swap agreement or any other
similar arrangement.
INDEXED SECURITIES
Any class of securities may consist of securities in which the INDEXED PRINCIPAL
AMOUNT, the principal amount payable at the final scheduled distribution date
for such class is determined by reference to a measure, commonly known as an
INDEX, which will be related to one of the following:
- the difference in the rate of exchange between United States dollars and a
currency or composite currency specified in the prospectus supplement;
- the difference in the price of a specified commodity on specified dates;
- the difference in the level of a specified stock index which may be based
on U.S. or foreign stocks, on specified dates;
- such other objective price or economic measure as is described in the
prospectus supplement. The manner of determining the indexed principal
amount of an indexed security and historical and other information
concerning the applicable index will be set forth in the prospectus
supplement, together with information concerning tax consequences to the
holders of such indexed securities.
If the determination of the indexed principal amount of an indexed security is
based on an index calculated or announced by a third party and that third party
either suspends the calculation or announcement of that index or
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changes the basis upon which that index is calculated, then that index shall be
calculated for purposes of such indexed security by an independent calculation
agent named in the prospectus supplement on the same basis, and subject to the
same conditions and controls, as applied to the original third party. If for any
reason that index cannot be calculated on the same basis and subject to the same
conditions and controls as applied to the original third party, then the indexed
principal amount of that indexed security will be calculated in the manner set
out in the prospectus supplement. Any determination of the independent
calculation agent shall in the absence of manifest error be binding on all
parties.
Interest on an indexed security will be payable based on the amount designated
in the prospectus supplement as the face amount of that indexed security. The
prospectus supplement will describe how the principal amount of the related
indexed security, if any, would be paid upon redemption or repayment prior to
the applicable final scheduled distribution date.
SCHEDULED AMORTIZATION SECURITIES; COMPANION SECURITIES
The securities may include one or more classes of SCHEDULED AMORTIZATION
SECURITIES and COMPANION SECURITIES. Scheduled amortization securities are
securities for which payments of principal are to be made in specified amounts
on specified payment dates, to the extent of funds being available on that
payment date. Companion securities are securities which receive payments of all
or a portion of any funds available on a given payment date which are in excess
of amounts required to be applied to payments on scheduled amortization
securities on such payment date. Because of the manner of application of
payments of principal to companion securities, the weighted average lives of
companion securities of a series may be expected to be more sensitive to the
actual rate of prepayments on the auto loans in the related trust than will the
scheduled amortization securities of that series.
MATURITY AND PREPAYMENT CONSIDERATIONS
The weighted average life of the securities will be influenced by the rate at
which the principal of the auto loans backing those securities are paid. Payment
on the auto loans may be in the form of scheduled payments or prepayments.
Prepayments will shorten the weighted average life of the securities. The rate
of prepayments on the auto loans may be influenced by a variety of economic,
financial and other factors. In addition, under various circumstances, the
seller or servicer will be obligated to acquire auto loans from the trust as a
result of breaches of representations and warranties. Any reinvestment risks
resulting from a faster or slower rate of principal repayment on the securities
will be borne entirely by the securityholders.
Each prospectus supplement will set forth additional information about the
maturity and prepayment considerations applicable to a particular pool of auto
loans and series of securities.
YIELD CONSIDERATIONS
The yield to maturity of a security will depend on the price paid, its interest
rate and the rate of payment of principal on the security or on its notional
amount, if the security is not entitled to payments of principal, as well as
other factors.
A class of securities may be entitled to variable payments of interest at a
fixed, maximum interest rate, commonly referred to as an AVAILABLE FUNDS CAP,
which is calculated based on the weighted average APR of the auto loan pool
minus any interest strips retained by the originator and all trust fees, if
specified in the prospectus supplement, or at another maximum interest rate as
may be described in the prospectus supplement.
The yield to maturity of the securities may be adversely affected by a higher or
lower than anticipated rate of prepayments on the auto loans. If you purchase a
security at a premium based on your expectations as to its maturity or weighted
average life, and the security pays principal more quickly than you expected,
your yield will be reduced and you may not recover the premium you paid. In
addition, if you purchase a security at a discount based
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on your expectations as to its maturity or weighted average life, and the
security principal more slowly than you expected, your yield will be lower than
you anticipated.
The yield on the securities also will be affected by liquidations of auto loans
following borrowers' defaults, receipt of proceeds from credit life, credit
disability or casualty insurance policies and by repurchases of auto loans in
the event of breaches of representations. The yield to maturity on some types of
securities, including interest only and principal only securities, and
securities in a series including more than one class, may be relatively more
sensitive to the rate of prepayment on the auto loans than other classes of
securities.
The timing of changes in the rate of principal payments on or repurchases of the
auto loans may significantly affect an investor's actual yield to maturity, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation. As a result, the effect on an investor's yield
of principal payments and repurchases occurring at a rate higher, or lower, than
the rate anticipated by the investor during the period immediately following the
issuance of a series of securities would not be fully offset by a subsequent
like reduction or increase in the rate of principal payments.
BOOK-ENTRY REGISTRATION
The securities are sometimes referred to in this prospectus as BOOK-ENTRY
SECURITIES. No person acquiring an interest in the book-entry securities will be
entitled to receive a definitive note representing an obligation of the trust,
except under the limited circumstances described in the prospectus. Beneficial
owners may elect to hold their interests through the Depository Trust Company,
commonly known as DTC, in the United States, or Cedelbank or the Euroclear
System, in Europe. Transfers within DTC, Cedelbank or Euroclear, as the case may
be, will be in accordance with the usual rules and operating procedures of that
system. So long as the securities are book-entry securities, they will be
evidenced by one or more securities registered in the name of Cede & Co., which
will be the HOLDER of those securities, as the nominee of DTC or one of the
relevant depositaries. Cross-market transfers between persons holding directly
or indirectly through DTC, on the one hand, and counterparties holding directly
or indirectly through Cedelbank or Euroclear, on the other, will be effected in
DTC through The Chase Manhattan Bank, the relevant depositories of Cedelbank or
Euroclear, respectively, and each participating member of DTC. The securities
will initially be registered in the name of Cede & Co. The interests of the
holders of those securities will be represented by book-entries on the records
of DTC and participating members thereof. All references in this prospectus to
any securities reflect the rights of beneficial owners only as those rights may
be exercised through DTC and its participating organizations for so long as
those securities are held by DTC.
The beneficial owners of securities may elect to hold their securities through
DTC in the United States, or Cedelbank or Euroclear if they are participants in
these systems, or indirectly through organizations which are participants in
these systems. The book-entry securities will be issued in one or more
securities per class of securities which in the aggregate equal the outstanding
principal balance of the related class of securities and will initially be
registered in the name of Cede & Co., the nominee of DTC. Cedelbank and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedelbank's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Chase will act as depositary for Cedelbank and Morgan Guaranty Trust Company of
New York will act as depositary for Euroclear. Investors may hold beneficial
interests in the book-entry securities in minimum denominations representing
principal amounts of $1,000. Except as described below, no beneficial owner will
be entitled to receive a physical or definitive security representing that
security. Unless and until definitive securities are issued, it is anticipated
that the only holder of these securities will be Cede & Co., as nominee of DTC.
Beneficial owners will not be "holders", "noteholders" or "certificateholders",
as the case may be, as those terms are used in the trust documents. Beneficial
owners are only permitted to exercise their rights indirectly through
participants and DTC.
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 that maintains the beneficial owner's account for that purpose. In
turn, the financial intermediary's ownership of such book-entry security will be
recorded on the records of DTC or on the records of a participating firm that
acts as agent for the financial intermediary, whose interest will in turn be
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recorded on the records of DTC, if the beneficial owner's financial intermediary
is not a DTC participant and on the records of Cedelbank or Euroclear, as
appropriate.
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 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 securities. Participants
include securities brokers and dealers, including the underwriter, banks, trust
companies and clearing corporations. 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.
Under the rules, regulations and procedures creating and affecting DTC and its
operations, DTC is required to make book-entry transfers of book-entry
securities, such as the securities, among participants on whose behalf it acts
with respect to the book-entry securities and to receive and transmit
distributions of principal of and interest on the book-entry securities.
Participants and indirect participants with which beneficial owners have
accounts with respect to the book-entry securities similarly are required to
make book-entry transfers and receive and transmit payments on behalf of their
respective beneficial owners.
Beneficial owners that are not participants or indirect participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
book-entry securities may do so only through participants and indirect
participants. In addition, beneficial owners will receive all distributions of
principal and interest from the trustee, or a paying agent on behalf of the
trustee, through DTC participants. DTC will forward these distributions to its
participants, which thereafter will forward them to indirect participants or
beneficial owners. Beneficial owners will not be recognized by the trustee, the
servicer or any paying agent as holders of the securities, and beneficial owners
will be permitted to exercise the rights of the holders of the securities only
indirectly through DTC and its participants.
Because of time zone differences, credits of securities received in Cedelbank 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. Credits or any transactions in these securities settled
during that processing will be reported to the relevant Euroclear or Cedelbank
participants on that business day. Cash received in Cedelbank or Euroclear as a
result of sales of securities by or through a Cedelbank participant or Euroclear
participant to a DTC participant will be received with value on the DTC
settlement date but will be available in the relevant Cedelbank or Euroclear
cash account only as of the business day following settlement in DTC.
Transfers between participants will conform with DTC rules. Transfers between
Cedelbank participants and Euroclear participants will conform 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 Cedelbank participants
or Euroclear participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by the relevant depositary; however, these 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. 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. Cedelbank participants and
Euroclear participants may not deliver instructions directly to the European
depositaries.
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participant organizations and
facilitates the clearance and settlement of securities transactions between
Cedelbank participants through electronic book-entry changes in accounts of
Cedelbank participants, thereby eliminating the need for physical movement of
securities. Transactions may be settled in Cedelbank in any of 38 currencies,
including United States dollars. Cedelbank provides to its Cedelbank
participants, among other things, services for safekeeping,
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administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic markets
in several countries. As a professional depository, Cedelbank is subject to
regulation by the Luxembourg Monetary Institute. Cedelbank participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Cedelbank is also available
to others, including banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Cedelbank 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 participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
both the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 37 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, under contract with Euroclear Clearance Systems S.C., a Belgian
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 Euroclear Clearance. Euroclear
Clearance establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include banks (including central banks), securities
brokers and dealers, and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear operator is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law. 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 Euroclear participants, and has no record of or relationship
with persons holding through Euroclear participants.
Distributions on the book-entry securities will be made on each distribution
date by the trustee to Cede & Co., as nominee of DTC. DTC will be responsible
for crediting the amount of those payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing payments 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, since those payments will be
forwarded by the trustee to Cede & Co., as nominee of DTC. Distributions with
respect to securities held through Cedelbank or Euroclear will be credited to
the cash accounts of Cedelbank participants or Euroclear participants 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.
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 DTC system, or otherwise take actions on those book-entry
securities, may be limited due to the lack of physical securities for such
book-entry securities. In addition, issuance of the book-entry securities in
book-entry form may reduce the liquidity of such securities in the secondary
market since certain potential investors may be unwilling to purchase securities
for which they cannot obtain physical securities.
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Monthly and annual reports on the trust provided by the trustee to Cede & Co.,
as nominee of DTC, may be made available to beneficial owners upon request, in
accordance with the rules, regulations and procedures creating and affecting
DTC, and to the financial intermediaries to whose DTC accounts the book-entry
securities of the beneficial owners are credited.
DTC has advised the seller and the servicer that it will take any action
permitted to be taken by a holder of the securities under the trust documents
only at the direction of one or more participants to whose accounts with DTC the
book-entry securities are credited. Additionally, DTC has advised the seller
that it will take such actions with respect to specified percentages of voting
rights only at the direction of and on behalf of participants whose holdings of
book-entry securities evidence such specified percentages of voting rights. DTC
may take conflicting actions with respect to percentages of voting rights to the
extent that participants whose holdings of book-entry securities evidence such
percentages of voting rights authorize divergent action.
None of the trust, the seller, the servicer, the insurer or the trustee will
have any responsibility for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the book-entry securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of securities among participants of DTC, Cedelbank
and Euroclear, they are under no obligation to perform or continue to perform
these procedures and these procedures may be discontinued at any time.
DEFINITIVE SECURITIES
The securities, which will be issued initially as book-entry securities, will be
converted to definitive securities and reissued to beneficial owners or their
nominees, rather than to DTC or its nominee, only if (a) DTC or the servicer
advises the trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to the
book-entry securities and DTC or the servicer is unable to locate a qualified
successor or (b) the trustee, at its option, elects to terminate the book-entry
system through DTC.
If any event described in the preceding paragraph occurs, DTC will be required
to notify all participants of the availability through DTC of definitive
securities. Upon delivery of definitive securities, the trustee will reissue the
book-entry securities as definitive securities to beneficial owners.
Distributions of principal of, and interest on, the book-entry securities will
thereafter be made by the trustee, or a paying agent on behalf of the trustee,
directly to holders of definitive securities in accordance with the procedures
set forth in the trust documents.
Definitive securities will be transferable and exchangeable at the offices of
the trustee or the registrar. No service charge will be imposed for any
registration of transfer or exchange, but the trustee may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
CREDIT AND CASH FLOW ENHANCEMENTS
The amounts and types of credit enhancement arrangements, if any, and the credit
enhancement provider, for each class of securities will be detailed in the
related prospectus supplement. Credit enhancement may be in the form of:
- an insurance policy;
- subordination of one or more classes of securities;
- reserve accounts;
- overcollateralization;
- letters of credit;
- credit or liquidity facilities;
- third party payments or other support;
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- surety bonds;
- guaranteed cash deposits;
- swap contracts, including interest rate and currency swaps; or
- other arrangements or any combination of two or more of the above.
Credit enhancement may cover one or more classes of the series. Credit
enhancement for any class or series of securities is intended to enhance the
likelihood that securityholders of that class or series will receive the full
amount of principal and interest due and to decrease the likelihood that the
securityholders will experience losses. 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. If losses
occur which exceed the amount covered by any credit enhancement or which are not
covered by any credit enhancement, securityholders will bear their allocable
share of deficiencies. In addition, if a form of credit enhancement covers more
than one series of securities, securityholders of those series will be subject
to the risk that the credit enhancement will be exhausted by the claims of
securityholders of other series.
THE TRUST DOCUMENTS
Each series of securities will be issued under one or more TRUST DOCUMENTS which
term refers to pooling and servicing agreements, trust agreements, receivables
purchase agreements, sale and servicing agreements and indentures which will
establish the trust, transfer the auto loans, provide for the servicing of the
auto loans and issue the securities. The following paragraphs describe the
material provisions common to the trust documents. A more detailed discussion of
the trust documents governing your specific series will appear in the prospectus
supplement.
SALE OF AUTO LOANS BY THE SUBSERVICER TO THE SELLER
The subservicer will sell to the seller all its right, title and interest in and
to all of the auto loans. The purchase price of the auto loans will be not less
than the principal amount as of the time of sale, plus the present value of the
anticipated excess spread discounted to account for uncertainty in the future
performance of the auto loans.
The subservicer will indicate in its computer files that the auto loans have
been sold to the seller and that the auto loans have been further sold or
transferred by the seller to the trust. In addition, the subservicer will
provide to the seller a computer file or a microfiche list containing a true and
complete list showing each auto loan, identified by account number and by total
outstanding balance on the date the auto loans was sold to the seller. In its
capacity as subservicer, the subservicer has retained possession of the records
and agreements relating to the auto loans. The records and agreements will not
be segregated by the subservicer from other documents and agreements relating to
other auto loans and are not stamped or marked to reflect the sale or transfer
of the auto loans to the seller. However, the computer records of the
subservicer are or will be marked to evidence the sale or transfer. The
subservicer will file a UCC financing statement meeting the requirements of
applicable state law and in each of the jurisdictions in which these filings are
required in order to maintain the lien priority of the auto loans.
REPRESENTATIONS AND WARRANTIES OF THE SUBSERVICER
In the trust documents, the subservicer will represent and warrant to the seller
to the effect, among other things, that:
- each auto loan satisfies the eligibility criteria;
- the sale constitutes a valid sale to the seller of all right, title and
interest of the subservicer in and to the auto loans, and the security
interests in the financed vehicles, or, if held not to constitute a sale,
constitutes a grant of a security interest in the auto loans;
- the sale constitutes a valid sale to the seller of all right, title and
interest in and to any service contracts on financed vehicles and rights
against dealers under dealer agreements; and
- the sale constitutes a valid sale to the seller of all right, title and
interest in and to any physical damage, credit life or disability
insurance policies covering financed vehicles or borrowers.
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If the breach of any of the subservicer's representations and warranties results
in the obligation of the seller to repurchase auto loans, either the seller, or
at the seller's election, the subservicer, will repurchase the affected auto
loans for an amount equal to the unpaid principal balance, plus accrued and
unpaid finance charges from the last date billed through the end of the current
collection period.
TRANSFER AND ASSIGNMENT OF THE AUTO LOANS BY THE SELLER TO THE TRUST
On the closing date for a series, the seller will transfer and assign to the
trust, without recourse, its entire interest in the auto loans, including its
security interests in the financed vehicles. Each of these auto loans will be
identified in a schedule of auto loans delivered to the trustee. The net
proceeds received from the sale of the securities will be used by the trust to
the purchase of the auto loans from the seller and, if applicable, to the
deposit of the pre-funded amount into the pre-funding account. The prospectus
supplement for a series of securities will specify whether, and the terms,
conditions and manner under which subsequent auto loans for the series will be
sold by the seller to the applicable trust from time to time during any
pre-funding period.
REPRESENTATION AND WARRANTIES OF THE SELLER; REPURCHASE OBLIGATION
If the seller breaches the representations and warranties relating to the auto
loans and the financed vehicles in a manner that materially and adversely
affects any auto loan or the interests of the securityholders or the interests
of the trustee, the seller will be obligated, unless the breach is cured, to
repurchase the auto loans from the trust. The seller will be obligated to
repurchase the auto loans if its breach is not cured by the last day of the
second calendar month following the discovery by or notice to the seller of the
breach.
The representations and warranties made by the seller under the trust documents
state that each auto loan:
- was originated by a properly licensed dealer in the ordinary course of
business, purchased by the subservicer pursuant to a dealer agreement,
sold to the seller, assigned to the trust and then assigned by the trust
to the trustee;
- the assignment was valid and made pursuant to the respective agreements
upon customary and enforceable terms;
- is fully amortizing with level monthly payments;
- was originated and sold to the seller without fraud or material
misrepresentation on the part of the dealer or the borrower;
- was originated in material compliance with all applicable laws and
regulations relating to the auto loans and all applicable laws and
regulations were complied with in writing any insurance policies with
respect thereto, and the auto loans and any insurance policies continue to
be in compliance with applicable laws and regulations;
- was originated in the United States and complied at the time of purchase
with the subservicer's then current underwriting and funding policies;
- is a valid, legal and binding obligation of the borrower, enforceable in
accordance with its terms subject to exceptions for bankruptcy, insolvency
or the Soldiers' & Sailors' Civil Relief Act of 1940;
- is not due from any governmental body;
- meets the statistical characteristics specified in the prospectus
supplement;
- has had no funds advanced by any party to maintain the auto loan as
current;
- as to which the information on the schedule of auto loans provided to the
trustee is true and correct in all material respects;
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- as to which the subservicer's and the servicer's records reflect the
successive assignments or pledge from the subservicer to the seller, from
the seller to the trust and by the trust to the trustee;
- will be accurately reflected in any list of auto loans provided by the
subservicer;
- constitutes chattel paper under the UCC;
- is documented by only one original executed contract;
- as to which the loan file contains the executed original contract,
evidence of physical damage insurance coverage, the original lien
certificate naming the subservicer or any predecessor or affiliate as
first lienholder and an original credit application;
- has not been satisfied, subordinated or rescinded and the financed vehicle
has not been released from the lien;
- was not originated in, or subject to laws of a jurisdiction, the laws of
which make it unlawful, void or voidable to sell, transfer or assign the
auto loans and the auto loans is not subject to any agreement restricting
or conditioning the assignment;
- has not been sold, transferred, assigned or pledged other than as
described in this prospectus and no other person holds any right to
receive any proceeds on the auto loans, any insurance policy or dealer
agreement;
- which creates a valid, binding and enforceable first priority security
interest in favor of the subservicer in the financed vehicle; the security
interest is prior to all other liens and security interests other than
those for taxes, labor or material for a vehicle and as to which no prior
liens exist;
- as to which all filings required to give the trustee a first priority
perfected lien on, or ownership interest in, the auto loans and the
proceeds have been made;
- as to which, the subservicer, or any predecessor or affiliate, has not
conveyed any interest thereto to any person that would impair the rights
of the trustee thereto;
- is not assumable;
- is not subject to recision, set off, counterclaim or defense and as to
which no right has been asserted or threatened with respect thereto;
- as to which no event has occurred permitting acceleration and no condition
exists or event has occurred and is continuing that would with notice,
lapse of time or both would constitute a default, breach, violation or
event permitting acceleration, nor any waiver of a default, breach,
violation or other event permitting acceleration, and as to which the
financed vehicle has not been repossessed;
- at the time of origination was covered by comprehensive, collision, loss
and damage insurance naming the subservicer, its successors and assigns as
loss payee;
- as to which the lien certificate names, or will name, the subservicer or
its predecessors or affiliates as the original secured party and all
required filings and recordings required to name that entity as the
original secured party have been made; and
- as to which no selection procedures adverse to the securityholder were
utilized.
Any deviations from these representations and warranties will be described in
the prospectus supplement.
In addition to the warranty that it will maintain the subservicer's perfected
security interest in the financed vehicles, the servicer will represent and
warrant in the trust documents that it:
- will do nothing to impair the rights of the trust or securityholders in
the auto loans, dealer agreements, the trust documents, any insurance
policies or any other trust asset;
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- will not create or allow to exist any lien or restriction on transfer of
the auto loans except for the lien in favor of the trustee, or sign or
file under the UCC of any jurisdiction any financing statement or security
agreement naming the subservicer, the servicer or any affiliate as debtor
or authorizing any other filing;
- will not extend or amend any auto loans other than as specified in the
trust documents;
- will service the auto loans in compliance with the trust documents and in
material compliance with its standard and customary procedures for
servicing; and
- will notify the trustee of any change in its principal offices and will
maintain the files relating to the auto loans in the United States.
PAYMENTS ON AUTO LOANS; DEPOSITS TO COLLECTION ACCOUNT
The trustee will establish and maintain a collection account. The collection
account will be a separate trust account for the benefit of the securityholders
and the trust, and will be an eligible account. Except as otherwise described in
this prospectus and subject to the investment provision described in the
following paragraphs, within two business days following receipt by the servicer
or the subservicer of amounts representing collected funds, the servicer will
cause these amounts to be deposited in the collection account. Amounts deposited
in the collection account may be invested in eligible investments maturing so
that funds will be available for distribution no later than the close of
business on the day prior to the payment date. However, for as long as Household
Finance Corporation remains the servicer and maintains a commercial paper rating
specified by the rating agencies, the servicer is not required to deposit
collections into the collection account within two business days following
receipt, but may use for its own benefit, all collections until the payment
date. So long as these ratings are maintained, the servicer will, on or prior to
each payment date, make deposits in an amount equal to collected funds for the
applicable collection period. RATING AGENCIES will be defined in the prospectus
supplement for each series.
ELIGIBLE INVESTMENTS will mean negotiable instruments or securities which
evidence:
(1) direct obligations of, or obligations fully guaranteed as to timely
payment by, the United States of America;
(2) demand deposits, time deposits or certificates of deposit of
depository institutions or trust companies incorporated under the laws of
the United States of America or any state and subject to supervision and
examination by federal or state banking or depository institution
authorities; provided the short-term debt rating of the depository
institution or trust company shall be in the highest rating category of the
rating agencies;
(3) commercial paper having, at the time of the trust's investment or a
contractual commitment to invest, a rating in the highest rating category of
the rating agencies;
(4) demand deposits, time deposits and certificates of deposit which are
fully insured by the FDIC having, at the time of the trust's investment in
them, a rating in the highest rating category of the rating agencies;
(5) bankers' acceptances issued by any depository institution or trust
company described in (2) above;
(6) money market funds having, at the time of the trust's investment in
them, a rating in the highest rating category of the rating agencies;
(7) time deposits, other than as referred to in (4) above, with an
entity, having a credit rating in the highest rating category of the rating
agencies;
(8) demand notes of Household Finance Corporation for so long as it's
commercial paper has, at the time of the trust's investment, a rating in the
highest rating category of the rating agencies; and
(9) any other investment acceptable to the rating agencies.
At any time that the commercial paper issued by Household Finance Corporation
does not satisfy the rating requirements specified above, it may continue to
hold collections prior to distribution as described above so long as it
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provides as security an irrevocable letter of credit, surety bond or other
instrument satisfactory to each rating agency from an entity having ratings on
its short-term and long-term obligations acceptable to the rating agencies.
An ELIGIBLE ACCOUNT is an account that is either (1) a segregated account with a
depository institution organized under the laws of the United States or any of
the states which depository at the time of any deposit therein has a net worth
in excess of $50,000,000 and long-term debt rating acceptable to the rating
agencies or a short-term deposit obligation rating acceptable to the rating
agencies, or (2) a segregated trust account with the corporate trust department
of a depository organized under the laws of the United States or any one of the
states, and acting as a trustee for funds deposited in the account, so long as
any of the unsecured, unguaranteed senior debt securities of the depository
shall have a long-term debt rating acceptable to the rating agencies.
The servicer will have the revocable power to withdraw funds from the collection
account and to instruct the trustee to make withdrawals and payments from the
collection account for the purpose of carrying out its duties under the trust
documents.
COLLECTION AND OTHER SERVICING PROCEDURES
The servicer will make reasonable efforts to collect all payments called for
under the auto loans and will, consistent with the trust documents, follow the
collection procedures as it follows from time to time for motor vehicle retail
installment sales contracts in its servicing portfolio which are comparable to
the auto loans. The subservicer, will follow the servicer's collection
procedures as they may be revised from time to time. Consistent with the above,
the subservicer or the servicer may in their discretion waive any late payment
charge or any assumption or other fee or charge that may be collected in the
ordinary course of servicing the auto loans.
The subservicer or the servicer may arrange with a borrower a schedule for the
payment of interest due and unpaid for a period, provided that the arrangement
is consistent with the servicer's policies for comparable auto loans held in its
portfolio.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As long as Household Finance Corporation is the servicer it will receive, or be
entitled to retain a SERVICING FEE on behalf of itself and the subservicer,
after making payments on the securities and making required deposits in the
reserve account. The servicing fee will be paid monthly in arrears at the annual
percentage described in the prospectus supplement on the pool balance as of the
beginning of the prior collection period. If Household Finance Corporation is no
longer the servicer, the servicing fee will be paid to the successor servicer
prior to any distributions on the securities and making required deposits in the
reserve account. The servicer is also entitled to retain SUPPLEMENTAL SERVICING
FEES which are all administrative fees, expenses and charges paid on behalf of
borrowers, including late fees, prepayment fees and liquidation fees.
The servicer will pay the ongoing expenses associated with the trust and the
securities, and incurred by it in connection with its responsibilities under the
trust documents, including payment of the fees and disbursements of the
trustees. In addition, the servicer will be entitled to reimbursement for
expenses incurred by it in connection with its servicing duties, this right of
reimbursement being prior to the rights of securityholders to payments of
principal and interest.
EVIDENCE AS TO COMPLIANCE
The trust documents provide for the delivery of an annual statement signed by an
officer of the servicer or of the subservicer to the effect that the servicer or
the subservicer has fulfilled the material obligations of the servicer under the
trust documents throughout the preceding calendar year, except as specified in
the statement.
Each year, the servicer will furnish a report prepared by a firm of independent
certified public accountants to the effect that the accountants have examined
documents and the records relating to servicing of the auto loans, and compared
mathematical calculations for monthly servicing reports selected by the
accountants with the servicer's computer reports, and the examination, has
disclosed no items of noncompliance with the provision of the trust documents or
variations in the results of the calculations which, in the opinion of the firm,
are material, except for the items of non-compliance as shall be referred to in
the report.
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CERTAIN MATTERS REGARDING THE SERVICER AND THE SELLER
The trust documents provide that the servicer may not resign from its
obligations and duties, except in connection with a permitted transfer of
servicing, unless:
- those duties and obligations are no longer permissible under applicable
law or are in conflict by reason of applicable law with any other
activities of a type and nature presently carried on by it; or
- upon the satisfaction of the following conditions: (1) the servicer has
delivered an executed assumption agreement in form satisfactory to the
trustee, assigning its obligations and duties to an entity as to which the
rating agencies have confirmed that the assumption will not result in a
lowering of the then current ratings of the securities, and (2) the
successor meets the eligibility requirements specified in the trust
document that defines the servicer's obligations.
No resignation will become effective until the trustee or a successor servicer
has assumed the servicer's obligations and duties.
The servicer may perform any of its duties and obligations through one or more
subservicers or delegates, which may be affiliates of the servicer.
Notwithstanding these arrangements, the servicer will remain liable and
obligated to the trust, the trustee, and the securityholders for the servicer's
duties and obligations, as if the servicer itself were performing the duties and
obligations. It is expected that so long as Household Finance Corporation is the
servicer, the subservicer will subservice the auto loans on behalf of it.
Any corporation into which the servicer or the seller may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the servicer or the seller shall be a party, or any
corporation succeeding to the business of the servicer or the seller shall be
the successor of the servicer or the seller under the sale and servicing
agreement.
SERVICER TERMINATION EVENT
A SERVICER TERMINATION event under the trust document defining its servicing
obligations will consist of the occurrence and continuance of any of the
following:
- any failure by the servicer to deliver to the trustee for distribution to
the securityholders any required payment, which failure continues
unremedied for five days after written notice is received by the servicer
from the trustee or after discovery of the failure by a responsible
officer of the servicer;
- any failure by the servicer duly to observe or perform in any material
respect the material covenants and agreements in the trust documents which
failure continues unremedied for 60 days after written notice of the
failure is given;
- events of insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings concerning the servicer or actions by
the servicer indicating its insolvency, inability to pay its obligations
or initiating a reorganization under bankruptcy laws; and
- the material breach of the servicer's material representations or
warranties and the servicer's failure to cure the breach within 60 days
after notice.
Notwithstanding the foregoing, a delay in or failure of performance referred to
in the first clause above, for five business days and in the second clause
above, for a period of 60 days, shall not constitute a servicer termination
event if the delay or failure could not be prevented by the exercise of
reasonable diligence by the servicer and the delay or failure was caused by an
act of God or other similar occurrence. Upon the occurrence of any event the
servicer shall provide the seller prompt notice of the failure or delay by it,
together with a description of its efforts to so perform its obligations.
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RIGHTS UPON SERVICER TERMINATION EVENT
If a servicer termination event occurs and remains unremedied, the trustee may
terminate all the rights and obligations of the servicer under the trust
document, and the trustee or a successor servicer appointed by the trustee will
succeed to all the responsibilities, duties, and liabilities of the servicer
under that agreement. Any successor servicer will succeed to all the
responsibilities, duties, and liabilities of the servicer and will be entitled
to similar compensation arrangements. There is no assurance that the succession
of a successor servicer will not result in a material disruption in the
performance of the duties of the servicer.
AMENDMENT
If it will not materially adversely affect the securityholders, the trust
documents may be amended, without the consent of the related securityholders,
for the purpose of adding, changing or eliminating any provisions or of
modifying in any manner the rights of the securityholders. The trust documents
may also be amended by the seller, the servicer, and the trustee with the
consent of securityholders evidencing at least a majority of the voting rights
of the then outstanding securities for the purpose of adding, changing in any
manner, or eliminating any provisions of the trust documents, including
provisions that would adversely affect the ratings of the securities; but no
amendment may, without the consent of all securityholders, (1) increase or
reduce the amount or priority of, or accelerate or delay the timing of,
collections on the related auto loans or distributions that are required to be
made for the benefit of the securityholders or (2) reduce the percentage of
securities which are required to consent to any amendment, without the consent
of all securityholders.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Any of the following will be an event of default for a series of securities
which are notes:
- a default in the payment of any interest on any security that, when it
becomes due and payable, continues for a period of five days;
- a default in the payment of the outstanding principal balance of a class
of notes of that series on the scheduled maturity date of the class, that
continues for a period of five days;
- default in the observance or performance of any covenant or agreement of
the trust made in the trust documents for that series, or any
representation or warranty of the trust made in the trust documents or in
any certificate or other writing delivered under the trust documents
proving to have been incorrect in any material respect as of the time when
made which has a material adverse effect on note owners, and the default
shall continue or not be cured, for a period of 60 days after notice is
given to the trust by the trustee or to the trust and the trustee by the
holders of at least 25% in principal amount of the notes of that series
then outstanding, specifying the default or incorrect representation or
warranty;
- the filing of a decree or order for relief by a court having jurisdiction
in the premises in respect of the trust or any substantial part of the
trust assets in an involuntary case under any applicable federal or state
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the trust or for any substantial part
of the trust assets, or ordering the winding-up or liquidation of the
trust's affairs, and the decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or
- the commencement by the trust of a voluntary case under any applicable
federal or state bankruptcy, insolvency or other similar law now or
hereafter in effect, or the consent by the trust to the entry of an order
for relief in an involuntary case, or the consent by the trust to the
appointment or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the trust or for
any substantial part of the trust assets, or the making by the trust of
any general assignment for the benefit of creditors, or the failure by the
trust generally to pay its debts as those debts become due, or the taking
of any action by the trust in furtherance of any of the foregoing. The
amount of principal required to be paid to noteholders on any payment date
will be limited to amounts available to be deposited in the account.
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Therefore, the failure to pay principal on a class of notes will not
result in the occurrence of an event of default until the scheduled
maturity date for that class of notes.
If there is an event of default due to late payment or nonpayment of interest or
principal on a note, interest will continue to accrue on the principal and the
overdue interest at the applicable interest rate on the note until the overdue
principal and interest is paid. If an event of default for a series occurs and
continues, and the trustee may, and at the direction of noteholders of that
series representing at least 66 2/3% of the aggregate outstanding principal
amount of the notes of that series shall, declare the principal of the notes to
be immediately due and payable. The declaration may, under some circumstances,
be rescinded by the holders of a majority in principal amount of the then
outstanding.
If the notes are accelerated following an event of default in that series, the
trustee may institute proceedings to collect amounts due or foreclose on
property comprising trust assets or exercise remedies as a secured party. If the
trustee determines that the auto loans will not provide sufficient funds for the
payment of principal and interest on the notes as the payments would become due,
any sale, liquidation or other disposition of the trust assets in that series
for an amount less than the amounts due on the notes will not occur without the
consent of holders of 66 2/3% of the outstanding principal amount of the notes
in that series. If the trustee has not made a determination that a sale or
liquidation of the trust assets in that series will not provide sufficient funds
to pay principal and interest on the notes, it may sell, liquidate or otherwise
dispose of the trust assets only if all noteholders consent.
If an event of default occurs and is continuing, the trustee will be under no
obligation to exercise any of the rights or powers under the trust documents at
the request or direction of any of the holders of the notes, if the 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 limitations contained
in the trust documents, the holders of a majority in principal amount of the
outstanding notes will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the trustee, and the
holders of a majority in principal amount of the notes then outstanding 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 trust
documents that cannot be modified without the waiver or consent of all the
holders of the outstanding notes. No holder of a note of a series will have the
right to institute any proceeding under the trust documents, unless:
- the holder previously has given the trustee written notice of a continuing
event of default;
- the holders of not less than 25% of the aggregate principal balance of all
outstanding notes of a series have made written request to the trustee to
institute the proceeding in its own name as trustee;
- the holder or holders have offered the trustee reasonable indemnity
against costs, expenses and liabilities to be incurred in complying with
the request;
- the trustee has for 60 days failed to institute the proceeding; and
- no direction inconsistent with the written request has been given to the
trustee during the 60-day period by the holders of a majority of the
aggregate principal balance of all outstanding notes of a series. In
addition, the trustee and the note owners, by accepting a beneficial
interest in the notes, will covenant that they will not at any time
institute against the trust or the seller, or join in any institution
against the trust or the seller of, any bankruptcy, reorganization or
other proceeding under any federal or state bankruptcy or similar law.
CERTAIN COVENANTS OF EACH TRUST
The trust documents provide that the trust may not consolidate with or merge
into any other entity, unless:
- 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;
- the entity expressly assumes the trust's obligation to make due and
punctual payments upon the securities and the performance or observance of
any agreement and covenant of the trust under the trust documents;
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- no event of default shall have occurred and be continuing immediately
after the merger or consolidation;
- the trust has been advised that the ratings of the securities then in
effect would not be reduced or withdrawn by any rating agency as a result
of the merger or consolidation;
- any action that is necessary to maintain the lien and security interest
created by the indenture is taken; and
- 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 securityholder.
The trust will not, among other things:
- except as expressly permitted by the trust documents, sell, transfer,
exchange or otherwise dispose of any of the assets of the trust,
- claim any credit on or make any deduction from the principal and interest
payable in respect of the securities other than amounts withheld under the
Internal Revenue Code or applicable state law or assert any claim against
any present or former holder of securities because of the payment of taxes
levied or assessed upon the trust,
- permit the validity or effectiveness of the trust documents to be impaired
or permit any person to be released from any covenants or obligations with
respect to the securities under the trust documents except as may be
expressly permitted thereby, or
- 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 of the trust, or any interest
therein or the proceeds of the trust.
The trust may not engage in any activity other than as specified under the trust
documents.
CERTAIN MATTERS REGARDING THE TRUSTEE AND THE TRUST
Neither the trust, the trustee nor any director, officer or employee of the
trust or the trustee will be under any liability to the trust or the
securityholders for any action taken or for refraining from the taking of any
action in good faith under the indenture or for errors in judgment. However, the
trustee, the trust and any director, officer or employee will not be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by reason
of reckless disregard of obligations and duties under the trust documents.
LIMITATION ON LIABILITY OF THE TRUSTEE
The trustee will make no representations as to the validity or sufficiency of
the trust documents, the securities or of the trust assets or related documents.
If no event of default has occurred, the trustee is required to perform only
those duties specifically required of it under the trust documents. Upon receipt
of the various certificates, statements, reports or other instruments required
to be furnished to it, the trustee will be required to examine them to determine
whether they are in the form required by the indenture; however, the trustee
will not be responsible for the accuracy or content of any of the documents
furnished by it.
The trustee may be held liable for its own negligent action or failure to act,
or for its own misconduct; provided, however, the trustee will not be personally
liable for any action taken, suffered or omitted to be taken by it in good faith
in accordance with the direction of the required percentage of the
securityholders in an event of default. The trustee is not required to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties under the indenture, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
the funds or adequate indemnity against the risk or liability is not reasonably
assured to it.
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RESIGNATION OF TRUSTEE
The trustee may, upon written notice to the seller and the trust, resign at any
time, in which event the servicer 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 60 days after giving notice of resignation, the
resigning trustee or the trust may petition any court of competent jurisdiction
for appointment of a successor trustee. The trustee may also be removed at any
time by the servicer. In addition, the trust may, and at the request of a
majority of the securityholders of a series shall, remove the trustee under a
series:
- if the trustee ceases to be eligible to continue as trustee under the
trust documents;
- if the trustee becomes insolvent; or
- the trustee's long-term debt ratings are below investment grade.
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.
LEGAL ASPECTS OF THE AUTO LOANS
The following discussion contains summaries of the material legal aspects of the
auto loans that are general in nature. These legal aspects are governed in part
by state laws, which may be different in the various states.
SECURITY INTEREST IN VEHICLES
In all the states in which the auto loans have been originated, retail
installment sale contracts evidence the credit sale of automobiles, light duty
trucks and vans by dealers to borrowers. The auto loans are CHATTEL PAPER under
the UCC.
Perfection of security interests in the financed vehicles is generally governed
by the motor vehicle registration laws of the state in which the vehicle is
located. In most states, a security interest in a vehicle generally may be
perfected only by amendment of that vehicle's certificate of title to note the
security interest of the secured party. That notation of a secured party's
security interest is generally effected in those states by depositing with the
applicable state highway department, motor vehicles registrar, or similar
authority along with any registration fees, the vehicle's certificate of title
and an application containing the name and address of the secured party.
The subservicer will assign its security interest in the financed vehicles
securing the auto loans to the seller, and the seller will then assign the
security interests to the trust. However, because of the administrative burden
and expense, involved, we will not amend any certificate of title to identify
the related trust as the new secured party on the certificates of title relating
to the financed vehicles. Also, the subservicer, as agent for the servicer, may
continue to hold the certificates of title in its possession.
Even though we are not amending the certificates of title, the assignment to the
trust will, in most states, be an effective conveyance of a security interest.
Under the laws of most states, a transferee of a security interest in a motor
vehicle is not required to reapply to the related department of motor vehicles
or analogous state office for a transfer of registration when the security
interest is sold or transferred by the lienholder to secure payment or
performance of an obligation. Accordingly, under the laws of these states, the
assignment by the subservicer to the seller and the seller to the trustee
effectively conveys the security in the auto loans, and specifically, the
vehicles, without re-registration and without amendment of any lien noted on the
certificate of title.
If there are any financed vehicles as to which a perfected security interest is
not obtained, the trust's security interest will be subordinate to the rights
of, among others, subsequent purchasers of the financed vehicles and holders of
perfected security interests. Such a failure, however, would constitute a breach
of the seller's warranties under the trust documents, and would create an
obligation of the seller to repurchase the auto loan unless the breach is cured.
By not identifying the trust as the secured party on the certificate of title,
the security interest of the trust in the financed vehicle could be defeated
through fraud or negligence.
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In Texas, unless the borrower has notice of the sale of its auto loan, payment
by the borrower to the owner of the auto loan last known to that borrower will
be binding upon all subsequent owners of the auto loan. By not notifying the
borrower of the sale of the auto loan to the trust, the trust would not have a
claim against the borrower for payments made by the borrower to the owner last
known to that borrower.
In most states, the perfected security interest in a vehicle continues for four
months after a vehicle leaves the state of its registration until
re-registration in the new state. A majority of states generally require a
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 to
the vehicle, or, in the case of vehicles registered in states providing for the
notation of a security interest on the certificate of title but not possession
by the secured party, the secured party would receive notice of surrender if the
security interest is noted on the certificate of title. Thus, the secured party
would have the opportunity to re-perfect its security interest in the vehicle in
the new state. In other states that do not require a certificate of title for
registration of a motor vehicle or in cases of fraud on the part of the
borrower, re-registration could defeat perfection. In the ordinary course of
servicing auto loans, the subservicer takes steps to re-perfect upon receipt of
notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower sells a vehicle, the subservicer must surrender
possession of the certificate of title or will receive notice as a result of its
security interest and will have an opportunity to require satisfaction of the
related receivable before release of the security interest. The servicer will be
obligated to take appropriate steps, at its expense, to maintain perfection of
security interests in the financed vehicles.
In most states, liens for repairs performed on, and for storage of, a motor
vehicle, and liens for some types of unpaid taxes, take priority over a
perfected security interest in a financed vehicle. The Internal Revenue Code
also grants priority to some federal tax liens over the lien of a secured party.
The laws of some states, and federal law permit the confiscation of motor
vehicles under certain circumstances if used in unlawful activities, which may
result in the loss of a secured party's perfected security interest in the
vehicle. The seller will represent each security interest in a financed vehicle
is or will be prior to all other present liens, other than tax liens and liens
that arise by operation of law, and security interests in that financed vehicle.
However, liens for repairs or taxes, or the confiscation of a financed vehicle,
could arise or occur at any time during the term of an auto loan. No notice will
be given to the indenture trustee in the event such a lien arises or
confiscation occurs.
REPOSSESSION
In the event of a default by a borrower, the servicer will be entitled to
exercise all the remedies of a secured party under the UCC of the state in which
enforcement is to take place, except where specifically limited by other laws.
In states other than Louisiana and Wisconsin, the UCC remedies of a secured
party include:
- right to repossession by self-help means, unless those means would
constitute a breach of the peace;
- unless a vehicle is voluntarily surrendered, self-help repossession is the
method that will be employed by the subservicer in the majority of
instances in which a default occurs and is accomplished by retaking
possession of the financed vehicle; and
- in cases where the borrower 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
repossessed in accordance with that order. In Louisiana and Wisconsin,
unless the vehicle is voluntarily surrendered or abandoned, judicial means
must be employed to seize the vehicle.
In some states under certain circumstances after the vehicle has been
repossessed, the borrower may reinstate the auto loan by paying the delinquent
amounts due on the auto loan.
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NOTICE OF SALE; REDEMPTION RIGHTS
In the event of default by the borrower, some states require that the borrower
be notified of the default and be given some time to 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 require the secured party to provide the borrower
with reasonable notice of the date, time, and place of any public sale and/or
the date after which any private sale of the vehicle may be held. In some states
the borrower has the right to vehicle prior to actual sale by paying the secured
party the unpaid principal balance of the auto loan plus reasonable expenses for
repossessing, holding, and preparing the vehicle for disposition and arranging
for sale, plus, in some jurisdictions, reasonable attorneys' fees, or, in some
other states, by payment of delinquent installments or the unpaid balance.
Repossessed vehicles are generally resold by the subservicer through automobile
auctions attended principally by automotive dealers.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of the repossessed vehicles generally will be applied to
the expenses of resale and repossession and then to the outstanding balance of
the auto loan. While some states impose prohibitions or limitations on
deficiency judgments, if the net proceeds from resale do not cover the full
amount of the auto loan, a deficiency judgment can be sought in those states
that do not prohibit or limit those judgments. Additionally, in Texas, in order
for a creditor in a secured transaction to sue for a deficiency, the lender must
first dispose of the vehicle in a commercially reasonable manner in accordance
with the governing UCC provisions. Any deficiency judgment would be a personal
judgment against the borrower for the shortfall, and a defaulting borrower can
be expected to 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.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and accompanying regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, state laws may impose finance charge ceilings and other
restrictions on consumer transactions and require disclosures in addition to
those required under federal law. These requirements may impose specific
statutory liabilities upon creditors who fail to comply with their provisions.
In some cases, this liability could affect the ability of the servicer to
enforce auto loans.
The so-called HOLDER-IN-DUE-COURSE RULE of the Federal Trade Commission has the
effect of subjecting the trust to all claims and defenses which the borrower
could assert against the originator of the auto loan. The provisions of the
holder-in due-course rule are generally duplicated by the Uniform Consumer
Credit Code, state statutes or the common law in some states. Liability under
the holder-in due-course rule is limited to the amounts paid by the borrower
under the auto loan, and the trust may be unable to collect any remaining
balance from the borrower.
Under most state motor vehicle dealer licensing laws, sellers of motor vehicles
are required to be licensed to sell motor vehicles at retail sale. Furthermore,
federal law requires that all sellers of new and used vehicles furnish a signed
written statement certifying the accuracy of the odometer reading. If a seller
is not properly licensed or if an odometer disclosure statement was not provided
to the purchaser of the financed vehicle, the borrower may be able to assert a
defense against the seller.
Courts have imposed general equitable principles on secured parties pursuing
repossession of collateral or litigation involving deficiency balances. These
equitable principles may relieve a borrower from some or all of the legal
consequences of a default.
In several cases, borrowers have asserted that the self-help remedies of secured
parties under the UCC and related laws violate the due process protections
provided under the Constitution of the United States. Courts have generally
upheld the notice provisions of the UCC and related laws as reasonable or have
found that the repossession and resale by the creditor do not involve sufficient
state action to afford constitutional protection to consumers.
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The seller will represent and warrant that each auto loan complies with all
requirements of law in all material respects. Accordingly, if a borrower has a
claim against the trust for violation of any law and that claim materially and
adversely affects the trust's interest in the auto loan, that violation would
constitute a breach and would oblige the seller to repurchase the auto loan
unless the breach is cured.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Relief Act of 1940, which is
referred to in this prospectus as the RELIEF ACT, members of all branches of the
military on active duty, including draftees and reservists on active duty, are
entitled to have interest rates reduced and capped at 6% annum on obligations,
including the auto loans, incurred prior to the commencement of active duty and
for the duration of active duty. Because the Relief Act applies to borrowers who
enter military service after origination of the auto loan, no information can be
provided as to the number of auto loans that may be effected by the Relief Act.
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 auto
loans. Any loss resulting from the application of the Relief Act or similar
legislation or regulations would reduce the amounts available to be paid to the
securityholders. In addition, the Relief Act limits the ability of the servicer
to repossess a vehicle during the borrower's period of active duty status, and,
under certain circumstances, during an additional three month period. Thus, in
the event that the Relief Act or similar legislation or regulations applies to
any auto loan which goes into default, there may be delays in payment and losses
on the securities. Any other interest shortfalls, deferrals or forgiveness of
payments on the auto loans resulting from similar legislation or regulations may
result in delays in payments or losses to securityholders.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments, other
statutory provisions, including the United States Bankruptcy Code and similar
state laws, may affect the ability of the trust and the servicer to repossess a
vehicle or enforce a deficiency judgment. For example, in a Chapter 13
proceeding under the federal bankruptcy law, a court may prevent a lender from
repossessing a motor vehicle. Furthermore, as part of the rehabilitation plan, a
court may reduce the amount of the secured indebtedness to the market value of
the motor vehicle at the time of bankruptcy, leaving the lender as a general
unsecured creditor for the remainder of the indebtedness. A bankruptcy court may
also reduce the monthly payments due under a contract or change the interest
rate and time of repayment.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a general discussion of the material anticipated federal income
tax consequences to investors of the purchase, ownership and disposition of the
securities offered by this prospectus. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
taxpayers subject to the alternative minimum tax, and holders that will hold the
securities as other than capital assets, all of whom may be subject to special
rules. Investors are urged to consult their own tax advisors in determining the
particular federal, state and local consequences to them of the purchase,
ownership and disposition of the securities.
The following discussion addresses securities of four general types:
(1) GRANTOR TRUST SECURITIES, representing interests in a trust, a
GRANTOR TRUST;
(2) DEBT SECURITIES, that are intended to be treated for federal income
tax purposes as indebtedness secured by the underlying loans;
(3) PARTNERSHIP INTERESTS, representing interests in a trust, a
PARTNERSHIP, that is intended to be treated as a partnership under the
Internal Revenue Code of 1986, as amended, referred to as CODE the "Code";
and
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(4) FASIT SECURITIES, representing interests in a financial asset
securitization investment trust, a FASIT, or portion thereof, which the
seller will covenant to elect to have treated as a FASIT under sections 860H
through 860L of the Code. The prospectus supplement for each series of
securities will indicate whether a FASIT election, or elections, will be
made for the related trust and, if a FASIT election is to be made, will
identify all "regular interests," "high-yield interests" and the "ownership
interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Code that require the
recognition of gain upon the "constructive sale of an appreciated financial
position." A constructive sale of an appreciated financial position occurs if a
taxpayer enters into a transaction or series of transactions with respect to a
financial instrument that have the effect of substantially eliminating the
taxpayer's risk of loss and opportunity for gain with respect to the financial
instrument. These provisions apply only to classes of securities that do not
have a principal balance.
GRANTOR TRUST SECURITIES
With respect to each series of grantor trust securities, Dewey Ballantine LLP,
special tax counsel to the seller, will deliver its opinion to the seller that
the related grantor trust will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. The opinion shall be
attached on Form 8-K to be filed with the SEC within fifteen days after the
initial issuance of the securities or filed with the SEC as a post-effective
amendment to the prospectus. Accordingly, each beneficial owner of a grantor
trust security will generally be treated as the owner of an interest in the auto
loans included in the grantor trust.
For purposes of the following discussion, a grantor trust security representing
an undivided equitable ownership interest in the principal of the auto loans
constituting the related grantor trust, together with interest thereon at a
pass-through rate, will be referred to as a GRANTOR TRUST FRACTIONAL INTEREST
SECURITY. A grantor trust security representing ownership of all or a portion of
the difference between interest paid on the auto loans constituting the related
grantor trust and interest paid to the beneficial owners of grantor trust
fractional interest securities issued with respect to a grantor trust will be
referred to as a GRANTOR TRUST STRIP SECURITY.
TAXATION OF BENEFICIAL OWNERS OF GRANTOR TRUST SECURITIES. Beneficial owners of
grantor trust fractional interest securities generally will be required to
report on their federal income tax returns their respective shares of the income
from the auto loans, including amounts used to pay reasonable servicing fees and
other expenses but excluding amounts payable to beneficial owners of any
corresponding grantor trust strip securities, and, subject to the limitations
described below, will be entitled to deduct their shares of any reasonable
servicing fees and other expenses. If a beneficial owner acquires a grantor
trust fractional interest security for an amount that differs from its
outstanding principal amount, the amount includible in income on a grantor trust
fractional interest security may differ from the amount of interest
distributable thereon. See "Discount and Premium" below. Individuals holding a
grantor trust fractional interest security directly or through a pass-through
entity will be allowed a deduction for reasonable servicing fees and expenses
only to the extent that the aggregate of a beneficial owner's miscellaneous
itemized deductions exceeds 2% of a beneficial owner's adjusted gross income.
Further, beneficial owners, other than corporations, subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be required
to treat the securities as "stripped coupons" under section 1286 of the Code.
Accordingly, a beneficial owner will be required to treat the excess of the
total amount of payments on a security over the amount paid for a security as
original issue discount and to include a discount in income as it accrues over
the life of a security. See "Discount and Premium" below.
Grantor trust fractional interest securities may also be subject to the coupon
stripping rules if a class of grantor trust strip securities is issued as part
of the same series of securities. The consequences of the application of the
coupon stripping rules would appear to be that any discount arising upon the
purchase of a security, and perhaps all stated interest thereon, would be
classified as original issue discount and includible in the beneficial owner's
income as it accrues, regardless of the beneficial owner's method of accounting,
as described below under "Discount and Premium." The coupon stripping
rules will not apply, however, if (1) the pass-through rate is no more than 100
basis points lower than the gross rate of interest payable on the underlying
auto loans and (2) the difference between
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the outstanding principal balance on the security and the amount paid for a
security is less than 0.25% of the principal balance times the weighted average
remaining maturity of the security.
SALES OF GRANTOR TRUST SECURITIES. Any gain or loss recognized on the sale of a
grantor trust security, equal to the difference between the amount realized on
the sale and the adjusted basis of a grantor trust security, will be capital
gain or loss, except to the extent of accrued and unrecognized market discount,
which will be treated as ordinary income, and in the case of banks and other
financial institutions except as provided under section 582(c) of the Code. The
adjusted basis of a grantor trust security will generally equal its cost,
increased by any income reported by the originator, including original issue
discount and market discount income, and reduced, but not below zero, by any
previously reported losses, any amortized premium and by any distributions of
principal.
GRANTOR TRUST REPORTING. The trustee will furnish to each beneficial owner of a
grantor trust fractional interest security with each distribution a statement
setting forth the amount of the distribution allocable to principal on the
underlying the auto loans and to interest thereon at the related interest rate.
In addition, within a reasonable time after the end of each calendar year, based
on information provided by the servicer, the trustee will furnish to each
beneficial owner during the year the customary factual information as the
servicer deems necessary or desirable to enable beneficial owners of grantor
trust securities to prepare their tax returns and will furnish comparable
information to the IRS as and when required to do so by law.
DEBT SECURITIES
With respect to each series of debt securities, Dewey Ballantine LLP, special
tax counsel to the seller, will deliver its opinion to the seller that the
securities will be classified as debt secured by the related auto loans.
Consequently, the debt securities will not be treated as ownership interests in
the auto loans or the trust. Beneficial owners will be required to report income
received with respect to the debt securities in accordance with their normal
method of accounting. For additional tax consequences relating to debt
securities purchased at a discount or with premium, see "Discount and Premium"
below.
TAXATION OF BENEFICIAL OWNERS OF DEBT SECURITIES. If the debt securities are
characterized as indebtedness, interest paid or accrued on a debt security will
be treated as ordinary income to the beneficial owner and principal payments on
a debt security will be treated as a return of capital to the extent of the
beneficial owner's basis in the debt security allocable thereto. An accrual
method taxpayer will be required to include in income interest on the debt
security when earned, even if not paid, unless it is determined to be
uncollectible. The trust will report to beneficial owners of record and the IRS
in respect of the interest paid and original issue discount, if any, accrued on
the debt securities to the extent required by law.
SALES OF DEBT SECURITIES. If a beneficial owner of a debt security sells or
exchanges the security, the beneficial owner will recognize gain or loss equal
to the difference, if any, between the amount received and the beneficial
owner's adjusted basis in the security. The adjusted basis in the security
generally will equal its initial cost, increased by any original issue discount
or market discount previously included in the seller's gross income with respect
to the security and reduced by the payments previously received on the security,
other than payments of qualified stated interest, and by any amortized premium.
In general, except as described in "Discount and Premium--Market Discount,"
below, except for financial institutions subject to section 582(c) of the Code,
any gain or loss on the sale or exchange of a debt security recognized by an
investor who holds the security as a capital asset, within the meaning of
section 1221 of the Code, will be capital gain or loss and will be long-term or
short-term depending on whether the security has been held for more than one
year.
DEBT SECURITIES REPORTING. The trustee will furnish to each beneficial owner of
a debt security with each distribution a statement setting forth the amount of a
distribution allocable to principal on the underlying auto loans and to interest
on it at the related interest rate. In addition, within a reasonable time after
the end of each calendar year, based on information provided by the servicer,
the trustee will furnish to each beneficial owner during a year the customary
factual information as the servicer deems necessary or desirable to enable
beneficial owners of debt
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securities to prepare their tax returns and will furnish comparable information
to the IRS as and when required to do so by law.
PARTNERSHIP INTERESTS
For each series of partnership interests, Dewey Ballantine LLP will deliver its
opinion to the seller that the trust will be treated as a partnership and not an
association taxable as a corporation for federal income tax purposes. The
opinion shall be attached on Form 8-K to be filed with the SEC within fifteen
days after the initial issuance of the securities or filed with the SEC as a
post-effective amendment to the prospectus. Accordingly, each beneficial owner
of a partnership interest will generally be treated as the owner of an interest
in the auto loans.
TAXATION OF BENEFICIAL OWNERS OF PARTNERSHIP INTERESTS. If the trust is treated
as a partnership for federal income tax purposes, the trust will not be subject
to federal income tax. Instead, each beneficial owner of a partnership interest
will be required to separately take into account its allocable share of income,
gains, losses, deductions, credits and other tax items of the trust. These
partnership allocations are made in accordance with the Code, Treasury
regulations and the partnership agreement, here, the trust agreement and related
documents.
The trust's assets will be the assets of the partnership. The trust's income
will consist primarily of interest and finance charges earned on the underlying
the auto loans. The trust's deductions will consist primarily of interest
accruing with respect to any indebtedness issued by the trust, servicing and
other fees, and losses or deductions upon collection or disposition of the
trust's assets.
In certain instances, the trust could have an obligation to make payments of
withholding tax on behalf of a beneficial owner of a partnership interest. See
"Backup Withholding" and "Foreign Investors" below.
Substantially all of the taxable income allocated to a beneficial owner of a
partnership interest that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity, including an individual retirement account, will
constitute "unrelated business taxable income" generally taxable to a holder
under the Code.
Under section 708 of the Code, the trust will be deemed to terminate for federal
income tax purposes if 50% or more of the capital and profits interests in the
trust are sold or exchanged within a 12-month period. Under Treasury regulations
issued on May 9, 1997 if a termination occurs, the trust is deemed to contribute
all of its assets and liabilities to a newly formed partnership in exchange for
a partnership interest. Immediately thereafter, the terminated partnership
distributes interests in the new partnership to the purchasing partner and
remaining partners in proportion to their interests in liquidation of the
terminated partnership.
SALE OR EXCHANGE OF PARTNERSHIP INTERESTS. Generally, capital gain or loss will
be recognized on a sale or exchange of partnership interests in an amount equal
to the difference between the amount realized and the seller's tax basis in the
partnership interests sold. A beneficial owner's tax basis in a partnership
interest will generally equal the beneficial owner's cost increased by the
beneficial owner's share of trust income and decreased by any distributions
received with respect to the partnership interest. In addition, both the tax
basis in the partnership interest and the amount realized on a sale of a
partnership interest would take into account the beneficial owner's share of any
indebtedness of the trust. A beneficial owner acquiring partnership interests at
different prices may be required to maintain a single aggregate adjusted tax
basis in the partnership interest, and upon sale or other disposition of some of
the partnership interests, allocate a portion of the aggregate tax basis to the
partnership interests sold, rather than maintaining a separate tax basis in each
partnership interest for purposes of computing gain or loss on a sale of that
partnership interest.
Any gain on the sale of a partnership interest attributable to the beneficial
owner's share of unrecognized accrued market discount on the assets of the trust
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. If a beneficial owner of a partnership
interest is required to recognize an aggregate amount of income over the life of
the partnership interest that exceeds the aggregate cash distributions with
respect thereto, the excess will generally give rise to a capital loss upon the
retirement of the partnership interest. If a beneficial owner sells its
partnership interest at a profit or loss, the transferee will have a higher or
lower
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basis in the partnership interests than the transferor had. The tax basis of the
trust's assets will not be adjusted to reflect that higher or lower basis unless
the trust files an election under section 754 of the Code.
PARTNERSHIP REPORTING. The trustee is required to (1) keep complete and
accurate books of the trust, (2) file a partnership information return with the
IRS (IRS Form 1065) and with any state where required for each taxable year of
the trust and (3) report each beneficial owner's allocable share of items of
trust income and expense to beneficial owners and the IRS on Schedule K-1. The
trust will provide the Schedule K-1 information to nominees that fail to provide
the trust with the information statement described below and the nominees will
be required to forward the information to the beneficial owners of the
partnership interests. Generally, beneficial owners of a partnership interest
must file tax returns that are consistent with the information return filed by
the trust or be subject to penalties unless the beneficial owner of a
partnership interest notifies the IRS of all inconsistencies.
Under section 6031 of the Code, any person that holds partnership interests as a
nominee at any time during a calendar year is required to furnish the trust with
a statement containing information on the nominee, the beneficial owners and the
partnership interests so held. The 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 partnership
interests that were held, bought or sold on behalf of the person throughout the
year. In addition, brokers and financial institutions that hold partnership
interests through a nominee are required to furnish directly to the trust
information as to themselves and their ownership of partnership interests. A
clearing agency registered under section 17A of the Securities Exchange Act of
1934 is not required to furnish any information statement to the trust.
Nominees, brokers and financial institutions that fail to provide the trust with
the information described above may be subject to penalties.
The Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a partnership interests, and, under certain circumstances, a
beneficial owner of a partnership interest may be precluded from separately
litigating a proposed adjustment to the items of the trust. An adjustment could
also result in an audit of the beneficial owner of a partnership interest's
returns and adjustments of items note related to the income and losses of the
trust.
FASIT SECURITIES
If provided in a related prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of section 860L(a) of the Code.
Qualification as a FASIT requires ongoing compliance with certain conditions.
With respect to each series of securities for which an election is made, Dewey
Ballantine LLP will deliver its opinion to the seller that assuming compliance
with the trust agreements, the trust will be treated as a FASIT for federal
income tax purposes. A trust for which a FASIT election is made will be referred
to in this prospectus as a FASIT TRUST. The securities of each class will be
designated as "regular interests" or "high-yield regular interests" in the FASIT
trust except that one separate class will be designated as the "ownership
interest" in the FASIT trust. The prospectus supplement for each series of
securities will state whether securities of each class will constitute either a
regular interest or a high-yield regular interest, a FASIT REGULAR SECURITY, or
an ownership interest, a FASIT OWNERSHIP SECURITY. An opinion shall be attached
on Form 8-K to be filed with the SEC within fifteen days after the initial
issuance of the securities or filed with the SEC as a post-effective amendment
to the prospectus.
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TAXATION OF BENEFICIAL OWNERS OF FASIT REGULAR SECURITIES. A FASIT trust will
not be subject to federal income tax except with respect to income from
prohibited transactions and in certain other instances as described below. The
FASIT regular securities generally will be treated for federal income tax
purposes as newly-originated debt instruments. In general, interest, original
issue discount and market discount on a FASIT regular security will be treated
as ordinary income to the beneficial owner, and principal payments, other than
principal payments that do not exceed accrued market discount, on an FASIT
regular security will be treated as a return of capital to the extent of the
beneficial owner's basis allocable thereto. Beneficial owners must use the
accrual method of accounting with respect to FASIT regular securities,
regardless of the method of accounting otherwise used by the beneficial owners.
See "Discount and Premium" below.
In order for the FASIT trust to qualify as a FASIT, there must be ongoing
compliance with the requirements set forth in the Code. The FASIT must fulfill
an asset test, which requires that substantially all the assets of the FASIT, as
of the close of the third calendar month beginning after the "Startup Day",
which for purposes of this discussion is the date of the initial issuance of the
FASIT securities, and at all times thereafter, must consist of cash or cash
equivalents, debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a Real Estate
Mortgage Investment Conduit, commonly referred to as a REMIC. Based on identical
statutory language applicable to REMICs, it appears that the "substantially all"
requirement should be met if at all times the aggregate adjusted basis of the
nonqualified assets is less than one percent of the aggregate adjusted basis of
all the FASIT's assets. The FASIT provisions of the Code, sections 860H through
860L, also require the FASIT ownership interest and "high-yield regular
interests," described below, to be held only by fully taxable domestic
corporations.
Permitted debt instruments must bear interest, if any, at a fixed or qualified
variable rate. Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees of
payment default and similar instruments to be provided in regulations, and which
are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the seller 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.
In addition to the foregoing requirements, the various interests in a FASIT also
must meet certain requirements. All of the interests in a FASIT must be either
of the following: (a) one or more classes of regular interests or (b) a single
class of ownership interest. A regular interest is an interest in a FASIT that
is issued on or after the STARTUP DAY with fixed terms, is designated as a
regular interest, and (1) unconditionally entitles the holder to receive a
specified principal amount, or other similar amount, (2) 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, (3) has a stated
maturity of not longer than 30 years, (4) has an issue price not greater than
125% of its stated principal amount, and (5) has a yield to maturity not greater
than 5 percentage points higher than the related applicable federal rate, as
defined in Code section 1274(d). A regular interest that is described in the
preceding sentence except that if it fails to meet one or more of requirements
(1), (2), (4), or (5). A high-yield regular interest that fails requirement (2)
must consist of a specified, nonvarying portion of the interest payments on the
permitted assets, by reference to the REMIC rules. An ownership interest is an
interest in a FASIT other than a regular interest that is issued on the startup
day, is designated an ownership interest and is held by a single, fully-taxable,
domestic corporation. An interest in a FASIT may be treated as a regular
interest even if payments of principal with respect to interest are subordinated
to payments on other regular interests or the ownership interest in the FASIT,
and are dependent on the absence of defaults or delinquencies on permitted
assets lower than reasonably expected returns on permitted assets, unanticipated
expenses incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing requirements of the
Code for status as a FASIT during any taxable year, the Code provides that the
entity or applicable potion thereof will not be treated as a FASIT thereafter.
The legislative history to the FASIT provisions indicates, however, that an
entity can continue to be a FASIT if loss of its status was inadvertent, it
takes prompt steps to requalify and other requirements that may be provided in
Treasury regulations are met. Loss of FASIT status results in retirement of all
regular interests and their
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reissuance. If the resulting instruments would be treated as equity under
general tax principles, cancellation of debt income may result.
TAXES ON A FASIT TRUST. Income from certain transactions by a FASIT, called
prohibited transactions, are taxable to the holder of the ownership interest in
a FASIT at a 100% rate. Prohibited transactions generally include (1) the
disposition of a permitted asset other than for (a) foreclosure, default, or
imminent default, (b) bankruptcy or insolvency of the FASIT, (c) a qualified,
complete, liquidation, (d) substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of the ownership interest to
reduce overcollateralization, but only if a principal purpose of acquiring the
debt instrument which is disposed of was not the recognition of gain, or the
reduction of a loss, on the withdrawn asset as a result of an increase in the
market value of the asset after its acquisition by the FASIT or (e) the
retirement of a class of FASIT regular interests; (2) the receipt of income from
nonpermitted assets; (3) the receipt of compensation for services; or (4) the
receipt of any income derived from a loan originated by the FASIT. It is unclear
the extent to which tax on the transactions could be collected from the FASIT
trust directly under the applicable statutes rather than from the holder of the
FASIT Residual Security.
DUE TO THE COMPLEXITY OF THESE RULES, THE ABSENCE OF TREASURY REGULATIONS AND
THE CURRENT UNCERTAINTY AS TO THE MANNER OF THEIR APPLICATION TO THE TRUST AND
TO HOLDERS OF FASIT SECURITIES, IT IS PARTICULARLY IMPORTANT THAT POTENTIAL
INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THEIR
ACQUISITION, OWNERSHIP AND DISPOSITION OF THE FASIT REGULAR SECURITIES.
DISCOUNT AND PREMIUM
A security purchased for an amount other than its outstanding principal amount
will be subject to the rules governing original issue discount, market discount
or premium. In addition, all GRANTOR TRUST STRIP SECURITIES and certain GRANTOR
TRUST FRACTIONAL INTEREST SECURITIES will be treated as having original issue
discount by virtue of the coupon stripping rules in section 1286 of the Code. In
very general terms, (1) original issue discount is treated as a form of interest
and must be included in a beneficial owner's income as it accrues, regardless of
the beneficial owner's regular method of accounting, using a constant yield
method; (2) market discount is treated as ordinary income and must be included
in a beneficial owner's income as principal payments are made on the security,
or upon a sale of a security; and (3) if a beneficial owner so elects, premium
may be amortized over the life of the security and offset against inclusions of
interest income. These tax consequences are discussed in greater detail below.
ORIGINAL ISSUE DISCOUNT. In general, a security will be considered to be issued
with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The issue price of a
security is the initial offering price to the public, excluding bond houses and
brokers, at which a substantial number of the securities were sold. The issue
price also includes any accrued interest attributable to the period between the
beginning of the first remittance period and the closing date. The stated
redemption price at maturity of a security that has a notional principal amount
or receives principal only or that is or may provide for accruals of interest is
equal to the sum of all distributions to be made under the security. The stated
redemption price at maturity of any other security is its stated principal
amount, plus an amount equal to the excess, if any, of the interest payable on
the first payment date over the interest that accrues for the period from the
closing date to the first payment date. The trustee will supply, at the time and
in the manner required by the IRS, to beneficial owners, brokers and middlemen
information with respect to the original issue discount accruing on the
securities.
Notwithstanding the general definition, original issue discount will be treated
as zero if the discount is less than 0.25% of the stated redemption price at
maturity of the security multiplied by its weighted average life. The weighted
average life of a security is apparently computed for this purpose as the sum,
for all distributions included in the stated redemption price at maturity, of
the amounts determined by multiplying (1) the number of complete years, rounding
down for partial years, from the closing date until the date on which each
distribution is expected to be made under the assumption that the auto loans
prepay at the rate specified in the related prospectus supplement, the
PREPAYMENT ASSUMPTION, by (2) a fraction, the numerator of which is the amount
of the distribution and the denominator of which is the security's stated
redemption price at maturity. Even if original issue discount is treated as zero
under this rule, the actual amount of original issue discount must be allocated
to the principal distributions
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on the security and, when each distribution is received, gain equal to the
discount allocated to the distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules applicable to prepayable securities. Under these rules, described in
greater detail below, (a) the amount and rate of accrual of original issue
discount on each series of securities will be based on (1) a prepayment
assumption as described below, and (2) in the case of a security calling for a
variable rate of interest, an assumption that the value of the index upon which
the variable rate is based remains equal to the value of that rate on the
closing date, and (b) adjustments will be made in the amount of discount
accruing in each taxable year in which the actual prepayment rate differs from
the prepayment assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment assumption
used to calculate original issue discount be determined in the manner prescribed
in Treasury regulations. To date, no regulations have been promulgated. The
legislative history of this Code provision indicates that the assumed prepayment
rate must be the rate used by the parties in pricing the particular transaction.
The seller anticipates that the prepayment assumption for each series of
securities will be consistent with this standard. The seller makes no
representation, however, that the auto loans for a given series will prepay at
the rate reflected in the prepayment assumption for that series or at any other
rate. Each investor must make its own decision as to the appropriate prepayment
assumption to be used in deciding whether or not to purchase any of the
securities.
Each beneficial owner must include in gross income the sum of the "daily
portions" of original issue discount on its security for each day during its
taxable year on which it held the security. For this purpose, in the case of an
original beneficial owner, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." Original
issue discount calculations must be based on accrual periods of no longer than
one year either (1) beginning on a payment date, or, in the case of the first
period, the Closing date, and ending on the day before the next payment date or
(2) beginning on the next day following a payment date and ending on the next
payment date.
Under section 1272(a)(6) of the Code, the portion of original issue discount
treated as accruing for any accrual period will equal the excess, if any, of
(a) the sum of (1) the present values of all the distributions remaining to be
made on the security, if any, as of the end of the accrual period and (2) the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (b) the adjusted issue price of
the security at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
based on (1) the yield to maturity of the security, calculated as of the closing
date, giving effect to the prepayment assumption, (2) events, including actual
prepayments, that have occurred prior to the end of the accrual period, (3) the
prepayment assumption, and (4) in the case of a security calling for a variable
rate of interest, an assumption that the value of the index upon which the
variable rate is based remains the same as its value on the closing date over
the entire life of the security. The adjusted issue price of a security at any
time will equal the issue price of the security, increased by the aggregate
amount of previously accrued original issue discount with respect to the
security, and reduced by the amount of any distributions made on the security as
of that time of amounts included in the stated redemption price at maturity. The
original issue discount accruing during any accrual period will then be
allocated ratably to each day during the period to determine the daily portion
of original issue discount.
In the case of GRANTOR TRUST STRIP SECURITIES as described in the related
prospectus supplement, and certain FASIT securities, the calculation described
in the preceding paragraph may produce a negative amount of original issue
discount for one or more accrual periods. No definitive guidance has been issued
regarding the treatment of negative amounts. The legislative history to section
1272(a)(6) indicates that negative amounts may be used to offset subsequent
positive accruals but may not offset prior accruals and may not be allowed as a
deduction item in a taxable year in which negative accruals exceed positive
accruals. Beneficial owners of the securities should consult their own tax
advisors concerning the treatment of negative accruals.
A subsequent purchaser of a security that purchases the security at a cost less
than its remaining stated redemption price at maturity also will be required to
include in gross income for each day on which it holds the security, the
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daily portion of original issue discount with respect to the security, but
reduced, if the cost of the security to the purchaser exceeds its adjusted issue
price, by an amount equal to the product of (1) the daily portion and (2) a
constant fraction, the numerator of which is the excess and the denominator of
which is the sum of the daily portions of original issue discount on the
security for all days on or after the day of purchase.
MARKET DISCOUNT. A beneficial owner that purchases a security at a market
discount, that is, at a purchase price less than the remaining stated redemption
price at maturity of the security, or, in the case of a security with original
issue discount, its adjusted issue price, will be required to allocate each
principal distribution first to accrued market discount on the security, and
recognize ordinary income to the extent the distribution does not exceed the
aggregate amount of accrued market discount on the security not previously
included in income. For securities that have unaccrued original issue discount,
the market discount must be included in income in addition to any original issue
discount. A beneficial owner that incurs or continues indebtedness to acquire a
security at a market discount may also be required to defer the deduction of all
or a portion of the interest on the indebtedness until the corresponding amount
of market discount is included in income. In general terms, market discount on a
security may be treated as accruing either (1) under a constant yield method or
(2) in proportion to remaining accruals of original issue discount, if any, or
if none, in proportion to remaining distributions of interest on the security,
in any case taking into account the prepayment assumption. The trustee will make
available, as required by the IRS, to beneficial owners of securities
information necessary to compute the accrual of market discount.
Regardless of the above rules, market discount on a security will be considered
to be zero if the discount is less than 0.25% of the remaining stated redemption
price at maturity of the security multiplied by its weighted average remaining
life. Weighted average remaining life presumably would be calculated in a manner
similar to weighted average life, taking into account payments, including
prepayments, prior to the date of acquisition of the security by the subsequent
purchaser. If market discount on a security is treated as zero under this rule,
the actual amount of market discount must be allocated to the remaining
principal distributions on the security and, when each distribution is received,
gain equal to the discount allocated to the distribution will be recognized.
PREMIUM. A purchaser of a security that purchases the security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased the security, a PREMIUM SECURITY, at a premium. A
purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat the premium as
"amortizable bond premium." If a beneficial owner makes an election, the amount
of any interest payment that must be included in the beneficial owner's income
for each period ending on a payment date will be reduced by the portion of the
premium allocable to that period based on the premium security's yield to
maturity. The premium amortization should be made using constant yield
principles. If an election is made by the beneficial owner, the election will
also apply to all FULLY TAXABLE BONDS, the interest on which is not excludible
from gross income, held by the beneficial owner at the beginning of the first
taxable year to which the election applies and to all fully taxable bonds
thereafter acquired by it, and is irrevocable without the consent of the IRS. If
an election is not made, (1) a beneficial owner must include the full amount of
each interest payment in income as it accrues, and (2) the premium must be
allocated to the principal distributions on the premium security and when each
distribution is received a loss equal to the premium allocated to the
distribution will be recognized. Any tax benefit from the premium not previously
recognized will be taken into account in computing gain or loss upon the sale or
disposition of the premium security.
SPECIAL ELECTION. A beneficial owner may elect to include in gross income all
"interest" that accrues on the security by using a constant yield method. For
purposes of the election, the term INTEREST includes stated interest,
acquisition discount, original issue discount, DE MINIMIS original issue
discount, market discount, DE MINIMIS market discount and unstated interest as
adjusted by any amortizable bond premium or acquisition premium. A beneficial
owner should consult its own tax advisor regarding the time and manner of making
and the scope of the election and the implementation of the constant yield
method.
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BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of proceeds
from the sale of securities, may be subject to the "backup withholding tax"
under section 3406 of the Code at a rate of 31% if recipients of the
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
The IRS recently issued the WITHHOLDING REGULATIONS, which change some of the
rules relating to presumptions currently available relating to information
reporting and backup withholding. The withholding regulations would provide
alternative methods of satisfying the beneficial ownership certification
requirement. The withholding regulations are effective January 1, 2001.
FOREIGN INVESTORS
The withholding regulations would require, in the case of securities held by a
foreign partnership, that (1) the certification described above be provided by
the partners rather than by the foreign partnership and (2) the partnership
provide information, including a United States taxpayer identification number.
See "Backup Withholding" above. A look-through rule would apply in the case of
tiered partnerships. Non-U.S. persons should consult their own tax advisors
regarding the application to them of the withholding regulations.
GRANTOR TRUST SECURITIES, DEBT SECURITIES, AND FASIT REGULAR
SECURITIES. Distributions made on a grantor trust security, debt security or a
FASIT regular security to, or on behalf of, a beneficial owner that is not a
U.S. person generally will be exempt from U.S. federal income and withholding
taxes. The term U.S. PERSON means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income, or
a trust if a court within the United States can exercise primary supervision
over its administration and at least one United States person has the authority
to control all substantial decisions of the trust. This exemption is applicable
provided (a) the beneficial owner is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the security, (b) the
beneficial owner signs a statement under penalties of perjury that certifies
that the beneficial owner is not a U.S. person, and provides the name and
address of the beneficial owner, and (c) the last U.S. person in the chain of
payment to the beneficial owner receives a statement from a beneficial owner or
a financial institution holding on its behalf and does not have actual knowledge
that the statement is false. Beneficial owners should be aware that the IRS
might take the position that this exemption does not apply to a beneficial owner
of a FASIT regular security that also owns 10% or more of the FASIT ownership
securities of any FASIT trust, or to a beneficial owner that is a "controlled
foreign corporation" described in section 881(c)(3)(C) of the Code.
HIGH-YIELD FASIT REGULAR SECURITIES. High-yield FASIT regular securities may
not be sold to or beneficially owned by non-U.S. persons. Any purported transfer
will be null and void and, upon the trustee's discovery of any purported
transfer in violation of this requirement, the last preceding owner of a
high-yield FASIT regular securities will be restored to ownership thereof as
completely as possible. The last preceding owner will, in any event, be taxable
on all income with respect to a high-yield FASIT regular securities for federal
income tax purposes. The trust documents will provide that, as a condition to
transfer of a high-yield FASIT regular security, the proposed transferee must
furnish an affidavit as to its status as a U.S. person and otherwise as a
permitted transferee.
PARTNERSHIP INTERESTS. Depending upon the particular terms of the trust
agreement, a trust may be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons. If the trust is considered to be engaged in a trade or business in the
United States for such purposes and the trust is treated as a partnership, the
income of the trust distributable to a non-U.S. person would be subject to
federal withholding tax. Also, in such cases, a non-U.S. beneficial owner of a
partnership interest that is a corporation may be subject to the branch profits
tax. If the trust is notified that a beneficial owner of a partnership interest
is a
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foreign person, the trust may withhold as if it were engaged in a trade or
business in the United States in order to protect the trust from possible
adverse consequences of a failure to withhold. A foreign holder generally would
be entitled to file with the IRS a claim for refund with respect to withheld
taxes, taking the position that no taxes were due because the trust was not in a
U.S. trade or business.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above, potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
ERISA CONSIDERATIONS
GENERAL
Provisions of ERISA and of the Internal Revenue Code prohibit a pension, profit
sharing or other employee benefit plan and other individual retirement
arrangements from engaging in transactions involving PLAN ASSETS with persons
that are PARTIES IN INTEREST under ERISA or DISQUALIFIED PERSONS under the Code
with respect to the plan. However, if a statutory or administrative exemption
applies to the transaction, plans may engage in these transactions. ERISA and
the Code also prohibit generally actions involving conflicts of interest by
fiduciaries of plans or arrangements. Persons who violate these PROHIBITED
TRANSACTION rules may incur excise tax and other liabilities under ERISA and the
Code. In addition, investments by plans are subject to ERISA's general fiduciary
requirements, including ERISA's investment prudence and diversification
requirements and the requirement that a plan make its investments in accordance
with its governing documents. Employee benefit plans that are governmental plans
and church plans under ERISA, are not subject to ERISA requirements.
Accordingly, these plans may invest in securities without regard to the ERISA
considerations discussed below. Any plan, which is qualified and exempt from
taxation under section 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules detailed in section 503 of the Code.
Transactions involving a trust might be deemed to constitute prohibited
transactions under ERISA and the Code with respect to a plan, including an
individual retirement arrangement, that purchased securities. In the absence of
an exemption, the purchase, sale or holding of a security by a plan, including
an individual retirement arrangement, might result in prohibited transactions.
This may result in excise taxes and civil penalties being imposed.
ERISA CONSIDERATIONS REGARDING SECURITIES WHICH ARE CERTIFICATES
The Department of Labor has issued to various underwriters individual prohibited
transaction exemptions which generally exempt transactions meeting the
department's requirements from:
a) the application of the prohibited transaction provisions of
section 406(a), section 406(b)(1), section 406(b)(2) and section 407(a) of
ERISA, and
b) excise taxes imposed under sections 4975(a) and (b) of the Code.
These exempted transactions deal with the initial purchase, holding and the
subsequent resale by plans of certificates in pass-through trusts which hold:
- secured receivables,
- secured loans, and
- other secured obligations.
These UNDERWRITER EXEMPTIONS will only be available for securities that are
certificates.
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Among the conditions that must be satisfied for the underwriter exemptions to
apply are the following:
(1) the plan must acquire the certificates on terms, including the certificate's
price, 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 certificates must not be subordinated to the trust's other certificates;
(3) when the plan acquires the certificates, the certificates must have a rating
in one of the three highest generic rating categories from Standard & Poor's
Rating Group, Moody's Investors Service, Duff & Phelps Credit Rating Co. or
Fitch IBCA Inc.;
(4) the trustee must not be an affiliate of any other member of the restricted
group;
(5) the sum of all payments made to and retained by the underwriters must not
total more than reasonable compensation for underwriting the certificates;
the sum of all payments made to and retained by the seller and the
subservicer for assigning the loans to the trust must not total more than
the fair market value of the loans; the sum of all payments made to and
retained by the servicer must not total more than reasonable compensation
and expense reimbursement for its services;
(6) the plan must be an ACCREDITED INVESTOR as defined in Regulation D of the
commission under the Securities Act; and
(7) in the event that all of the auto loans to be held by the trust have not
been transferred to the trust on the closing date, additional auto loans
having an aggregate value equal to no more than 25% of the certificate's
total principal amount may be transferred to the trust under a pre-funding
feature, within 90 days or 3 months following the closing date.
The trust must also meet the following requirements:
- the trust property must consist solely of assets of the type that have
been included in other investment pools;
- certificates in the other investment pools must have been rated in one of
the three highest rating categories of Standard & Poor's Rating Group,
Moody's Investors Service, Fitch IBCA Inc. or Duff & Phelps Credit Rating
Co. for at least one year prior to the date the plan acquired the
certificates; and
- investors other than plans must have purchased certificates evidencing
interests in the other investment pools for at least one year prior to the
date the plan acquired the certificates.
Moreover, the underwriter exemptions provide relief from various
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary--or its affiliate--is an obligor on the auto loans held in the trust;
provided that, among other requirements:
(1) when a plan acquires an initial issuance of certificates, at least fifty
percent of each class in which a plan has invested is acquired by persons
independent of the restricted group and at least fifty percent of the
aggregate interest in the trust is acquired by persons independent of the
restricted group;
(2) the fiduciary--or its affiliate--is an obligor with respect to five percent
or less of the fair market value of the obligations contained in the trust;
(3) when the plan acquires the certificates the plan's investment in any class
does not exceed twenty-five percent of all of the certificates of that
class; and
(4) immediately after the plan acquires the certificates, no more than
twenty-five percent of the plan's assets for which the person is a fiduciary
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity.
The underwriter exemptions do not apply to plans sponsored by a member of the
RESTRICTED GROUP, which is the seller, the subservicer, the servicer, the
underwriters, the trustee, any obligor with respect to auto loans included in
the trust property constituting more than five percent of the aggregate
unamortized principal balance of the trust estate's assets, or any affiliate of
these parties.
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ERISA CONSIDERATIONS REGARDING SECURITIES WHICH ARE NOTES
The underwriter exemptions will not be available for securities that are notes.
Under the PLAN ASSETS REGULATION issued by the Department of Labor, the trust's
assets would be treated as a plan's assets for the purposes of ERISA and the
Code only if the plan acquired an equity interest in the trust and none of the
exceptions contained in the plan assets regulation were applicable. An EQUITY
INTEREST is defined under the plan assets regulation as an interest other than
an instrument which:
- is treated as indebtedness under applicable local law, and
- which has no substantial equity features.
If the notes are treated as having substantial equity features, the purchase,
holding and resale of the notes could result in a transaction that is prohibited
under ERISA or the Code. If the notes are treated as indebtedness without
substantial equity features, the trust's property would not be deemed assets of
a plan. In that case, the acquisition or holding of the notes by or on behalf of
a plan could still result in a prohibited transaction, if the acquisition or
holding of notes by or on behalf of a plan were deemed to be a prohibited loan
to a party in interest with respect to the plan. Exemptions from these
prohibited transaction rules could apply to a plan's purchase and its holding of
notes, depending on the type and circumstances of the plan fiduciary making the
decision to acquire the notes. Included among these exemptions are:
- PTCE 84-14, regarding transactions effected by QUALIFIED PROFESSIONAL
ASSET MANAGERS;
- PTCE 90-1, regarding transactions entered into by INSURANCE COMPANY POOLED
SEPARATE ACCOUNTS;
- PTCE 91-38, regarding transactions entered into by BANK COLLECTIVE
INVESTMENT FUNDS;
- PTCE 95-60, regarding transactions entered into by INSURANCE COMPANY
GENERAL ACCOUNTS; and
- PTCE 96-23, regarding transactions effected by IN-HOUSE ASSET MANAGERS.
Each purchaser and each transferee of a note that is treated as debt for
purposes of the plan assets regulation may be required to represent and warrant
that its purchase and holding of the note will be covered by one of the
exemptions listed above or by another Department of Labor class exemption.
CONSULTATION WITH COUNSEL
The prospectus supplement will provide further information that plans should
consider before purchasing the securities. A plan fiduciary considering the
purchase of securities may wish to consult its tax or legal advisors regarding:
- whether the trust's property would be considered plan assets,
- the possibility of exemptive relief from the prohibited transaction rules;
and
- other ERISA issues and their potential consequences.
In addition, each plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, investing in the
securities is appropriate for the plan, taking into account the plan's overall
investment policy and the composition of the plan's investment portfolio. The
sale of securities to a plan is in no respect a representation by us or by the
underwriters that this investment meets all relevant requirements regarding
investments by plans generally, by any particular plan or that this investment
is appropriate for plans generally or any particular plan.
In JOHN HANCOCK MUTUAL LIFE INSURANCE CO. V. HARRIS TRUST AND SAVINGS BANK,
510 U.S. 86 (1993), the United States Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be plan assets for ERISA
purposes under certain circumstances.
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METHODS OF DISTRIBUTION
The trusts will offer the securities in series through one or more of the
methods described below. The prospectus supplement will describe the offering
method and will state the public offering or purchase price and the net proceeds
to the seller from the sale.
The securities will be offered through the following 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 securities may be made
through a combination of two or more of these methods. The methods are as
follows:
- by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
- by placements by the company with institutional investors through dealers;
- by direct placements by the company with institutional investors; and
- by competitive bid.
In addition, securities may be offered in whole or in part in exchange for the
auto loans--and other assets, if applicable--that would comprise the trust
property.
If underwriters are used in a sale of any securities, other than in connection
with an underwriting on a best efforts basis, the securities will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or at
the time of commitment. The securities will be described on the cover of the
prospectus supplement and the members of the underwriting syndicate, if any,
will be named in the prospectus supplement.
In connection with the sale of the securities, underwriters may receive
compensation from the seller or from purchasers of the securities in the form of
discounts, concessions or commissions. Underwriters and dealers participating in
the distribution of the securities may be deemed to be underwriters in
connection with the securities, and any discounts or commissions received by
them and any profit on the resale of securities by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933. The
prospectus supplement will describe any compensation paid by the seller or its
affiliates.
It is anticipated that the underwriting agreement pertaining to the sale of
securities will provide that the obligations of the underwriters will be subject
to conditions precedent providing that the underwriters will be obligated to
purchase all the securities if any are purchased, other than in connection with
an underwriting on a best efforts basis, and that, in limited circumstances, the
seller indemnify the several underwriters and the underwriters will indemnify
the seller against certain civil liabilities, including liabilities under the
Securities Act of 1933 or will contribute to payments required to be made.
The prospectus supplement for any securities offered by placements through
dealers will contain information regarding the nature of the offering and any
agreements to be entered into between the seller or its affiliates and
purchasers of securities.
Purchasers of securities, including dealers, may, depending on the facts and
circumstances of such 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 prior to any reoffer or sale.
LEGAL MATTERS
Legal matters relating to these securities will be passed upon by legal officers
of Household International, Inc., and by Dewey Ballantine LLP, New York, New
York.
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ANNEX I
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the securities will be available only in
book-entry form. Investors in the securities may hold the securities through any
of DTC, Cedelbank or Euroclear. The 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 through Cedelbank and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedelbank and Euroclear and in accordance with
conventional eurobond practice, which is seven calendar day settlement.
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
participants holding securities will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear and as DTC
participants.
Non-U.S. holders of global securities will be subject to U.S. withholding taxes
unless the holders meet a number of requirements and deliver appropriate U.S.
tax documents to the securities clearing organizations or their participants.
INITIAL SETTLEMENT
All securities will be held in book-entry form by DTC in the name of Cede & Co.
as nominee of DTC. Investors' interests in the securities will be represented
through financial institutions acting on their behalf as direct and indirect
participants in DTC. As a result, Cedelbank and Euroclear will hold positions on
behalf of their participants through their relevant depository which in turn
will hold these positions in their accounts as DTC participants.
Investors electing to hold their securities through DTC will follow DTC
settlement practices. 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 securities through Cedelbank or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary security and no lock-up or
restricted period. 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 asset-back
securities issues in same-day funds.
TRADING BETWEEN CEDELBANK OR EUROCLEAR PARTICIPANTS. Secondary market trading
between Cedelbank participants or Euroclear participants will be settled using
the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC, SELLER AND CEDELBANK OR EUROCLEAR PARTICIPANTS. When
securities are to be transferred from the account of a DTC participant to the
account of a Cedelbank participant or a Euroclear participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the relevant depository, as the case may
be, to receive the securities against payment. Payment will include interest
accrued on the securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in the
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will
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then be made by the relevant depository to the DTC participant's account against
delivery of the securities. After settlement has been completed, the securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedelbank participant's or
Euroclear participant's account. The securities credit will appear the next day,
European time and the cash debt will be back-valued to, and the interest on the
global securities will accrue from, the value date, which would be the preceding
day when settlement occurred in New York. If settlement is not completed on the
intended value date and the trade fails, the Cedelbank or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under this approach,
they may take on credit exposure to Cedelbank or Euroclear until the securities
are credited to their account one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit to
them, Cedelbank participants or Euroclear participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedelbank participants or Euroclear
participants purchasing securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the securities were credited to their
accounts. However, interest on the 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 the result will depend on each Cedelbank
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 crediting global securities
to the respective European depository for the benefit of Cedelbank 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 CEDELBANK OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedelbank participants and Euroclear
participants may employ their customary procedures for transactions in which
securities are to be transferred by the respective clearing system, through the
respective depository, to a DTC participant. The seller will send instructions
to Cedelbank or Euroclear through a Cedelbank participant or Euroclear
participant at least one business day prior to settlement. In these cases
Cedelbank or Euroclear will instruct the respective depository, as appropriate,
to credit the securities to the DTC participant's account against payment.
Payment will include interest accrued on the securities from and including the
last interest payment to and excluding the settlement date on the basis of the
actual number of days in the accrual period and a year assumed to consist of 360
days. For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedelbank participant or
Euroclear participant the following day, and receipt of the cash proceeds in the
Cedelbank 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. In the event that the Cedelbank participant or Euroclear participant
has a line of credit with its respective clearing system and elects 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 and the trade fails,
receipt of the cash proceeds in the Cedelbank participant's or Euroclear
participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase global
securities from DTC participants for delivery to Cedelbank participants or
Euroclear participants may wish to note that these trades would automatically
fail on the sale side unless affirmative action is taken. At least three
techniques should be readily available to eliminate this potential problem:
- borrowing through Cedelbank or Euroclear for one day, until the purchase
side of the trade is reflected in their Cedelbank or Euroclear accounts in
accordance with the clearing system's customary procedures;
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- borrowing the securities in the U.S. from a DTC participant no later than
one day prior to settlement, which would give the securities sufficient
time to be reflected in their Cedelbank or Euroclear account in order to
settle the sale side of the trade; or
- 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 Cedelbank participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of securities holding securities through Cedelbank 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 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 securityholders or
their 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 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.
On April 22, 1996, the IRS proposed regulations relating to withholding, backup
withholding and information reporting that, if adopted in their current form
would, among other things, unify current certification procedures and forms and
clarify reliance standards. The regulations are proposed to be effective for
payments made after December 31, 2000 but provide that securities issued on or
before the date that is 60 days after the proposed regulations are made final
will continue to be valid until they expire. Proposed regulations, however, are
subject to change prior to their adoption in final form.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the securities. Investors
should consult their own tax advisors for specific tax advice concerning their
holding and disposing of the securities.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses (other than
underwriting discounts and commissions) to be incurred by Household Auto
Receivables Corporation in connection with the issuance and distribution of the
Notes.
<TABLE>
<S> <C>
SEC Filing Fee.............................................. $ 792,000*
Trustee's Fees and Expenses................................. 40,000+
Legal Fees and Expenses..................................... 400,000+
Accounting Fees and Expenses................................ 325,000+
Printing and Engraving Expenses............................. 325,000+
Blue Sky Qualification and Legal Investment Fees and
Expenses.................................................. 40,000+
Rating Agency Fees.......................................... 1,200,000+
Miscellaneous............................................... 78,000+
----------
Total................................................... $3,200,000+
==========
</TABLE>
- ------------------------
* Actual.
+ Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A. INDEMNIFICATION. The General Corporation Law of Delaware (Section 145)
gives Delaware corporations broad powers to indemnify their present and former
directors and officers and those of affiliated corporations against expenses
incurred in the defense of any lawsuit to which they are made parties by reason
of being or having been such directors or officers, subject to specified
conditions and exclusions; gives a director or officer who successfully defends
an action the right to be so indemnified; and authorizes said corporation to buy
directors' and officers' liability insurance. Such indemnification is not
exclusive of any other right to which those indemnified may be entitled under
any bylaw, agreement, vote of stockholders or otherwise.
The General Corporation Law of Nevada (Section 78.751) permits Nevada
corporations to indemnify their present and former directors and officers and
those serving at the request of the corporation against expenses reasonably
incurred in connection with: (1) an action other than one by or in the right of
the corporation, and (2) an action by or in the right of the corporation if a
court determines that such indemnification is proper; gives a director or
officer who successfully defends an action the right to be so indemnified; and
authorizes said corporation to buy directors' and officers' liability insurance.
Such indemnification: (1) must be authorized in the specific case upon a
determination by the stockholders, disinterested directors, or independent
counsel that it is proper, and (2) is not exclusive of any other right to which
those indemnified may be entitled under any bylaw, agreement, vote of
stockholders or otherwise, so long as the defendant's acts or conduct did not
involve intentional misconduct, fraud or a knowing violation of the law.
A bylaw adopted by Household Finance Corporation, a Delaware corporation
("HFC"), and the immediate parent of the Seller states and makes mandatory the
indemnification expressly authorized under the General Corporation Law of
Delaware, in the absence of other indemnification by contract, vote of
stockholders or otherwise except that the bylaw makes no distinction between
litigation brought by third parties and litigation brought by or in the right of
HFC as regards the required standard of conduct
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<PAGE>
imposed upon the individual in order to be entitled to indemnification. The
bylaw standard applicable in all cases (excepting indemnification in connection
with the successful defense of any proceeding or matter therein, which is
mandatory under the General Corporation Law of Delaware and the bylaw without
reference to any such standard) is that the individual shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of HFC, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Further, the bylaw would
protect directors, officers, employees and agents against any and all expenses
and liability with respect to actions brought against them by or in the right of
HFC if the required standard of conduct is met. The bylaw is qualified in its
entirety in that no indemnification will be made if prohibited by applicable
law. The bylaw is applicable only to claims, actions, suits or proceedings made
or commenced after its adoption, whether arising from prior or subsequent acts
or omissions to act. The bylaw is applicable to directors, officers, employees
or agents of HFC and also to persons who are serving at the request of HFC as
directors, officers, employees or agents or other corporations (including
subsidiaries such as the Seller).
Article VII of Household International, Inc.'s Certificate of Incorporation
provides for indemnification to the fullest extent permitted by Section 145 of
the General Corporation of Delaware for directors, officers and employees of
Household International, Inc., and also to persons who are serving at the
request of Household International, Inc. as directors, officers or employees of
other corporations (including subsidiaries such as the Seller). Household
International, Inc. has also purchased liability policies which indemnify the
Seller, officers and directors against loss arising from claims by reason of
their legal liability for acts as officers and directors, subject to limitations
and conditions as set forth in the policies.
Article Ninth and Tenth of the Seller's charter also provides for
indemnification as permitted by the Nevada Revised Statues.
The forms of the Underwriting Agreement, filed as Exhibits 1.1 and 1.2 to this
Registration Statement, provide that the Registrant will indemnify and reimburse
the underwriter(s) and each controlling person of the underwriter(s) with
respect to certain expenses and liabilities, including liabilities under the
1933 Act or other federal or state regulations or under the common law, which
arise out of or are based on certain material misstatements or omissions in the
Registration Statement. In addition, the Underwriting Agreements provide that
the underwriter(s) will similarly indemnify and reimburse the Registrant with
respect to certain material misstatements or omissions in the Registration
Statement which are based on certain written information furnished by the
underwriter(s) for use in connection with the preparation of the Registration
Statement.
B. INSURANCE. As permitted under the laws which govern the organization of
the Registrant, the registrant's Certificate of Incorporation permits the board
of directors to purchase and maintain insurance on behalf of the Registrant's
agents, including its officers and directors, against any liability asserted
against them in such capacity or arising out of such agents' status as such,
whether or not such Registrant would have the power to indemnify them against
such liability under applicable law.
ITEM 16. EXHIBITS.
(a) Exhibits
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<CAPTION>
EXHIBITS
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<C> <S> <C>
1.1+ - Form of Underwriting Agreement-Notes.
1.2+ - Form of Underwriting Agreement-Certificates.
3.1 - Certificate of Incorporation of Seller (incorporated by
reference to Exhibit 3.1 to File No. 333-59837).
3.2 - By-Laws of Seller (incorporated by reference to Exhibit 3.2
to File No. 333-59837).
</TABLE>
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<PAGE>
<TABLE>
<C> <S> <C>
4.1+ - Form of Trust Agreement between the Owner Trustee and the
Seller.
4.2+ - Form of Indenture between the Issuer and the Indenture
Trustee.
4.3+ - Form of Series Supplement to the Indenture, the Trust
Agreement and the Master Sale and Servicing Agreement.
4.4+ - Form of Master Sale and Servicing Agreement among the
Seller, the Servicer, the Issuer, and the Indenture Trustee.
4.5+ - Form of Master Receivables Purchase Agreement between
Household Automotive Finance Corporation and the Seller.
4.6+ - Form of Pooling and Servicing Agreement among the Seller,
the Servicer and the Trustee.
5.1+ - Opinion of John W. Blenke, Esq., Vice President-Corporate
Law and Assistant Secretary of Household
International, Inc. (for Grantor Trust structure).
5.2+ - Opinion of John W. Blenke, Esq., Vice President-Corporate
Law and Assistant Secretary of Household
International, Inc. (for Owner Trust structure).
8 + - Opinion of Dewey Ballantine LLP with respect to tax matters.
23.1+ - Consents of John W. Blenke and Dewey Ballantine LLP are
included in opinions filed as Exhibits 5.1, 5.2 and 8
hereto, respectively.
24 + - Powers of Attorney.
</TABLE>
- ------------------------
+ Previously filed.
ITEM 17. UNDERTAKINGS.
A. UNDERTAKING IN RESPECT OF INDEMNIFICATION. Insofar as indemnification
for liabilities arising under the 1933 Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described above in Item 15, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by them is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
B. UNDERTAKING PURSUANT TO RULE 415. The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if,
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<PAGE>
in the aggregate, the changes in volume and price represent on more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change of such information in the Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Issuer pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
C. UNDERTAKING PURSUANT TO RULE 430A. The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a 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 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Household Auto
Receivables Corporation 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
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Prospect Heights, State of
Illinois, on the 22nd day of December, 1999.
HOUSEHOLD AUTO RECEIVABLES CORPORATION
By: *
--------------------------------------------
Rellen M. Stewart
PRESIDENT
The Registrant reasonably believes that the security ratings to be assigned to
the securities registered hereunder will make the securities "investment grade
securities" pursuant to Transaction Requirement B.2 of Form S-3, prior to the
sale of such securities.
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Registration Statement has been signed below by the following persons in
the capacities indicated on the 22nd day of December, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
*
------------------------------------------- President (Principal Executive Officer)
(Rellen M. Stewart) and Director
*
------------------------------------------- Senior Vice President, Treasurer and Director
(Edgar Ancona) (Principal Financial Officer)
*
-------------------------------------------
(John W. Blenke) Vice President, Secretary and Director
*
------------------------------------------- Vice President, Assistant Treasurer and
(Steven H. Smith) Director
*
------------------------------------------- Vice President and Controller
(Steven L. McDonald) (Principal Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ PATRICK D. SCHWARTZ
--------------------------------------
(Patrick D. Schwartz)
ATTORNEY-IN-FACT
</TABLE>
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