<PAGE> 1
Prospectus Supplement
- --------------------------------------
(To Prospectus dated August 10, 1999)
$275,000,000
Advanta Revolving Home Equity Loan Trust 1999-B
Advanta Revolving Home Equity Loan Asset Backed Notes,
Series 1999-B
[Advanta Logo] [Advanta Logo]
Advanta Conduit Receivables, Inc. Advanta Mortgage Corp. USA
Sponsor Master Servicer
WE SUGGEST THAT YOU READ
THE SECTION ENTITLED
"RISK FACTORS" STARTING
ON PAGE S-7 OF THIS
PROSPECTUS SUPPLEMENT AND
PAGE 8 OF THE PROSPECTUS
AND CONSIDER THESE
FACTORS BEFORE MAKING A
DECISION TO INVEST IN THE
NOTES.
The notes represent non-
recourse obligations of
the trust only and are
not interests in or
obligations of any other
person or entity.
Neither the notes nor the
mortgage loans will be
insured or guaranteed by
any governmental agency
or instrumentality.
This prospectus
supplement may be used to
offer and sell the notes
only if accompanied by
the prospectus.
THE TRUST WILL ISSUE ONE CLASS OF NOTES WITH THE
FOLLOWING CHARACTERISTICS:
<TABLE>
<CAPTION>
INITIAL NOTE FINAL SCHEDULED
NOTE BALANCE INTEREST RATE PAYMENT DATE
--------------- ------------- ---------------
<S> <C> <C>
$275,000,000 LIBOR + 0.37% January 2024
</TABLE>
Interest and principal on the notes is scheduled to
be paid monthly on the 25th day of the month, or the
next business day. The first scheduled payment date
is October 25, 1999.
The property of the trust consists of a pool of
adjustable-rate home equity revolving credit line
loans. The trust will also hold cash for the purchase
of additional mortgage loans on or before January 17,
2000.
The notes will have the benefit of a certificate
guaranty insurance policy from Ambac Assurance
Corporation which will guarantee minimum payments due
on the notes.
[AMBAC LOGO]
Delivery of the notes is expected to be made in
book-entry form through the facilities of DTC,
Cedelbank and the Euroclear System on or about
September 28, 1999.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE SPONSOR
------------ ------------ --------------
<S> <C> <C> <C>
Per note............. 100% 0.25% 99.75%
Total................ $275,000,000 $687,500 $274,312,500
</TABLE>
The proceeds to the sponsor were calculated before
deducting expenses, payable by the sponsor, which are
estimated to be approximately $525,000.
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.
MORGAN STANLEY DEAN WITTER
BANC OF AMERICA SECURITIES LLC
September 21, 1999
<PAGE> 2
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your notes; and (2)
this prospectus supplement, which describes the specific terms of your notes and
may be different from the information in the prospectus.
This prospectus supplement does not contain complete information about
the offering of the notes. Additional information is contained in the
prospectus. We suggest that you read both this prospectus supplement and the
prospectus in full. We cannot sell the notes to you unless you have received
both this prospectus supplement and the prospectus.
IF THE TERMS OF YOUR NOTES AND ANY OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT ARE MORE SPECIFIC THAN THE GENERAL TERMS AND INFORMATION
IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE MORE SPECIFIC INFORMATION
IN THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions. The following table of contents and the table of contents
included in the accompanying prospectus provide the pages where these captions
are located.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary......................................... S-3
Risk Factors.................................... S-7
Formation of the Trust.......................... S-11
The Owner Trustee............................ S-11
The Indenture Trustee........................ S-11
The Master Servicer............................. S-11
The Sponsor and the Master Servicer.......... S-11
Recent Developments Related To Advanta Corp.. S-12
Pending Consumer Mortgage Lending Proposals.. S-13
The HELOC Lending Program....................... S-13
Underwriting Procedures Relating to Home
Equity Revolving Credit Line Loans........ S-13
Servicing of the HELOCs...................... S-14
Delinquencies and Losses on the Owned and
Managed HELOC Servicing Portfolio......... S-15
Description of the Mortgage Loans............... S-16
Conveyance of Subsequent Mortgage Loans...... S-22
Maturity and Prepayment Considerations.......... S-22
The Notes.................................... S-23
Effect of Overcollateralization Feature...... S-23
The Pre-Funding Account...................... S-24
Capitalized Interest Account................. S-24
Optional Redemption.......................... S-24
Decrement Table.............................. S-25
Description of the Notes........................ S-27
Optional Transfers of Mortgage Loans to the
Sponsor or the Related Originator......... S-27
Payments on Mortgage Loans; Deposits to
Principal and Interest Account............ S-27
Distributions on the Notes................... S-27
Overcollateralization Feature................ S-28
Interest Distributions....................... S-28
Calculation of the LIBOR Rate for the Notes.. S-29
Payment of Principal......................... S-30
Rapid Amortization Events.................... S-30
Events of Default Under the Indenture........ S-31
Remedies on Event of Default under the
Indenture................................. S-31
Flow of Funds................................ S-31
The Insurer and the Policy................... S-33
The Insurer............................... S-33
The Policy................................ S-34
Drawings Under the Policy................. S-35
Provisions of the Agreements.................... S-35
Collection and Other Servicing Procedures
on Mortgage Loans......................... S-35
Transfer of the Mortgage Loan Files.......... S-35
Hazard Insurance............................. S-36
Realization Upon Defaulted Mortgage Loans.... S-36
Servicing Compensation and Payment of
Expenses.................................. S-36
Reports...................................... S-37
Evidence as to Compliance.................... S-37
Matters Regarding the Master Servicer........ S-37
Amendments................................... S-38
The Indenture Trustee........................ S-38
Use of Proceeds................................. S-39
Material Federal Income Tax Consequences........ S-39
Characterization of the Notes as
Indebtedness.............................. S-39
Taxation of Interest Income of Noteholders... S-40
Possible Classification of the Trust as a
Partnership or Association Taxable as a
Corporation............................... S-41
Foreign Investors............................ S-42
Backup Withholding........................... S-43
Tax-Exempt Entities.......................... S-43
State Taxes..................................... S-43
ERISA Considerations............................ S-44
Legal Investment Considerations................. S-44
Underwriting.................................... S-45
Legal Matters................................... S-45
Experts......................................... S-46
Ratings......................................... S-46
Glossary........................................ S-47
Exhibit A....................................... A-1
</TABLE>
S-2
<PAGE> 3
SUMMARY
- This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. To understand all of the terms of the
offering of the notes, carefully read this entire prospectus supplement and the
accompanying prospectus.
- This summary provides an overview of structural provisions,
calculations, cash flows and other information to aid your understanding and is
qualified by the full description of these structural provisions calculations,
cash flows and other information in this prospectus supplement and the
accompanying prospectus.
---------------
<TABLE>
<S> <C>
ISSUING TRUST: Advanta Revolving Home
Equity Loan Trust 1999-B
NOTES: Advanta Revolving Home
Equity Loan Asset Backed
Notes, Series 1999-B
NON-OFFERED
CERTIFICATES: Trust Certificate
SPONSOR: Advanta Conduit
Receivables, Inc.
MASTER
SERVICER: Advanta Mortgage Corp. USA
INDENTURE TRUSTEE: Bankers Trust Company of
California, N.A.
Ambac Assurance Corporation
INSURER:
PAYMENT DATES: The 25th day of each
month, beginning in
October 1999. If the 25th
day is not a business day,
then the payment date will
be the next business day.
CLOSING DATE: On or about September 28,
1999.
CUT-OFF DATE: The close of business on
August 31, 1999.
ORIGINATORS: Advanta National Bank and
Advanta Finance Corp.
OWNER TRUSTEE: Wilmington Trust Company
</TABLE>
---------------
ASSETS OF THE TRUST
The trust's assets include:
- a pool of adjustable rate home equity revolving credit line loans, or
mortgage loans, secured by either first or junior deeds of trust or
mortgages on one- to four-family residential properties;
- payments of principal and interest collected on the mortgage loans on
and after the cut-off date;
- property that secured a mortgage loan to the extent it has been
acquired by foreclosure or deed in lieu of foreclosure;
- cash on deposit in the pre-funding account and the capitalized
interest account;
- a certificate guaranty insurance policy issued by Ambac Assurance
Corporation; and
- rights under mortgage hazard insurance policies covering the mortgaged
properties.
S-3
<PAGE> 4
During the life of the trust, all new draws made by mortgagors under the
applicable credit line agreement will become assets of the trust. Due to these
advances and any principal payments on the mortgage loans, the pool balance may
fluctuate and differ each day.
THE MORTGAGE LOANS
The mortgage loans owned by the trust consist of adjustable rate revolving
home equity credit line loans.
We refer you to "Description of the Mortgage Loans" in this prospectus
supplement for additional information.
Payment Terms of Mortgage Loans
- Each borrower under a mortgage loan may borrow amounts from time to
time up to the maximum amount of that borrower's line of credit. If
borrowed amounts are repaid, they can be borrowed again during the
draw period.
- Interest -- Interest on each mortgage loan is payable monthly on the
outstanding principal balance for each day in the billing cycle.
- Principal -- The mortgage loans generally have either:
(i) a three-year draw period during which time amounts may be borrowed
under the credit line agreement and no principal is required to be
repaid. The draw period is followed by a 20-year repayment period
during which the borrower must repay the outstanding principal of the
loan; or
(ii) a five-year draw period during which time amounts may be borrowed
under the credit line agreement and no principal is required to be
repaid. The draw period is followed by a 15-year repayment period
during which the borrower must repay the outstanding principal of the
loan.
We refer you to "Description of the Mortgage Loans" in this prospectus
supplement for additional information.
THE NOTES
1. General
- The notes will be secured by the assets of the trust.
- Each month, the indenture trustee will calculate the amount you are
owed.
- If you hold a note on the day immediately preceding a payment date,
you will be entitled to receive payments on that payment date.
2. Interest Payments: Interest on the notes accrues during the period
beginning on the prior payment date, or in the case of the first payment date,
beginning on the closing date, and ending on the day prior to the payment date.
The indenture trustee will calculate interest based on the actual number of days
in the interest accrual period and a year assumed to consist of 360 days. On
each payment date, you will be entitled to the following amount of interest:
- interest that accrued at the note interest rate during the interest
accrual period on the principal balance of your note; and
- any interest that was due on a prior payment date and not paid plus
interest on the amount of interest which was previously due and not
paid.
3. Principal Payments: From the first payment date through the September
2002 payment date, you will be entitled to the lesser of:
(a) 95% of the principal collected during the prior remittance period
minus any amounts applied to reduce over-collateralization; or
(b) the amount of principal collected during the prior remittance period
minus advances made to the borrowers under the credit line agreements
during that remittance period and minus any amounts applied to reduce
over-collateralization.
Beginning on the payment date in October 2002, you will be entitled to
receive the amount described in (a) above on each subsequent payment date. In
addition, on each payment date you may receive extra payments to reduce the
principal balance of your note to the extent excess funds are allocated to you.
S-4
<PAGE> 5
We refer you to "Description of the Notes" in this prospectus supplement
for additional information.
CREDIT ENHANCEMENT
1. The Certificate Guaranty Insurance Policy: Ambac Assurance Corporation
will issue a certificate guaranty insurance policy which unconditionally
guarantees the payment of:
- accrued and unpaid interest on the notes at the note interest rate;
and
- any principal amounts owed to noteholders on the maturity date.
We refer you to "The Insurer and the Policy" in this prospectus supplement
for additional information.
2. Overcollateralization: Initially, the principal balance of the mortgage
loans will be greater than the principal balance of the notes. In addition, a
portion of available funds in excess of that required to pay the amounts due on
the notes will be used to make accelerated payments of principal on the notes,
further increasing the credit support for the notes, until the targeted amount
of overcollateralization has been reached.
We refer you to "Description of the Notes -- Overcollateralization Feature"
in this prospectus supplement for additional information.
PRE-FUNDING ACCOUNT
On the closing date, approximately $104,500,000 will be deposited into
the pre-funding account. With these funds, the trust will purchase subsequent
mortgage loans until the earlier of:
- the date on which the amount on deposit in the pre-funding account is
less than or equal to $100,000;
- January 17, 2000; and
- the occurrence of an event of default or a rapid amortization event
under the indenture.
After one of these events occurs, any amount remaining on deposit in
the pre-funding account will be distributed to the noteholders as a prepayment
of principal.
CAPITALIZED INTEREST ACCOUNT
On the closing date, cash will be deposited into the capitalized
interest account. This amount will be used to cover any interest shortfalls on
the notes that may arise because money on deposit in the pre-funding account
will not be expected to generate as much interest income as would an equivalent
amount of mortgage loans.
OPTIONAL REDEMPTION
The notes may be redeemed by the master servicer or any master servicer
affiliate sub-servicer on any payment date after the principal balance of the
notes is reduced to an amount less than or equal to 10% of the original
principal balance of the notes. This clean-up call will result in the optional
redemption of the notes at a price of par plus accrued interest.
We refer you to "Maturity and Prepayment Considerations -- Optional
Redemption" in this prospectus supplement for additional information.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
- tax counsel is of the opinion that the notes will be treated as debt
instruments; and
- that the trust will not be treated as an association separately
taxable as a corporation, a publicly traded partnership or a taxable
mortgage pool.
You must agree to treat your note as indebtedness for federal, state and
local income and franchise tax purposes.
We refer you to "Material Federal Income Tax Consequences" in this
prospectus supplement and in the prospectus for additional information.
ERISA CONSIDERATIONS
Subject to the conditions and considerations discussed in this prospectus
supplement, the notes may be purchased by pension, profit-sharing or other
employee benefit plans, as well as individual
S-5
<PAGE> 6
retirement accounts and various types of Keogh plans.
We refer you to "ERISA Considerations" in this prospectus supplement and
the prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984, defines mortgage
related securities to include only first mortgages, and not second mortgages.
Because the pool of mortgage loans owned by the trust includes junior mortgage
loans, the notes will not be mortgage related securities under that definition.
Some institutions may be limited in their legal investment authority to only
first mortgages or mortgage related securities and will be unable to invest in
the notes.
We refer you to "Legal Investment Considerations" in this prospectus
supplement and "Legal Matters" in the prospectus for additional information.
NOTE RATING
The trust will not issue the notes unless they receive the following
ratings:
- "AAA" by S&P; and
- "Aaa" by Moody's.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by either rating agency.
We refer you to "Ratings" and "Risk Factors -- Note Rating Based Primarily
on the Financial Strength of the Insurer" in this prospectus supplement for
additional information.
S-6
<PAGE> 7
RISK FACTORS
We suggest that you carefully consider the following risk factors, and
the information under "Risk Factors" in the accompanying prospectus prior to any
purchase of notes.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the
rate of principal payments on the mortgage loans. Please consider that home
equity loans generally are not viewed by borrowers as permanent financing.
Accordingly, the mortgage loans may experience a higher rate of prepayment than
purchase money first lien mortgage loans, which may affect the return you
receive on your investment.
We refer you to "Description of the Securities -- Yield Considerations"
and "Description of the Securities -- Maturity and Prepayment Considerations" in
the prospectus.
NOTE RATING BASED PRIMARILY ON THE FINANCIAL STRENGTH OF THE INSURER
The rating on the notes depends primarily on an assessment by the
rating agencies of the mortgage loans and upon the financial strength of the
insurer. Any reduction of the rating assigned to the financial strength of the
insurer may cause a corresponding reduction on the ratings assigned to the
notes. A reduction in the rating assigned to the notes will reduce the market
value of the notes and may affect your ability to sell them.
We refer you to "Ratings" in this prospectus supplement.
LIEN PRIORITY COULD RESULT IN PAYMENT DELAY AND LOSS
Most of the mortgage loans are secured by mortgages which are junior in
priority. Mortgage loans that are secured by junior mortgages will receive
proceeds from a sale of the mortgaged property only after any senior mortgage
loans and prior statutory liens have been paid. If the remaining proceeds are
insufficient to satisfy the mortgage loan in the trust, the insurer fails to
perform its obligations under the certificate guaranty insurance policy and the
overcollateralization is insufficient to cover the loss, then there will be a
delay in payments to you while a deficiency judgment against the borrower is
sought and you may incur a loss if a deficiency judgment cannot be obtained or
is not realized upon.
We refer you to "Legal Aspects of Mortgage Loans" in the prospectus.
THE MASTER SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS COULD
REDUCE THE FUNDS AVAILABLE TO PAY THE NOTES OR DELAY PAYMENTS TO YOU
Subject to limitations, the master servicer may agree to changes in the
terms of a mortgage loan if these changes are consistent with accepted servicing
practices. The master servicer may also change its servicing procedures. These
changes could result in delays or reductions in payments on the mortgage loans,
and correspondingly on the notes.
We refer you to "Provisions of the Agreements -- Collection and Other
Servicing Procedures on Mortgage Loans" in this prospectus supplement.
DELINQUENT MORTGAGE LOANS ARE MORE LIKELY TO DEFAULT
The trust will include mortgage loans which are 30-59 days delinquent.
These mortgage loans may be more likely to default than mortgage loans that are
not currently delinquent.
S-7
<PAGE> 8
MORTGAGE LOANS HAVE AN INTEREST ONLY FEATURE DURING THE DRAW PERIOD, WHICH MAY
REDUCE YOUR PRINCIPAL PAYMENTS
The terms of the mortgage loans require payments of interest but no
payments of principal for initial periods that last for either three or five
years. After this initial period, the borrowers are required to make level
monthly payments of principal sufficient to amortize the loan in addition to
payments of interest.
During the draw period, noteholders may receive little or no payments
of principal. If the borrower makes little or no payments of principal during
the draw period, the payments of principal during the subsequent amortization
period will be greater than if amortized over the full term of the loan. The
increased payment obligation may result in delinquencies and defaults.
HIGH CLTV MORTGAGE LOANS MAY HAVE GREATER LOSSES
Some of the mortgage loans have combined loan-to-value ratios greater
than 100%, but not greater than 125%. Consequently, the mortgaged properties are
unlikely to provide adequate security for these mortgage loans. In the event
that any mortgaged property fails to provide adequate security for the mortgage
loan, any losses incurred in connection with the mortgage loans may affect the
timing of payments of principal to the noteholders, since there may be
substantial delays in collecting on deficiency judgments, assuming they can be
collected on at all.
LOANS IN EXCESS OF THE CREDIT LIMIT MAY RESULT IN INCREASED DEFAULTS AND
DELINQUENCIES
As part of their normal lending practices, the originators may in some
instances permit borrowers to borrow up to 3% over the credit limit even though
the mortgage loans were not originated on that basis. Any excess amount is added
to the principal balance and will be amortized during the repayment period of
the mortgage loan. This will cause the monthly payments during the repayment
period to be higher, which may result in increased defaults and delinquencies.
Since the mortgaged property now secures a larger debt, if the mortgage
properties are liquidated it is more likely that you will experience a loss if
the overcollateralization is insufficient and the insurer does not perform its
obligations under the policy.
PREPAYMENTS OF PRINCIPAL MAY REDUCE INTEREST PAYMENTS
If a mortgagor prepays a mortgage loan in full, the mortgagor is
charged interest only up to the date of the prepayment, instead of a full month.
None of the insurer, the sponsor or the master servicer is required to cover any
shortfalls resulting from prepayments of principal.
THE NOTES HAVE A CAP ON THEIR NOTE INTEREST RATE, WHICH MAY LIMIT THE AMOUNT OF
INTEREST YOU WILL RECEIVE
The notes are subject to an available funds cap on their note interest
rate, which is equal to the weighted average coupon rate on the mortgage loans
minus the fees of the trust. This means that the interest that is payable to the
investors in the notes may be limited to the interest the trust receives on the
mortgage loans minus fees. If the weighted average interest rate of the mortgage
loans was reduced significantly, under a relatively high prepayment scenario, or
the interest rate index for the mortgage loans decreased without a corresponding
decrease in the index for the notes, the note interest rate could be subject to
the limitation imposed by the available funds cap. This cap may reduce the
amount of interest you, as an investor in the notes, receive.
PRE-FUNDING FEATURE MAY RESULT IN A PARTIAL MANDATORY REDEMPTION OF THE NOTES
AND CAUSE THE CHARACTERISTICS OF THE POOL OF MORTGAGE LOANS TO VARY
- Mandatory redemption. In the event that the sponsor does not have
enough subsequent mortgage loans to sell to the trust on or before the end of
the pre-funding period, the notes will be subject to a partial mandatory
redemption on the payment date immediately following the end of the pre-funding
period. The sponsor does not expect that a material amount of principal
redemption will occur due to an insufficient amount of subsequent mortgage
loans.
S-8
<PAGE> 9
- Eligibility of subsequent mortgage loans. Each subsequent mortgage
loan must satisfy the eligibility criteria at the time of its acquisition by the
trust. However, subsequent mortgage loans may have been originated or purchased
using credit criteria different from those which were applied to the mortgage
loans initially conveyed on the closing date, and may be of a different credit
quality. As a result, following the transfer of subsequent mortgage loans, the
aggregate characteristics of the mortgage loans then held in trust may vary from
those initially conveyed, but such variance is not expected to be material.
INTEREST SHORTFALLS ARISING FROM THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT ARE
NOT COVERED BY THE MASTER SERVICER, THE SPONSOR OR THE INSURER
The Soldiers' and Sailors' Civil Relief Act of 1940 permits certain
modifications to the payment terms for mortgage loans, including a reduction in
the amount of interest paid by certain borrowers on active duty in military
service. In addition, this legislation imposes limitations that would impair the
ability of the master servicer to foreclose on an affected mortgage loan during
the mortgagor's period of active duty status. Thus, in the event that the
mortgage loan goes into default, there may be delays and losses experienced by
noteholders due to the inability of the master servicer to realize upon the
mortgaged property in a timely fashion. None of the master servicer, the
sponsor, or the insurer are required to cover any interest shortfalls created by
the Soldiers' and Sailors' Civil Relief Act of 1940.
INTEREST ON NOTES MAY BE REDUCED BECAUSE THE MORTGAGE LOANS ACCRUE INTEREST
BASED ON A DIFFERENT INDEX
The interest rate on the notes is based on the value of LIBOR and the
coupon rate on the mortgage loans is based on the prime rate. Because LIBOR and
the prime rate respond differently to economic factors, LIBOR could be higher
than the prime rate, in which case interest payments to noteholders may be
limited by the available funds cap.
NOTEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results on or after
January 1, 2000. In connection with this issue Advanta Corp., the parent company
of the originators and of the master servicer, has completed an evaluation of
its systems, applications and vendor lists, and has implemented project plans to
modify existing computer programs, convert to new programs or replace systems,
to the extent necessary to address the upcoming change in the century. As of
June 30, 1999, these plans had been substantially implemented with respect to
both mission critical and non-mission critical applications. Advanta Corp. has
identified significant business relationships, including, without limitation,
vendors, customers, asset management counterparties and funding counterparties.
Advanta Corp. has initiated communications with these third parties to determine
the extent to which Advanta Corp. is vulnerable to these third parties' failure
to remediate their own year 2000 issues. To date, Advanta Corp. is not aware of
any material third party business relationship, product or system with a year
2000 problem that it believes would have a material adverse effect on it. In the
event that Advanta Corp.'s project plans are not timely or successfully
completed, there can be no assurance that the upcoming change in the century
will not have a material adverse effect on the operations of the originators or
of the master servicer, including a shut-down of operations for a period of
time, which may, in turn, have a material adverse effect on the notes. In
addition, there can be no assurance that the systems used by outside service
providers, including sub-servicers providing services to the master servicer, or
other third parties upon which the originators' and the master servicer's
systems rely, will be converted on a timely basis. Further, there can be no
assurance that a failure to convert by another company, or a conversion that is
incompatible with the originators' and the master servicer's systems, would not
have a material adverse effect on their operations, which may, in turn, have a
material adverse effect on the notes. In the event that the systems or programs
of the indenture trustee or of Ambac Assurance Corporation are not year 2000
compliant, there can be no assurance that there would not be a material adverse
effect on the operations of the indenture trustee or Ambac Assurance
Corporation, respectively, which may, in turn, have a material adverse effect on
the notes.
S-9
<PAGE> 10
DTC AND THE YEAR 2000 ISSUE
The management of DTC is aware that some computer applications, systems
and the like for processing data that are dependent upon calendar dates,
including dates before, on and after January 1, 2000, may encounter year 2000
issues. DTC has informed its participants and members of the financial community
that it has developed and is implementing a program so that its systems, as the
same relate to the timely payment to securityholders, book-entry deliveries, and
settlement of trades within DTC continue to function appropriately on and after
January 1, 2000. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
DTC's ability to perform properly its services is also dependent upon
other parties, including, but not limited to, issuers, their agents and its
participating organizations, through which the owners of the notes will hold
their notes, as well as third party vendors on whom DTC relies for information
or the provision of services, including telecommunication and electrical utility
service providers among others. DTC has informed the financial community that it
is contacting, and will continue to contact, third party vendors from whom DTC
acquires services to: (a) impress upon them the importance of these services
being year 2000 compliant and (b) determine the extent of their efforts for year
2000 remediation of their services. In addition, DTC has stated that it is in
the process of developing the contingency plans that it deems appropriate.
If problems associated with the year 2000 issue were to occur with
respect to DTC and the services described above, distributions to the owners of
notes could be delayed or otherwise adversely affected.
According to DTC, the foregoing information with respect to DTC has
been provided to the financial community for information purposes only and is
not intended to serve as a representation, warranty or contract modification of
any kind.
------------------
You can find a glossary of defined terms used in this prospectus
supplement beginning on page S-47 of this prospectus supplement.
S-10
<PAGE> 11
FORMATION OF THE TRUST
Advanta Revolving Home Equity Loan Trust 1999-B is a business trust
formed under the laws of the State of Delaware under a trust agreement between
Advanta Conduit Receivables, Inc., as sponsor, Advanta Holding Trust 1999-B and
Wilmington Trust Company, as owner trustee. Prior to formation, the trust will
have no assets or obligations or any operating history. The trust will not
engage in any business other than acquiring, holding and managing the adjustable
rate home equity revolving credit line loans transferred to the trust and the
other assets of the trust and any proceeds therefrom, issuing the notes and
trust certificates representing the ownership interest in the trust property,
making payments on the notes and the trust certificates and engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto.
The trust will not acquire any assets other than the trust property,
and it is not anticipated that the trust will have any need for additional
capital resources. Because the trust will have no operating history upon its
establishment and will not engage in any business other than the duties
discussed above, no historical, pro forma financial statements, or ratios of
earnings to fixed charges with respect to the trust have been included in this
prospectus supplement, other than the balance sheet of the trust at September
22, 1999 included as Exhibit A hereto.
THE OWNER TRUSTEE
Wilmington Trust Company, the owner trustee, is a Delaware banking
corporation and its principal offices are located at Rodney Square North, 1100
North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration. The owner trustee will perform limited administrative functions
under the trust agreement. The owner trustee's duties in connection with the
issuance and sale of the notes and the trust certificates are limited solely to
the express obligations of the owner trustee set forth in the trust agreement,
the indenture between the trust and the indenture trustee, and the sale and
servicing agreement, among the trust, Advanta Holding Trust 1999-B, the sponsor,
Advanta Mortgage Corp. USA., as master servicer, and the indenture trustee.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A. is the indenture trustee
under the indenture. Bankers Trust Company of California, N.A., is a national
banking association and its principal corporate trust offices are located at 3
Park Plaza, 16th Floor, Irvine, California 92614. The indenture trustee's duties
in connection with the notes are limited solely to its express obligations under
the indenture and the sale and servicing agreement.
THE MASTER SERVICER
Advanta Mortgage Corp. USA, as master servicer, will service the
mortgage loans in accordance with the terms of the sale and servicing agreement.
The master servicer may perform any of its obligations under the sale and
servicing agreement through one or more sub-servicers, which may be affiliates
of the master servicer. Notwithstanding any sub-servicing arrangement, the
master servicer will remain liable for its servicing duties and obligations as
if the master servicer alone were servicing the mortgage loans.
THE SPONSOR AND THE MASTER SERVICER
The sponsor is an indirect subsidiary of Advanta Mortgage Corp. USA,
the master servicer, and of Advanta Corp., a Delaware corporation. Advanta Corp.
is a publicly-traded company with its principal executive offices located in
Spring House, Pennsylvania. As of June 30, 1999, Advanta Corp. had assets in
excess of $3.7 billion and consolidated managed assets in excess of $12.3
billion. See "The Sponsor" and "The Master Servicer" in the prospectus.
As of June 30, 1999, the master servicer and its subsidiaries were
servicing:
- - approximately 136,000 mortgage loans in the combined closed-end and
HELOC owned and managed servicing portfolios, representing an aggregate
outstanding principal balance of approximately $8.3 billion, and
S-11
<PAGE> 12
- - approximately 144,000 mortgage loans which are serviced for third
parties on a contract servicing basis representing an aggregate
outstanding principal balance of approximately $9.4 billion.
As of August 31, 1999, the sponsor or its affiliates have issued 40
series of closed-end mortgage asset-backed securities with an original principal
balance of approximately $12.7 billion, some of which are no longer outstanding,
and 5 series of revolving mortgage asset-backed securities with an original
principal balance of approximately $585 million all of which are outstanding.
The indenture trustee and the insurer may remove the master servicer,
and the master servicer may resign, only in accordance with the terms of the
sale and servicing agreement. No removal or resignation shall become effective
until the indenture trustee or a successor master servicer acceptable to the
insurer, or the indenture trustee, if an insurer default has occurred and is
continuing, shall have assumed the master servicer's servicing responsibilities
and obligations.
The master servicer may not assign its obligations under the sale and
servicing agreement unless it shall have first obtained the written consent of
the indenture trustee and the insurer, which consent shall not be unreasonably
withheld. Any assignee must meet the eligibility requirements for a successor
master servicer set forth in the sale and servicing agreement. See "The
Agreements -- Removal and Resignation of the Master Servicer" in the prospectus.
Upon removal or resignation of the master servicer, the indenture
trustee may solicit bids for a successor master servicer and, pending the
appointment of a successor master servicer, the indenture trustee will be
required to serve as master servicer. If the indenture trustee is unable to
obtain a qualifying bid and is prevented by law from acting as master servicer,
the indenture trustee will be required to appoint, or petition a court of
competent jurisdiction to appoint, an eligible successor. Any successor is
required to be acceptable to the insurer, unless the insurer has defaulted, in
which case the indenture trustee's decision shall control.
The notes will not represent an interest in or obligation of, nor are
the mortgage loans guaranteed by, either the sponsor, the master servicer, the
indenture trustee or any of their affiliates. In addition, the notes will not be
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency or instrumentality.
RECENT DEVELOPMENTS RELATED TO ADVANTA CORP.
On January 22, 1999, Fleet Financial Group, Inc. and some of its
affiliates filed a complaint against Advanta Corp. and some of its subsidiaries
in Delaware Chancery Court bringing a lawsuit relating to a transaction between
Advanta Corp. and some of its affiliates and Fleet Financial Group, Inc. and
some of its affiliates which closed on February 20, 1998. Pursuant to the
transaction Advanta Corp. contributed substantially all of its consumer credit
card business to a limited liability company controlled by Fleet Financial
Group, Inc. The lawsuit centers around post-closing adjustments and other
matters relating to the transaction. Fleet seeks damages of approximately $141
million.
On February 16, 1999 Advanta Corp. filed an answer to the complaint
denying the material allegations of the complaint. Advanta Corp. also filed
counterclaims against Fleet Financial Group, Inc. and some of its affiliates
seeking damages of approximately $101 million from Fleet. Although the outcome
of this litigation cannot be determined, Advanta Corp. does not expect this
litigation to have a material adverse effect on the financial position or future
operating results of Advanta Corp. or Advanta Mortgage Corp. USA.
This prospectus supplement contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
from those projected. Additional risks that may affect Advanta Corp.'s
performance are detailed in Advanta Corp.'s filings with the Securities and
Exchange Commission, including its most recent Annual Report on Form 10-K and
its Quarterly Reports on Form 10-Q.
The ability of Advanta Corp.'s subsidiaries to honor their financial
and other obligations is to some extent influenced by the financial condition of
Advanta Corp. Such obligations, as they are related to the trust and the
S-12
<PAGE> 13
notes, primarily consist of the sponsor's obligation to repurchase mortgage
loans which are inconsistent with representations and warranties in the sale and
servicing agreement, as well as the obligations of the master servicer pursuant
to the sale and servicing agreement. To the extent the sponsor's and the master
servicer's ability to perform such obligations is adversely affected, the
mortgage loans may experience an increased level of delinquencies and losses.
PENDING CONSUMER MORTGAGE LENDING PROPOSALS
A number of consumer lending proposals have been proposed on the
federal and state levels, which may impact the sponsor's, the originators' and
the master servicer's origination and servicing procedures.
Federal Proposals. On May 4, 1999, the Clinton Administration announced
the Clinton-Gore Plan for Financial Privacy and Consumer Protection. Among other
things, the Clinton-Gore Plan would extend the scope of HOEPA, the Home
Ownership and Equity Protection Act. HOEPA loans, or Section 32 loans, are
subject to special disclosure requirements under Section 129 of the federal
Truth in Lending Act. In addition, state and federal credit protection laws may
limit collection of principal and interest on the mortgage loans describing
sanctions and damages that may be imposed for violations of various mortgage
lending laws, these violations and sanctions may be imposed on the owner of a
HOEPA loan, such as the trust.
The Clinton-Gore Plan also urges Congress to adopt recommendations made
by the Federal Reserve Board and the Department of Housing and Urban Development
and to enhance disclosures made under the Real Estate Settlement Procedures Act.
Congressional hearings have been scheduled.
Although these proposals are not in legislative form, it is likely that
a number of them will be offered as amendments to financial modernization and
bankruptcy reform legislation. The form in which any of the foregoing will be
adopted, if at all, cannot be predicted. Accordingly, the sponsor, the master
servicer and the originators have no way to determine what, if any, impact they
will have on their origination and servicing procedures in the future.
State Proposals. Several states are considering legislation along the
same lines as HOEPA. These proposals would prohibit the collection of some fees,
the financing of points or fees, prepayment penalties, balloon notes, and
lending with the intent to foreclose. Also being considered are statutory
requirements that all HOEPA borrowers receive government approved counseling
before taking out a loan. These proposals are strongly opposed by the mortgage
lending industry and are likely to be substantially revised before passage.
THE HELOC LENDING PROGRAM
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY REVOLVING CREDIT LINE LOANS
The following is a description of the underwriting procedures
customarily employed by the originators, Advanta National Bank and Advanta
Finance Corp., in their HELOC, or home equity revolving credit line loan
program, including the mortgage loans. The underwriting process is intended to
assess the applicant's credit standing, repayment ability, the value and
adequacy of the mortgaged property as collateral, and the characteristics of any
current existing mortgages. These factors include the quality of the mortgaged
property, the length of time the mortgagor has owned the property, amount of
disposable income, type of employment, length of employment, credit history,
current and pending debt obligations, payment habits and status of past and
currently existing mortgages.
Each applicant for a HELOC is required to complete an application which
lists the applicant's liabilities, income, credit and employment history and
other demographic and personal information. If information in the loan
application demonstrates that there is sufficient income and equity in the
mortgaged property to justify making a HELOC, the originators will conduct a
further credit investigation of the applicant. This investigation will include
obtaining and reviewing an independent credit bureau report on the credit
history of the applicant in order to evaluate the applicant's ability to repay.
The credit report typically contains information about credit history with local
merchants and lenders, installment debt payments and any record of
delinquencies, defaults, bankruptcy, collateral repossessions, suits or
judgments.
S-13
<PAGE> 14
Either a full appraisal, a drive-by appraisal or a statistical property
evaluation is performed on all mortgaged properties underlying the HELOCs. Full
appraisals are provided by an independent third-party, fee-based appraiser and
completed on forms approved by Federal National Mortgage Association or Federal
Home Loan Mortgage Corporation. To become approved as an appraiser by the
originators, an appraiser must submit a copy of their license and demonstrate
proof of an errors and omissions policy. Any drive-by appraisal is an exterior
examination of the premises by the appraiser to determine that the property is
in good condition. A statistical property evaluation is completed by a
third-party who performs an electronic comparison of the stated value of the
mortgaged properties with comparable properties in the area. The sponsor
believes that no more than 30% of the mortgage loans in the statistical
calculation date pool are secured by mortgaged properties which were appraised
using the statistical property evaluation method. The appraisal is required to
have been made not earlier than 120 days prior to the date of origination of the
HELOC and is based on various factors, including the market value of comparable
homes and the cost of replacing the home. In the event that an originator
provided an applicant with a first lien mortgage loan, the appraisal for the
first lien mortgage loan may be used as the basis of a junior lien HELOC on the
same property. If the first lien mortgage loan was originated more than twelve
months prior to the date of origination of the HELOC, the originators will
perform a statistical property evaluation and increase or decrease the property
value accordingly.
After obtaining all applicable employment, credit and property
information required by the applicable underwriting guidelines, the originators
may use a debt-to-income ratio to assist in determining whether the prospective
borrower has sufficient monthly income available to support the payments of
principal and interest on the HELOC, any senior mortgage loan payments,
including any escrows for property taxes and hazard insurance premiums, and any
other monthly credit obligations. The debt-to-income ratio is the ratio of the
borrower's total monthly payments, assumed to be based on the applicable fully
indexed coupon rate plus a margin, to the borrower's gross monthly income. The
underwriting guidelines state that the maximum monthly debt-to-income ratio is
50%, although variations in the monthly debt-to-income ratios limits are
permitted based on compensating factors.
The policy of each originator is to obtain an insured property report
before the originator makes a HELOC for amounts less than or equal to $50,000.
Advanta Finance Corp. generally requires a full title policy for each HELOC, and
Advanta National Bank generally requires a full title policy for HELOCs in
amounts greater than $50,000. In addition, each originator requires proof of
hazard insurance at the time of origination. Flood insurance is required in
jurisdictions designated as flood zones and may be provided through a blanket
insurance policy maintained by the master servicer.
SERVICING OF THE HELOCS
The master servicer has established standard policies for the servicing
and collection of the HELOC mortgage loans. Servicing includes, but is not
limited to, the collection and aggregation of payments relating to the HELOCs,
the supervision of delinquent HELOCs, loss mitigation efforts, foreclosure
proceedings, the disposition of mortgaged properties, if applicable, and the
preparation of tax information in connection with the HELOCs.
Billing statements are mailed monthly to the mortgagors. The statement
details all debits and credits and specifies the minimum payment due and the
available credit line. Notice of changes in the applicable loan coupon rate are
provided to the mortgagor with these statements. Payments are due on varying
days of the month.
The master servicer's policy on HELOCs is to initiate foreclosure on
the underlying property after a loan has become 90 days delinquent and, in the
judgment of the master servicer, satisfactory arrangements cannot be made with
the mortgagor for repayment, if a notice of default on a senior lien is received
by the master servicer, or if circumstances are discovered by the master
servicer which would indicate that a potential for loss exists.
Foreclosure proceedings may be terminated if the delinquency is cured.
Mortgagors that have become insolvent may have their mortgage loans restructured
in accordance with applicable law and with a view to maximizing recovery of
these mortgage loans.
Once foreclosure is initiated by the master servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
S-14
<PAGE> 15
progressing within the time frame typical for the state in which the property is
located. During the foreclosure proceeding, the master servicer determines the
amount of the foreclosure bid and whether to liquidate the loan.
After foreclosure, if the HELOC is secured by a first mortgage lien,
the master servicer may liquidate the mortgaged property and charge-off the
balance of the HELOC which was not recovered through liquidation proceeds. If
the mortgaged property was subject to a senior lien, the master servicer will
either directly manage the foreclosure sale of the property and satisfy the lien
at the time of sale or take other action as deemed necessary to protect the
interest in the mortgaged property. If in the judgment of the master servicer,
the cost of maintaining or purchasing the senior lien position exceeds the
economic benefit of the action, the master servicer will charge off the entire
HELOC. In these instances, the master servicer will not pursue any recovery
against the mortgaged property, but may seek a money judgment against the
mortgagor if allowed by law.
Servicing policies, charge-off policies and collection practices may
change over time in accordance with, among other things, the master servicer's
business judgment, changes in the portfolio and applicable laws and regulations.
The master servicer may not change its policies if the change would adversely
affect the interest of the noteholders or the insurer. Any change must be
consistent with accepted servicing practices, the terms of the HELOCs and the
terms of the sale and servicing agreement.
DELINQUENCIES AND LOSSES ON THE OWNED AND MANAGED HELOC SERVICING PORTFOLIO
The following tables set forth information relating to the delinquency,
loan loss and foreclosure experience of the master servicer for its servicing
portfolio of HELOCs for the six months ending June 30, 1999, and for the prior
three years ended December 31, 1998. The owned and managed HELOC portfolio
includes, but is not limited to, HELOCs originated on or prior to June 30, 1999.
Delinquencies, foreclosures and losses are expected to occur more
frequently after the first full year of the life of mortgage loans. Accordingly,
because a large number of mortgage loans serviced by the master servicer have
been recently originated, the current level of delinquencies, foreclosures and
losses may not be representative of the levels which may be experienced over the
lives of these mortgage loans. If the master servicer's portfolio of new loans
does not continue to grow at the rate experienced in recent years, the levels of
delinquencies, foreclosures and losses as percentages of the portfolio could
rise significantly above the rates indicated in the tables.
The following servicing portfolio information includes mortgage loans
with characteristics which are not necessarily representative of the mortgage
loans. The servicing portfolio information includes mortgage loans underwritten
under guidelines which have changed over time and may not necessarily be
representative of the guidelines used to originate the mortgage loans.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
MASTER SERVICER'S OWNED AND MANAGED HELOC PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING YEAR ENDING YEAR ENDING
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT
LOANS (000) LOANS (000) LOANS (000) LOANS (000)
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio............... 20,015 $616,697 12,314 $360,186 6,434 $157,087 2,252 $59,675
Delinquency percentage
30-59 days............ 1.80% 1.67% 1.89% 1.67% 2.66% 2.59% 1.29% 1.27%
60-89 days............ 0.57% 0.49% 0.89% 0.90% 0.95% 0.75% 0.75% 0.99%
90-119 days........... 0.27% 0.24% 0.39% 0.29% 0.61% 0.33% 0.32% 0.26%
120-159 days.......... 0.19% 0.16% 0.39% 0.46% 0.45% 0.31% 0.04% 0.12%
160-180 days.......... 0.13% 0.16% 0.15% 0.14% 0.23% 0.23% 0.04% 0.03%
180 days or more...... 0.72% 0.75% 0.67% 0.62% 0.42% 0.56% 0.04% 0.03%
Total................... 3.68% 3.47% 4.38% 4.08% 5.32% 4.77% 2.48% 2.70%
Foreclosure rate........ 0.11% 0.14% 0.14% 0.31% - - - -
</TABLE>
S-15
<PAGE> 16
The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude loans
in foreclosure. Foreclosure rate is the number of mortgage loans in foreclosure
as a percentage of the total number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage the total dollar amount of the
mortgage loans.
LOAN LOSS EXPERIENCE OF THE MASTER SERVICER'S
OWNED AND MANAGED HELOC PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING YEAR ENDING YEAR ENDING
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- ----------------- -----------------
(DOLLARS IN (DOLLARS IN (DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS) THOUSANDS) THOUSANDS)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average amount
outstanding............... $ 460,367 $ 244,520 $ 109,407 $ 23,236
Net losses.................. $ 718 $ 519 $ 174 $ 45
Net losses as a percentage of
average amount
outstanding................. 0.31% 0.21% 0.16% 0.19%
</TABLE>
Average amount outstanding during the period is the arithmetic average
of the principal balances and accrued interest of the mortgage loans outstanding
on the last business day of each month during the period. Net losses represent
amounts which have been determined to be uncollectible relating to mortgage
loans for each respective period minus recoveries from liquidation proceeds and
deficiency judgments. The June 30, 1999 net loss percentage has been based on
annualized net losses.
The information above should not be considered as a basis for assessing
the likelihood, amount or severity of delinquencies, foreclosures or losses on
the HELOC mortgage loans. No assurances can be given that the delinquency,
foreclosure and loss experience presented in the tables above will be indicative
of such experience on the HELOC mortgage loans. The statistics shown above
represent the respective delinquency and foreclosure experiences only at the
dates presented. The aggregate delinquency, foreclosure and loss experience on
the mortgage loans will depend on the results obtained over the life of the
trust. It should be noted that if residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies, foreclosures and losses could be higher than those previously
experienced by the master servicer. In addition, adverse economic conditions may
effect the timely payment by borrowers of scheduled payments of principal and
interest on the mortgage loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the mortgage loans. The
likelihood that borrowers will become delinquent, the rate of foreclosures and
the severity of any losses also may be affected by a number of factors related
to each borrower's personal circumstances, including, but not limited to,
unemployment or change in employment and marital separation.
The changes in the delinquency and loss levels reported in the tables
are the result of changes in the seasoning of owned and managed HELOC portfolio.
It is expected that the rate of new originations will continue to offset the
seasoning of previously originated mortgage loans. The normal increase in
delinquency associated with seasoning will not become evident until the rate of
new originations slows down. Further, most of the mortgage loans have not
reached the end of their draw period. It is expected that the rate of
delinquency and loss will increase when more of the mortgage loans in the owned
and managed HELOC portfolio reach the end of their draw periods.
DESCRIPTION OF THE MORTGAGE LOANS
The statistical information presented in this prospectus supplement is
computed based on the pool of mortgage loans as of the statistical calculation
date, which is the close of business on August 31, 1999. The aggregate principal
balance of the pool, or pool balance, as of the statistical calculation date is
$185,080,574.03. Prior to the closing date, some of the mortgage loans may
prepay in full or may be determined not to meet the eligibility requirements
and, as a result, may not be included in the pool of initial mortgage loans.
Consequently, the
S-16
<PAGE> 17
characteristics of the mortgage loans as of the closing date may vary from the
statistical information presented in this prospectus supplement, although this
variance will not be greater than five percent.
In addition, after the closing date and prior to January 17, 2000, the
trust is expected to acquire subsequent mortgage loans with an aggregate
principal balance of approximately $104,500,000. The subsequent mortgage loans
will be selected using the same criteria used to select the initial mortgage
loans and are required to meet specified criteria. In general, other than the
specific statistical information presented in this prospectus supplement, the
description of the mortgage loans will apply to both the initial mortgage loans
and the subsequent mortgage loans. The exact characteristics of the entire pool
of mortgage loans will vary from the specific statistical information presented
in this prospectus supplement upon the acquisition of the subsequent mortgage
loans, although the variance will not be greater than five percent.
The mortgage loans were originated under credit line agreements and are
secured by mortgages or deeds of trust, which are either first or junior
mortgages or deeds of trust, on mortgaged properties. The mortgaged properties
are the properties securing the mortgage loans and consist primarily of
residential properties that are one- to four-family properties.
Interest on each mortgage loan, excluding introductory coupon rates
offered from time to time during promotional periods, is computed and payable
monthly on the average daily outstanding Principal Balance of the mortgage loan.
From time to time prior to the expiration of the draw period specified
in the credit line agreement, additional amounts, up to the credit limit
specified in the credit line agreement, may be borrowed, with the result that
the Principal Balance of the mortgage loan will be increased. These additional
borrowings are known as draws. New draws under the mortgage loans will
automatically become property of the trust, but the trust will not be required
to advance funds to the sponsor in connection with these draws. As a result, the
aggregate Principal Balance of the mortgage loans may fluctuate from day to day
as new draws by the mortgagors thereunder are added to the trust and principal
payments received are applied in reduction of the aggregate Principal Balance.
During the draw period, the mortgagor is obligated to pay the amount of
interest which accrues on the mortgage loan during the billing cycle, and may,
but is not obligated to, also pay all or a portion of the principal. The
interest only payment obligation terminates at the end of the draw period
specified in the credit line agreement, and then the mortgagor must begin paying
at least a minimum monthly portion of the outstanding Principal Balance of the
mortgage loan in addition to required interest payments.
The mortgage loans bear interest at a coupon rate, which is the sum of
(1) the index rate, which is a variable rate based on the prime rate or a base
rate specified in the credit line agreement and (2) a margin. The coupon rate on
each mortgage loan may change monthly and may be subject to limitations or caps.
As of the statistical calculation date, the mortgage loans have the
following characteristics:
- - the monthly periodic caps range from 0.25% to 11.75%,
- - the weighted average periodic cap is 2.36%,
- - the annual coupon rate caps range from 0.25% to 11.75%, and
- - the weighted average annual coupon rate cap is 3.16%.
The mortgage loans will be subject to a maximum per annum coupon rate
and are subject to applicable usury limitations. See "Legal Aspects of Mortgage
Loans -- Applicability of Usury Laws" in the prospectus.
In the tables below, the credit limit utilization rate is determined by
dividing the Principal Balance of a mortgage loan by the credit limit of the
mortgage loan. The credit limit on a mortgage loan is the maximum dollar amount
of draws permitted to be made by the mortgagor. The combined loan-to-value
ratio, or CLTV, for a
S-17
<PAGE> 18
particular mortgage loan is the ratio of (A) the sum of (1) the credit limit of
the mortgage loan and (2) any outstanding principal balances of mortgage loans
senior to the mortgage loan, calculated at the date of origination of the
mortgage loan, to (B) the lesser of (1) the appraised value of the mortgaged
property at the time of origination or (2) in the case of a mortgaged property
purchased within one year of the origination of the mortgage loan, the purchase
price of the mortgaged property.
The margin with respect to a mortgage loan is the fixed amount by which
the coupon rate on the mortgage loan exceeds an index rate. The index rate is a
variable rate based on the prime rate or a base rate specified in the credit
line agreement, published in the Money Rates table of the applicable edition of
The Wall Street Journal. The margin is significant in that it provides one
indication of the amount of money the trust will have available to meet trust
expenses, including paying interest on the notes.
Owner Occupied properties include vacation and second homes.
The following tables provide a description of the principal
characteristics of the mortgage loans as of the statistical calculation date:
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE PERCENTAGE OF POOL BY
STATE MORTGAGE LOANS PRINCIPAL BALANCE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington 241 $ 6,892,481.12 3.72%
Illinois 264 7,142,890.91 3.86
Virginia 257 7,159,006.31 3.87
Ohio 327 8,407,933.93 4.54
Florida 347 9,291,405.01 5.02
New Jersey 334 10,276,790.62 5.55
Michigan 476 12,730,185.35 6.88
New York 426 13,077,494.73 7.07
Pennsylvania 502 14,054,496.86 7.59
California 726 24,004,765.36 12.97
Other 2,632 72,043,123.83 38.93
- --------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
==================================================================================================
</TABLE>
Geographic location is determined by the address of the mortgaged property
securing the mortgage loan. The mortgaged properties are located in 31
states.
PROPERTY TYPE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single Family/PUD 6,016 $ 170,663,283.60 92.21%
Rowhouse/Townhouse 113 2,746,601.56 1.48
Condo 153 4,233,850.18 2.29
2 Units 102 3,191,486.83 1.72
3 - 4 Units 25 900,905.09 0.49
Manufactured 122 3,309,097.69 1.79
Other 1 35,349.08 0.02
- -----------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
=====================================================================================================
</TABLE>
S-18
<PAGE> 19
LIEN PRIORITY
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Lien 276 $ 11,475,444.95 6.20%
Junior Lien 6,256 173,605,129.08 93.80
- --------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
============================================================================================
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Owner Occupied 6,519 $ 184,543,031.78 99.71%
Non-Owner Occupied 13 537,542.25 0.29
- -----------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
=========================================================================================
</TABLE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
RANGE OF PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.00 - 25,000.00 3,320 $ 57,473,065.32 31.05%
25,000.01 - 50,000.00 2,787 99,898,166.05 53.97
50,000.01 - 75,000.00 362 21,576,352.59 11.66
75,000.01 - 100,000.00 47 4,044,015.61 2.19
100,000.01 - 125,000.00 7 750,808.87 0.41
125,000.01 - 150,000.00 7 962,119.61 0.52
150,000.01 - 200,000.00 2 376,045.98 0.20
- -------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
=================================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Principal Balance: $ 0.00
Maximum Principal Balance: $ 189,320.20
Average Principal Balance: $ 28,334.44
</TABLE>
CREDIT LIMITS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
RANGE OF CREDIT LIMITS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.00 - 25,000.00 3,161 $ 55,060,441.82 29.75%
25,000.01 - 50,000.00 2,899 100,781,153.77 54.45
50,000.01 - 75,000.00 402 22,686,682.90 12.26
75,000.01 - 100,000.00 53 4,387,858.58 2.37
100,000.01 - 125,000.00 7 750,808.87 0.41
125,000.01 - 150,000.00 8 1,037,582.11 0.56
150,000.01 - 200,000.00 2 376,045.98 0.20
- -------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
=================================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Credit Limit: $ 7,155.00
Maximum Credit Limit: $ 190,000.00
Average Credit Limit: $ 29,565.55
</TABLE>
S-19
<PAGE> 20
CREDIT LIMIT UTILIZATION
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
RANGE OF CREDIT LIMIT UTILIZATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0.000 - 50.000% 174 $ 1,208,521.67 0.65%
50.001 - 80.000 255 5,745,449.05 3.10
80.001 - 90.000 143 3,924,040.69 2.12
90.001 - 100.000 5,928 173,458,482.70 93.73
100.001 - 103.000 32 744,079.92 0.40
- -------------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
=======================================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Credit Limit Utilization: 0.000%
Maximum Credit Limit Utilization: 101.246%
Average Credit Limit Utilization: 96.046%
</TABLE>
MORTGAGE LOAN COUPON RATES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT OF POOL BY
MORTGAGE LOAN COUPON RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7.001 - 8.000% 27 $ 1,436,760.46 0.78%
8.001 - 9.000 122 4,780,754.25 2.58
9.001 - 10.000 395 12,741,416.60 6.88
10.001 - 11.000 669 19,251,855.22 10.40
11.001 - 12.000 1,110 33,924,816.86 18.33
12.001 - 13.000 1,385 40,747,194.17 22.02
13.001 - 14.000 1,628 43,090,561.26 23.28
14.001 - 15.000 1,056 25,300,015.18 13.67
15.001 or greater 140 3,807,200.03 2.06
- ------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
================================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Mortgage Loan Coupon Rate: 7.250%
Maximum Mortgage Loan Coupon Rate: 18.750%
Weighted Average Mortgage Loan Coupon
Rate: 12.516%
</TABLE>
MAXIMUM MORTGAGE LOAN COUPON RATES
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF PERCENT OF POOL BY
MORTGAGE LOAN COUPON RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
14.001 - 15.000% 1 $ 13,200.00 0.01%
15.001 - 16.000 64 2,451,189.63 1.32
16.001 - 17.000 122 4,802,911.13 2.60
17.001 - 18.000 525 16,003,681.70 8.65
18.001 - 19.000 649 18,802,652.38 10.16
19.001 - 20.000 980 29,818,424.40 16.11
20.001 - 21.000 1,491 41,969,146.59 22.68
21.001 - 22.000 2,458 66,255,422.75 35.79
22.001 - 23.000 207 4,239,467.75 2.29
23.001 or greater 35 724,477.70 0.39
- --------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
==================================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Mortgage Loan Coupon Rate: 14.25%
Maximum Mortgage Loan Coupon Rate: 24.00%
Weighted Average Maximum Mortgage Loan
Coupon Rate: 20.30%
</TABLE>
S-20
<PAGE> 21
DISTRIBUTION OF INTEREST RATE MARGINS
ABOVE INDEX
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
RANGE OF MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0.000 - 1.000% 139 $ 5,924,915.55 3.20%
1.001 - 1.500 153 4,922,757.98 2.66
1.501 - 2.000 238 7,768,330.32 4.20
2.001 - 2.500 255 8,209,716.30 4.44
2.501 - 3.000 408 10,856,187.15 5.87
3.001 - 3.500 339 10,535,648.97 5.69
3.501 - 4.000 759 23,040,909.48 12.45
4.001 - 4.500 567 16,285,947.49 8.80
4.501 - 5.000 827 24,815,781.39 13.40
5.001 - 5.500 678 16,896,871.59 9.13
5.501 - 6.000 941 25,951,867.37 14.01
6.001 - 6.500 818 19,222,149.04 10.39
6.501 - 7.000 252 6,324,115.48 3.42
7.001 or greater 158 4,325,375.92 2.34
- ----------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
==============================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Margin: 0.000%
Maximum Margin: 10.750%
Weighted Average Margin: 4.544%
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
RANGE OF COMBINED NUMBER OF PERCENT OF POOL BY
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0.00 - 50.00% 136 $ 3,985,109.19 2.15%
50.01 - 80.00 667 21,380,249.96 11.55
80.01 - 90.00 954 28,299,204.05 15.29
90.01 - 100.00 3,082 72,953,059.69 39.42
100.01 - 125.00 1,693 58,462,951.14 31.59
- --------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
============================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum CLTV: 6.90%
Maximum CLTV: 125.00%
Weighted Average CLTV: 98.29%
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
RANGE OF MONTHS REMAINING NUMBER OF PERCENT OF POOL BY
TO SCHEDULED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than 228 1 $ 35,349.08 0.02%
229 - 234 25 853,866.01 0.46
235 - 240 322 8,804,731.76 4.76
253 - 258 2 5,425.21 0.00
259 - 264 27 272,073.31 0.15
265 - 270 87 1,885,390.75 1.02
271 - 276 6,068 173,223,737.91 93.59
- -------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
=================================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Remaining Term: 226 months
Maximum Remaining Term: 276 months
Weighted Average Remaining Term: 272 months
</TABLE>
S-21
<PAGE> 22
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS ELAPSED NUMBER OF PERCENT OF POOL BY
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0 - 6 6,403 $ 182,387,251.26 98.54%
7 - 12 113 2,600,826.57 1.41
13 - 18 14 87,070.99 0.05
19 or greater 2 5,425.21 0.00
- -------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
===========================================================================================
</TABLE>
<TABLE>
<S> <C>
Minimum Seasoning: 0 months
Maximum Seasoning: 20 months
Weighted Average Seasoning: 2 months
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL BY
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current 6,309 $ 179,278,062.24 96.87%
1 - 29 185 4,691,589.44 2.53
30 - 59 38 1,110,922.35 0.60
- -------------------------------------------------------------------------------------------------
TOTAL 6,532 $ 185,080,574.03 100.00%
=================================================================================================
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
During the pre-funding period, the trust may acquire, with the consent
of Ambac Assurance Corporation, approximately $104,500,000 aggregate principal
balance of mortgage loans. Accordingly, the characteristics of the mortgage
loans will vary following the acquisition by the trust of these additional
mortgage loans.
Each individual subsequent mortgage loan must:
- - have a margin of at least 1.00%;
- - have a combined loan-to-value ratio not higher than 125.00%;
- - have a maturity date not later than January 2023; and
- - have a principal balance not greater than $200,000.00.
MATURITY AND PREPAYMENT CONSIDERATIONS
The weighted average life of the notes may be affected by: (i) the rate
and timing of payments of principal on the mortgage loans; (ii) prepayments and
amounts received by virtue of refinancings, liquidations of mortgage loans due
to defaults, casualties, condemnations and repurchases; (iii) the rate at which
mortgagors make draws; (iv) the amount and timing of delinquencies and defaults
by mortgagors; and (v) the application of Accelerated Principal Payments on the
notes.
The effective yield of the notes may be affected by a higher or lower
than anticipated rate of principal payments, including prepayments, on the
mortgage loans. The rate of principal payments on the mortgage loans will be
affected by: (i) the length of the draw period; (ii) the amortization schedules
of the mortgage loans; (iii) the rate and timing of prepayments by the
mortgagors; (iv) the enforcement, or lack of enforcement, of due-on-sale
clauses;
S-22
<PAGE> 23
(v) liquidation of defaulted mortgage loans and (vi) optional or required
repurchases of mortgage loans. The timing of changes in the rate of principal
payments and the timing of losses could significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Since the rate and timing of
principal payments on the mortgage loans will depend on future events and on a
variety of factors, no assurance can be given as to the rate or the timing of
prepayments on the notes.
The mortgage loans generally may be prepaid in full or in part at any
time. Some of the mortgage loans may be subject to termination fees, which in
most instances do not exceed $500. Any termination fees paid by the mortgagor
will be retained by the master servicer as servicing compensation.
The actual rate of prepayments on pools of mortgage loans is influenced
by a variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of prepayments may differ among pools of mortgage loans at any time because of
specific factors relating to the mortgage loans in the particular pool.
No one can accurately determine in advance the rate of principal
payments on the mortgage loans, or the yield to maturity of the notes. We
suggest that you make your investment decision based on your own determination
as to anticipated mortgage loan prepayment rates and the effect of those
prepayment rates on the yield of the notes. In addition, investors should
carefully consider the factors discussed under "Risk Factors -- Prepayments
Affect Timing and Rate of Return on Your Investment" in this prospectus
supplement.
THE NOTES
On each payment date, the noteholders will be entitled to receive the
Scheduled Principal Distribution Amount for that payment date. See "Description
of the Notes -- Payment of Principal" in this prospectus supplement.
The notes will be likely, over time, to represent a declining
percentage of the pool. This is because payments of principal are based on a
fixed allocation percentage of 95%, which is larger than the actual percentage
of the pool represented by the notes. This results, in most cases, in larger
distributions of principal to the holders than they would receive if they
received the actual percentage of the amortizing balance of the pool represented
by their notes. This is especially true during the rapid amortization period. In
addition, the holders may receive a payment of Excess Cashflow as an Accelerated
Principal Payment on any payment date if the Specified Overcollateralization
Amount exceeds the Overcollateralization Amount.
If mortgagors make more draws than principal payments during any month,
the Pool Balance may grow and Principal Collections which are paid through to
the noteholders will also grow. Even if the Pool Balance backing the notes
increases, we cannot issue more notes, so the noteholders of the notes will
receive principal at a faster rate. Although, if the Pool Balance grows, the
sponsor or the originators may remove mortgage loans from the pool at any time
during the life of the trust, so long as the dollar amount of the
Overcollateralization Amount exceeds the then Specified Overcollateralization
Amount. These removals may affect the rate at which principal is distributed to
the noteholders by reducing the overall Pool Balance and thus the amount of
Principal Collections. See "Description of the Notes -- Optional Transfers of
Mortgage Loans to the Sponsor or the Related Originator" in this prospectus
supplement.
EFFECT OF OVERCOLLATERALIZATION FEATURE
All or a portion of the Excess Cashflow may be applied as an
Accelerated Principal Payment in reduction of the outstanding Note Balance to
the extent the Specified Overcollateralization Amount exceeds the
Overcollateralization Amount. Until the Specified Overcollateralization Amount
is reached, Accelerated Principal Payments attributable to the
overcollateralization feature are derived, in part, from interest collections on
the mortgage loans and will be applied to reduce the outstanding Note Balance.
Therefore, the aggregate payments in reduction of the outstanding Note Balance
on a payment date will usually be greater than the aggregate amount of Principal
Collections, including prepayments, paid during the Remittance Period. As a
result, to the extent the Excess Cashflow is not applied to offset losses on
mortgage loans, Excess Cashflow available for payment in
S-23
<PAGE> 24
reduction of the outstanding Note Balance will increase in proportion to the
outstanding Note Balance over time. The amount of Accelerated Principal Payments
will influence the weighted average life of the notes.
If a note is purchased at other than par, its yield to maturity will be
affected by the rate at which Accelerated Principal Payments are paid to the
noteholders. If the actual rate of Accelerated Principal Payments on the notes
applied in reduction of the outstanding Note Balance is slower than the rate
anticipated by an investor who purchases a note at a discount, the actual yield
to the investor will be lower than the investor's anticipated yield. If the
actual rate of Accelerated Principal Payments applied in reduction of the
outstanding Note Balance is faster than the rate anticipated by an investor who
purchases a note at a premium, the actual yield to the investor will be lower
than the investor's anticipated yield. The amount of Excess Cashflow which is
available to fund Accelerated Principal Payments on any payment date will be
affected by, among other things, the actual amount of interest received,
collected or recovered in respect of the mortgage loans during the Remittance
Period and the amount will be influenced by changes in LIBOR.
The Specified Overcollateralization Amount may decrease or increase
over time subject to floors, caps and triggers. Any increase in the Specified
Overcollateralization Amount may result in an accelerated amortization of the
notes until the Specified Overcollateralization Amount is reached.
THE PRE-FUNDING ACCOUNT
The sponsor will cause the pre-funding account to be established in the
name of the indenture trustee on the closing date and the indenture trustee will
deposit approximately $104,500,000 in the pre-funding account from the net
proceeds of the sale of the notes. With these funds, the trust will purchase
subsequent mortgage loans upon instruction of the sponsor until the earlier of:
- the date on which the amount on deposit in the pre-funding
account is less than $100,000;
- January 17, 2000; and
- the occurrence of an event of default or a rapid amortization
event under the indenture.
After one of these events occurs, the pre-funding period will end and
any amounts on deposit in the pre-funding account will be distributed on the
notes as a prepayment of principal.
The pre-funding account will be an asset of the trust, but the amounts
on deposit in the account will not be available to cover losses on or in respect
of the mortgage loans. The amounts on deposit in the pre-funding account will be
invested as provided in the indenture. Any net investment income on the amount
on deposit in the pre-funding account will be deposited into the note account.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the indenture trustee will make a cash deposit to
the capitalized interest account from the proceeds of the sale of the notes. On
each payment date during the pre-funding period, the indenture trustee will
transfer the Capitalized Interest Requirement from the capitalized interest
account to the note account.
OPTIONAL REDEMPTION
The notes will be subject to optional redemption by the master servicer
or a master servicer affiliate on any payment date after the Note Balance is
reduced to an amount less than or equal to 10% of the Original Note Balance. The
first payment date on which an optional redemption may be exercised is referred
to as the Clean-Up Call Date. This optional redemption will only occur if the
trust property is sold on behalf of the trust for a price at least equal to the
sum of the (i) outstanding Note Balance and accrued and unpaid interest at the
Note Interest Rate through the day preceding the final payment date, and (ii)
all amounts due and owing to the insurer.
S-24
<PAGE> 25
DECREMENT TABLE
The following table is based on (i) a constant draw rate, which for
purposes of the assumptions is the amount of Additional Balances on the mortgage
loans drawn each month expressed as an annual percentage of the total principal
of the pool of mortgage loans outstanding at the beginning of each month and
(ii) the CPR, or conditional prepayment rate, which is a prepayment assumption,
representing an assumed rate of prepayment relative to the then-outstanding
principal balance on a pool of new loans. For example, 0% CPR indicates no
prepayments, 5% indicates prepayments at an annual rate of 5%, and so on.
For the purposes of the table below, we have assumed:
- - the pool of mortgage loans consists of three representative groups of
loans, with the mortgage loans in each group having the following
aggregate characteristics as of the cut-off date:
<TABLE>
<CAPTION>
ORIGINAL REMAINING
NET AMORTIZATION TERM TO DRAW
PRE-FUNDING COUPON TERM MATURITY PERIOD GROSS
LOAN TYPE PERIOD PRINCIPAL BALANCE RATE (MONTHS) (MONTHS) (MONTHS) MARGIN
---- ---- ------ ----------------- ---- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 ARM 0 $185,080,574.03 11.7659% 274 272 37 4.5443%
2 ARM 2 $ 52,196,555.09 11.7659% 274 274 37 4.5443%
3 ARM 4 $ 52,196,555.09 11.7659% 274 274 37 4.5443%
</TABLE>
- - that distributions of principal and interest on the notes will be made
on the 25th day of each calendar month regardless of the day the
payment date actually occurs,
- - no extension past the scheduled maturity date of a mortgage loan is
made,
- - no delinquencies occur,
- - scheduled monthly payments on the mortgage loans are comprised of
interest-only payments,
- - the only principal payments on the mortgage loans are those represented
by prepayments calculated under each of the prepayment assumptions as
set forth in the tables below before giving effect to draws,
- - monthly draws occur before giving effect to prepayments,
- - the scheduled due date of the mortgage loans is the twenty-fifth day of
each month, each month consists of 30 days, the closing date is
September 28, 1999,
- - for each payment date the Note Interest Rate is 5.75%, and
- - the prime rate remains constant at 8.25%.
The foregoing assumptions do not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of the mortgage loans. There will be discrepancies between the characteristics
of the actual mortgage loans and the characteristics assumed in preparing the
following table. Any discrepancy may have an effect upon the weighted average
life of the notes set forth in the table. In addition, since the actual mortgage
loans will have characteristics that differ from those assumed in preparing the
table set forth below, the notes may mature earlier or later than indicated by
the table. Variations in the prepayment experience and the principal balance of
the mortgage loans that prepay may increase or decrease the percentages of
Original Note Balance, and weighted average lives, shown in the following table.
These variations may occur even if the average prepayment experience of all
these mortgage loans equals any of the specified CPR percentages.
S-25
<PAGE> 26
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL NOTE BALANCE
AMORTIZATION SCHEDULE
CONDITIONAL PREPAYMENT RATE (%CPR)
------------------------------------------------------------------
PAYMENT DATE 10% 20% 25% 30% 35% 40% 45%
------------ --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100 100 100 100 100 100 100
9/25/00............................... 88 78 74 69 64 58 53
9/25/01............................... 82 63 55 46 39 31 25
9/25/02............................... 77 51 40 31 22 15 9
9/25/03............................... 69 41 32 24 18 13 0
9/25/04............................... 61 33 24 17 12 0 0
9/25/05............................... 53 26 18 12 0 0 0
9/25/06............................... 47 21 13 0 0 0 0
9/25/07............................... 41 17 10 0 0 0 0
9/25/08............................... 38 13 0 0 0 0 0
9/25/09............................... 35 11 0 0 0 0 0
9/25/10............................... 31 0 0 0 0 0 0
9/25/11............................... 28 0 0 0 0 0 0
9/25/12............................... 25 0 0 0 0 0 0
9/25/13............................... 23 0 0 0 0 0 0
9/25/14............................... 20 0 0 0 0 0 0
9/25/15............................... 18 0 0 0 0 0 0
9/25/16............................... 17 0 0 0 0 0 0
9/25/17............................... 15 0 0 0 0 0 0
9/25/18............................... 13 0 0 0 0 0 0
9/25/19............................... 12 0 0 0 0 0 0
9/25/20............................... 11 0 0 0 0 0 0
9/25/21............................... 0 0 0 0 0 0 0
9/25/22............................... 0 0 0 0 0 0 0
9/25/23............................... 0 0 0 0 0 0 0
Weighted Average Life to Redemption (in years) 8.6 4.1 3.1 2.5 2.1 1.7 1.3
Weighted Average Life to Maturity (in years) 8.7 4.4 3.4 2.8 2.3 1.9 1.6
</TABLE>
All percentages in the above table are rounded to the nearest 1%. The
calculation of weighted average life to redemption assumes that optional
redemption, when the Note Balance equals 10% of the Original Note Balance, is
exercised on the first possible payment date and a constant draw rate of 5%.
The calculation of the weighted average life to maturity assumes that the
notes pay to maturity and a constant draw rate of 5%.
S-26
<PAGE> 27
DESCRIPTION OF THE NOTES
The notes will be issued in minimum denominations of $1,000 and
multiples of $1 in excess of the minimum denominations. Physical notes, if
issued, will be transferable and exchangeable at the corporate trust office of
the registrar, which is the indenture trustee, until the indenture trustee
appoints a successor acceptable to the insurer. No service charge will be made
for any registration of exchange or transfer of notes, but the indenture trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE SPONSOR OR THE RELATED ORIGINATOR
Upon notice to the insurer and subject to the conditions of the sale
and servicing agreement, on any payment date, the sponsor or either originator
may, but shall not be obligated to, except upon a breach of a representation or
warranty, remove from the trust a portion of the mortgage loans without notice
to the noteholders. The sponsor or the originator is permitted to designate the
mortgage loans to be removed. Mortgage loans so designated will only be removed
upon satisfaction of conditions specified in the sale and servicing agreement,
including: (i) the Overcollateralization Amount as of the payment date, after
giving effect to the removal, equals or exceeds the Specified
Overcollateralization Amount; (ii) the sponsor or the originator shall represent
and warrant that random selection procedures were used in selecting the mortgage
loans and no other selection procedures which are adverse to the interests of
the noteholders or the insurer were used by the sponsor or the originator in
selecting the mortgage loans; and (iii) no Rapid Amortization Event has occurred
or will occur as a result of the removal.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO PRINCIPAL AND INTEREST ACCOUNT
All collections on the mortgage loans will be allocated in accordance
with the terms of the credit line agreements between amounts collected as
payment of fees, interest and principal. As to any payment date, Interest
Collections will be equal to the amounts collected and allocated as interest
during the Remittance Period, including the portion of Net Liquidation Proceeds
allocable to interest. For mortgage loans that are 180 or more days delinquent,
total Net Liquidation Proceeds will be treated as Interest Collections.
As to any payment date, Principal Collections will be equal to the
amounts collected as payment of principal during the Remittance Period,
including the portion of Net Liquidation Proceeds allocated to principal under
the terms of the credit line agreements. Any recoveries made with respect to
mortgage loans that are 180 or more days delinquent will be treated as Interest
Collections, with the result that those amounts will be available to restore or
maintain the required overcollateralization.
Net Liquidation Proceeds for a mortgage loan are equal to the
Liquidation Proceeds, reduced by out-of-pocket expenses and advances. Net
Liquidation Proceeds do not include any amounts in excess of the sum of the
Principal Balance of the mortgage loan and any accrued and unpaid interest to
the end of the Remittance Period during which the mortgage loan became a
Liquidated Mortgage Loan.
The master servicer will deposit Interest Collections and Principal
Collections in an account in the name of the trust known as the principal and
interest account.
The indenture trustee will deposit amounts received from the master
servicer on the determination dates, any amount required to be transferred from
the Capitalized Interest Account, investment earnings on the amount on deposit
in the pre-funding account, any amounts remaining on deposit in the pre-funding
account following the end of the pre-funding period, and any amounts drawn under
the policy into an account in the name of the trust known as the note account.
DISTRIBUTIONS ON THE NOTES
Beginning with the first payment date, which will occur on October 25,
1999, distributions on the notes will be made by the indenture trustee on each
payment date to the persons in whose names the notes are registered at the close
of business on the record date. The record date will be the Business Day
immediately preceding the payment date. Payment dates occur on the twenty-fifth
day of each month or, if the day is not a Business Day, then
S-27
<PAGE> 28
the following Business Day. Distributions will be made by check, wire transfer,
or otherwise upon the request of an owner owning notes having denominations
aggregating at least $1,000,000 and notice received by the indenture trustee at
least five Business Days prior to the record date. The final distribution in
respect of the notes will be made only upon presentation and surrender of the
notes at the office or the agency of the indenture trustee specified in the
notice to holders of the final distribution.
OVERCOLLATERALIZATION FEATURE
The Overcollateralization Amount is equal to the amount by which the
Pool Balance exceeds the Note Balance. The insurer will require that the
Overcollateralization Amount be maintained at the Specified
Overcollateralization Amount.
The Overcollateralization Amount for the notes as of the closing date
will be less than the initial Specified Overcollateralization Amount, thus
requiring an increase in the Overcollateralization Amount on future payment
dates until the Overcollateralization Amount equals the Specified
Overcollateralization Amount.
Excess Cashflow will equal the sum of (i) the excess of Interest
Collections on the mortgage loans over the sum of interest payable for the notes
and fees, plus (ii) Principal Collections not required to be applied to
principal amortization for the notes or to Reimbursement Amounts. Excess
Cashflow will be applied as a payment of principal on the notes on each payment
date to maintain the Overcollateralization Amount, or to increase it to the
Specified Overcollateralization Amount. The amount of the Excess Cashflow
applied as a payment of principal on a payment date is an Accelerated Principal
Payment. The requirement to maintain the Overcollateralization Amount at the
Specified Overcollateralization Amount, or to increase it to the Specified
Overcollateralization Amount, is not an obligation of the sponsor, the
originators, Advanta Holding Trust 1999-B, the master servicer, the insurer, the
indenture trustee, the owner trustee or any other person.
The insurer may permit the Specified Overcollateralization Amount to
decrease or step down over time, subject to floors and triggers. The dollar
amount of any decrease in the Specified Overcollateralization Amount is an
Overcollateralization Reduction Amount which may result in the removal of cash
or mortgage loans from the lien of the trust on payment dates occurring after
the step-downs take effect. The dollar amount of any Overcollateralization
Reduction Amount will be released to the certificateholders from the monthly
cashflow, which will reduce the Overcollateralization Amount.
INTEREST DISTRIBUTIONS
Interest on the notes will be payable monthly on each payment date,
commencing on October 25, 1999. On each payment date, noteholders are entitled
to the Interest Distribution Amount, the Interest Shortfall Amount, and to the
extent funds are available, the Net Funds Cap Carry-Forward Amount.
For any payment date, the Interest Distribution Amount is the interest
then due on the notes, calculated using the Note Interest Rate.
The Note Interest Rate for an Interest Accrual Period is equal to the
lesser of:
- - the Formula Rate, which is the per annum rate equal to (x) for any
payment date which occurs on or prior to the Clean-Up Call Date, the
sum of LIBOR and 0.37% and (y) for any payment date thereafter, the sum
of LIBOR and 0.74%, and
- - the Net Funds Cap Rate, which is the per annum rate equal to (x) (A)
the interest due on the mortgage loans during the prior Remittance
Period, minus the sum of the amount of Prepayment Interest Shortfalls,
the Relief Act Shortfalls, the servicing fee, the indenture trustee
fee, the owner trustee fee and the insurer premium, divided by (B) the
Pool Balance as of the opening of the prior Remittance Period, less (y)
0.50%.
For any payment date, the Interest Shortfall Amount is equal to the sum
of (1) the amount by which the Interest Distribution Amount on the date exceeded
the actual amount distributed as an interest payment on the date
S-28
<PAGE> 29
and (2) any unreimbursed Interest Shortfall Amounts from prior payment dates
together with interest thereon at the Note Interest Rate.
CARRY-FORWARD FEATURE.
On any payment date when the Net Funds Cap Rate is less than the
Formula Rate, the excess of the amount of interest due, calculated at the
Formula Rate, over the interest due calculated at the Net Funds Cap Rate,
together with interest at the then-applicable Formula Rate, will be
carried-forward and paid, to the extent of available funds, on future payment
dates. None of the insurer, the sponsor, or the master servicer guarantees the
payment of, nor do the ratings assigned to the notes address the likelihood of
payment of, any Net Funds Cap Carry-Forward Amount.
INTEREST ACCRUAL PERIOD.
Interest on the notes for any payment date will accrue from the
preceding payment date, or in the case of the first payment date, from the
closing date, through the day preceding the payment date, this is known as the
Interest Accrual Period. Interest on the notes will be based on the actual
number of days in the Interest Accrual Period and a 360-day year.
CALCULATION OF THE LIBOR RATE FOR THE NOTES
On each Interest Determination Date, which is the second business day
preceding each payment date or, in the case of the first payment date, on the
second business day preceding the closing date, the indenture trustee will
determine the London interbank offered rate for one-month U.S. dollar deposits,
or LIBOR, for the next Interest Accrual Period. LIBOR will be established on the
basis of the offered rates of the Reference Banks for one-month U.S. dollar
deposits, as they appear on the Telerate Screen 3750, as of 11:00 a.m., London
time. As used in this section, business day means a day on which banks are open
for dealing in foreign currency and exchange in London and New York City; and
Reference Banks means leading banks, selected by the indenture trustee after
consultation with the master servicer, which are engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (1) with an
established place of business in London, (2) which have been designated by the
indenture trustee after consultation with the master servicer and (3) which are
not controlling, controlled by, or under common control with, the sponsor.
On each Interest Determination Date, the indenture trustee will
determine LIBOR for the Interest Accrual Period as follows:
first, on the basis of offered rates for one month United States dollar
deposits, as this rate appears on Telerate page 3750, as of 11:00 am London
time;
second, if the rate does not appear on Telerate Page 3750 as of 11:00
am London time, LIBOR will be the arithmetic mean of the offered quotations of
two or more Reference Banks, rounded to the nearest whole multiple of 1/16%; and
third, if on the Interest Determination Date fewer than two Reference
Banks provide offered quotations, LIBOR for the Interest Accrual Period will be
the higher of (x) LIBOR as determined on the previous Interest Determination
Date and (y) the Reserve Interest Rate.
The Reserve Interest Rate is the rate per annum that the indenture
trustee determines to be either the arithmetic mean, rounded to the nearest
whole multiple of 1/16%, of the one-month U.S. dollar lending rates which New
York City banks selected by the indenture trustee are quoting on the Interest
Determination Date to the principal London offices of leading banks in the
London interbank market or, in the event that the indenture trustee cannot
determine the arithmetic mean, the lowest one-month U.S. dollar lending rate
which New York City banks selected by the indenture trustee are quoting on the
Interest Determination Date to leading European banks.
The establishment of LIBOR on each Interest Determination Date by the
indenture trustee and the indenture trustee's calculation of the rate of
interest applicable to the notes for the related Interest Accrual Period
S-29
<PAGE> 30
will, in the absence of manifest error, be final and binding. Each rate of
interest may be obtained by telephoning the indenture trustee at 1-800-735-7777.
PAYMENT OF PRINCIPAL
SCHEDULED PRINCIPAL. On each payment date, the noteholders will be
entitled to receive the Scheduled Principal Distribution Amount for the payment
date.
The term of the notes has been divided into two periods, the managed
amortization period and the rapid amortization period. The managed amortization
period is the period commencing on the initial payment date, and ending on the
earlier to occur of (x) the September 2002 payment date and (y) the payment date
which immediately precedes the occurrence of a Rapid Amortization Event. The
rapid amortization period is the period which follows the end of the managed
amortization period. The amount of principal the noteholders will be entitled to
receive varies depending on whether the payment date occurs during the managed
amortization period or rapid amortization period.
The Scheduled Principal Distribution Amount equals:
(A) on any payment date during the managed amortization
period, the excess of (x) the lesser of (1) the maximum principal
payment and (2) the Net Principal Collections over (y) the
Overcollateralization Reduction Amount, if any, or
(B) on any payment date during the rapid amortization period,
the excess of (x) the maximum principal payment over (y) the
Overcollateralization Reduction Amount, if any, for the payment date.
For any payment date, the maximum principal payment will equal 95%, the
fixed allocation percentage, of the Principal Collections. For any payment date,
the Net Principal Collections is the excess of (x) Principal Collections over
(y) the aggregate principal amount of all Additional Balances arising during the
Remittance Period; although in no event will Net Principal Collections be less
than zero. The aggregate principal distributions to the noteholders will not
exceed the Original Note Balance.
In addition, on the Final Scheduled Payment Date, which is the January
2024 payment date, the noteholders will be entitled to receive a payment of
principal in an amount equal to the outstanding Note Balance. The final
scheduled payment date is the twelfth payment date following the latest maturity
date of a mortgage loan which amortizes according to its terms.
RAPID AMORTIZATION EVENTS
A Rapid Amortization Event refers to any of the following events:
(a) failure on the part of sponsor or the master servicer (1) to make a
payment or deposit required under the sale and servicing agreement
within five Business Days after the date the payment or deposit is
required to be made or (2) to observe or perform in any material
respect any other covenants or agreements of the sponsor set forth in
the sale and servicing agreement, which failure continues unremedied
for a period of 60 days after written notice;
(b) any representation or warranty made by the sponsor in the sale and
servicing agreement proves to have been incorrect in any material
respect when made and continues to be incorrect in any material respect
for a period of 60 days after receipt of written notice and as a result
of which the interests of the noteholders or the insurer are materially
and adversely affected; a Rapid Amortization Event will not occur if
the representation and warranty relates to a mortgage loan and the
sponsor has purchased or made a substitution for the mortgage loan
during the period, or within an additional 60 days with the consent of
the indenture trustee and the insurer, in accordance with the
provisions of the sale and servicing agreement;
S-30
<PAGE> 31
(c) the occurrence of events of bankruptcy, insolvency or receivership
relating to the originators or the sponsor;
(d) the trust becomes subject to regulation by the Securities and Exchange
Commission as an investment company within the meaning of the
Investment Company Act of 1940;
(e) the occurrence of an event permitting the removal of the master
servicer. See "Provisions of the Agreements --Matters Regarding the
Master Servicer" in this prospectus supplement;
(f) a draw under the certificate guaranty insurance policy; and
(g) a default in the payment of any interest on the notes when the same
becomes due and payable, and the default continues for a period of five
Business Days.
EVENTS OF DEFAULT UNDER THE INDENTURE
The following constitute Events of Default under the indenture:
(i) a default in the payment of any interest when the same
becomes due and payable and continuance of the default for a period of
five days or a default in the payment in full of the Note Balance on
the final scheduled payment date;
(ii) failure on the part of the trust to perform in any
material respect any covenant or agreement under the indenture, other
than a covenant covered in the above bullet, or the breach of a
representation or warranty of the trust, which continues for a period
of thirty days after notice is given; and
(iii) events of bankruptcy, insolvency, receivership or
liquidation of the trust.
At the direction of noteholders evidencing at least 51% of the Note
Balance, the indenture trustee shall, at the direction of the insurer, or with
the consent of the insurer, so long as a default by the insurer shall not have
occurred and be continuing, declare an Event of Default upon the occurrence of
any of the above events.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the indenture has occurred and is
continuing, the indenture trustee (i) may, with the consent of the insurer, so
long as a default by the insurer shall not have occurred and be continuing, or
(ii) shall, (x) at the direction of the insurer, so long as a default by the
insurer shall not have occurred and be continuing, or (y) upon the direction of
noteholders representing not less than 51% of the aggregate Note Balance, with
the written consent of the insurer so long as a default by the insurer shall not
have occurred and be continuing, declare the principal amount of the notes due
and payable immediately. This declaration may be rescinded by the insurer or
noteholders representing at least 51% of the aggregate Note Balance, with the
written consent of the insurer so long as a default by the insurer shall not
have occurred and be continuing.
If the principal of the notes has been declared due and payable as
described in the preceding paragraph, the indenture trustee, at the direction of
the insurer, so long as a default by the insurer shall not have occurred and be
continuing, may institute proceedings to collect all amounts payable on the
notes, sell the assets of the trust or refrain from selling the assets of the
trust.
FLOW OF FUNDS
The indenture trustee shall deposit into the note account, without
duplication, upon receipt: (i) any Insured Payments, (ii) the proceeds of any
final liquidation of the assets of the trust, (iii) the Principal Collections
and the Interest Collections, (iv) any Capitalized Interest Requirement, (v)
investment earnings on amounts on deposit in the pre-funding account, (vi)
amounts on deposit in the pre-funding account following the end of the
pre-funding period, and (vii) any other amounts remitted by the master servicer
or any sub-servicer.
S-31
<PAGE> 32
On each payment date, to the extent of Available Funds and to the
extent these amounts are due on that payment date, the indenture trustee shall
make the following allocations, disbursements and transfers in the following
order of priority. Each allocation, transfer and disbursement shall be treated
as having occurred only after all preceding allocations, transfers and
disbursements have occurred:
(i) to the indenture trustee, the indenture trustee fee and to
the owner trustee, the owner trustee fee;
(ii) to the insurer the premium due;
(iii) to the noteholders, the Interest Distribution Amount for
the payment date;
(iv) to the noteholders, the Interest Shortfall Amount, if
any;
(v) to the noteholders as a distribution of principal, the
Scheduled Principal Distribution Amount;
(vi) to the noteholders as a distribution of principal, any
amount remaining on deposit in the pre-funding account following the
end of the pre-funding period;
(vii) to the noteholders, as a distribution of principal, an
amount equal to the Overcollateralization Deficit for the payment date;
(viii) to the insurer, the Reimbursement Amount, if any;
(ix) to the noteholders, the Accelerated Principal Payment, if
any;
(x) to the noteholders, the amount of any Net Funds Cap
Carry-Forward Amount;
(xi) to the master servicer, reimbursement for Servicing
Advances to the extent not previously reimbursed and reimbursement for
Servicing Advances which have become non-recoverable;
(xii) to the indenture trustee and the owner trustee expenses
due; and
(xiii) to the certificateholders, any amount remaining on
deposit in the note account.
Servicing Advances are any out-of-pocket costs and expenses, incurred
by the master servicer in the performance of its servicing obligations,
including, but not limited to,
(i) expenditures in connection with a foreclosed Mortgage Loan
prior to the liquidation of the mortgage loan, including expenditures
for real estate property taxes, hazard insurance premiums and property
restoration or preservation,
(ii) the cost of any enforcement or judicial proceedings,
including (a) foreclosures, and (b) other legal actions and costs
associated therewith that potentially affect the existence, validity,
priority, enforceability or collectability of the mortgage loans,
including collection agency fees and costs of pursuing or obtaining
personal judgments, garnishments, levies, attachment and similar
actions,
(iii) the cost of the conservation, management, liquidation,
sale or other disposition of any Mortgaged Property acquired in
satisfaction of the mortgage loan, including reasonable fees paid to any
independent contractor in connection therewith, and
(iv) advances to keep senior liens current unless the master
servicer has determined that the advance would not be recoverable.
S-32
<PAGE> 33
In the event of a delinquency or default on a mortgage loan, neither
the master servicer nor any sub-servicer will have any obligation to advance
scheduled monthly payments of principal and interest, nor will the master
servicer or any sub-servicer have an obligation to make up any Prepayment
Interest Shortfall.
THE INSURER AND THE POLICY
THE INSURER
The following information has been supplied by Ambac Assurance
Corporation for inclusion in this prospectus supplement. No representation is
made by the sponsor, the originators, the master servicer, the underwriters or
any of their affiliates as to the accuracy or completeness of this information.
Ambac Assurance Corporation is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. Ambac
Assurance Corporation primarily insures newly issued municipal and structured
finance obligations. Ambac Assurance Corporation is a wholly-owned subsidiary of
Ambac Financial Group, Inc., a 100% publicly-held company. Moody's, Standard &
Poor's and Fitch IBCA, Inc., have each assigned a triple-A financial strength
rating to Ambac Assurance Corporation.
The consolidated financial statements of the insurer and its
subsidiaries as of December 31, 1998 and December 31, 1997, and for each of the
years in the three-year period ended December 31, 1998, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. - which was filed with the Securities
and Exchange Commission on March 30, 1999; Securities and Exchange Commission
File No. 1-10777 - and the unaudited consolidated financial statements of the
insurer and subsidiaries as of June 30, 1999 and for the periods ending June 30,
1999 and June 30, 1998, included in the Quarterly Report on Form 10-Q of Ambac
Financial Group, Inc. for the period ended June 30, 1999 - which was filed with
the Securities and Exchange Commission on August 13, 1999 - are incorporated by
reference into this prospectus supplement and are deemed to constitute a part of
this prospectus supplement. Any statement contained in a document incorporated
by reference shall be modified or superseded for the purposes of this prospectus
supplement to the extent that a statement contained by reference in this
prospectus supplement also modifies or supersedes that statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus supplement.
All financial statements of the insurer and its subsidiaries included
in documents filed by Ambac Financial Group, Inc. with the Securities and
Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, subsequent to the date of this prospectus supplement and
prior to the termination of the offering of the notes are deemed to be
incorporated by reference into this prospectus supplement and to be a part of
this prospectus supplement from the respective dates of filing the financial
statements.
S-33
<PAGE> 34
The following table sets forth the capitalization of the insurer as of
December 31, 1996, December 31, 1997, December 31, 1998 and June 30, 1999,
respectively, in conformity with generally accepted accounting principles.
<TABLE>
<CAPTION>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998 1999
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums .................................. $ 995 $1,184 $1,303 $1,349
Other liabilities .................................. 259 562 548 413
------ ------ ------ ------
Total liabilities .................................. $1,254 $1,746 $1,851 $1,762
------ ------ ------ ------
Stockholders' equity:(1)
Common stock ..................................... $ 82 $ 82 $ 82 $ 82
Additional paid-in capital ....................... 515 521 541 644
Accumulated other comprehensive income ........... 66 118 138 39
Retained earnings ................................ 992 1,180 1,405 1,530
------ ------ ------ ------
Total stockholders' equity ......................... 1,655 1,901 2,166 2,295
------ ------ ------ ------
Total liabilities and stockholders' equity ......... $2,909 $3,647 $4,017 $4,057
====== ====== ====== ======
</TABLE>
- ----------
(1) Components of stockholder's equity have been restated for all
periods presented to reflect "Accumulated other comprehensive
income" in accordance with the Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income"
adopted by the insurer effective January 1, 1998. As this new
standard only requires additional information on the financial
statements, it does not affect the insurer's financial
position or results of operations.
For additional financial information concerning the insurer, see the
audited and unaudited financial statements of the insurer incorporated by
reference in this prospectus supplement. Copies of the financial statements of
the insurer incorporated by reference in this prospectus supplement and copies
of the insurer's annual statement for the year ended December 31, 1998 prepared
in accordance with statutory accounting standards are available, without charge,
from the insurer. The address of the insurer's administrative offices is One
State Street Plaza, New York, New York 10004 and its telephone number is (212)
668-0340.
The insurer makes no representation regarding the notes or the
advisability of investing in the notes and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the insurer and presented under the heading
"The Insurer and the Policy" in this prospectus supplement and in the financial
statements incorporated in this prospectus supplement by reference.
THE POLICY
The insurer will issue its certificate guaranty insurance policy for
the notes. This policy unconditionally guarantees the payment of Insured
Payments on the notes. The insurer will make each required Insured Payment to
the indenture trustee on the later of (1) the Business Day immediately preceding
the payment date the Insured Payment is distributable to the holders under the
indenture; and (2) the Business Day next following the day the insurer shall
have received telephonic or telegraphic notice, subsequently confirmed in
writing, or written notice by registered or certified mail, from the indenture
trustee, specifying that an Insured Payment is due in accordance with the terms
of the policy.
The insurer's obligation under the policy will be discharged to the
extent that funds are received by the indenture trustee for distribution to the
Holders, whether or not those funds are properly distributed by the indenture
trustee.
For purposes of the policy, Holder as to a particular note, does not
and may not include the trust, the master servicer, the sponsor or the
originators.
S-34
<PAGE> 35
The insurer only insures the timely receipt of interest on the notes,
calculated at the Note Interest Rate, the receipt of the Overcollateralization
Deficit, if any, payable on each payment date on the notes and the principal
balance of the notes on the Final Scheduled Maturity Date. The policy will not
cover the Net Funds Cap Carry-Forward Amount, Prepayment Interest Shortfalls or
Relief Act Shortfalls, nor does the policy guarantee to the Holders of the notes
any particular rate of principal payment. The policy expires and terminates
without any action on the part of the insurer or any other person on the date
that is one year and one day following the date the notes have been paid in
full.
In the absence of payments under the policy, Holders will directly bear
the credit risks associated with their notes.
The policy is non-cancelable.
The policy is issued under and shall be construed under, the laws of
the State of New York, without giving effect to the conflict of laws principles
of the State of New York.
IN THE EVENT THAT THE INSURER WERE TO BECOME INSOLVENT, ANY CLAIMS
ARISING UNDER THE POLICY WOULD BE EXCLUDED FROM COVERAGE BY THE CALIFORNIA
INSURANCE GUARANTY ASSOCIATION, ESTABLISHED UNDER THE LAWS OF THE STATE OF
CALIFORNIA.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
DRAWINGS UNDER THE POLICY
On each determination date the indenture trustee shall determine, for
the next payment date, the Available Funds to be on deposit in the note account
on that payment date, excluding the amounts of the indenture trustee fee, the
owner trustee fee, and the premium payable to the insurer. In relation to each
payment date, the Determination Date is the third Business Day next preceding
that payment date or any earlier day that shall be agreed to by the insurer and
the indenture trustee.
If there is a Deficiency Amount for a payment date, the indenture
trustee shall complete a telephone or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A to the policy, the
original of which is subsequently delivered by registered or certified mail, and
submit the notice to the insurer no later than 12:00 noon New York City time on
the second Business Day preceding the payment date as a claim for an Insured
Payment in an amount equal to the Deficiency Amount.
PROVISIONS OF THE AGREEMENTS
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The master servicer will make reasonable efforts to collect all
payments called for under the mortgage loans and will, consistent with the sale
and servicing agreement, follow the collection procedures that it follows for
its HELOC servicing portfolio. Consistent with this standard, the master
servicer may in its 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 mortgage loans. Subject to the sale and servicing agreement, the master
servicer may increase credit limits and solicit mortgagors for a reduction in
the coupon rate of a mortgage loan and arrange payment schedules with mortgagors
who are delinquent.
TRANSFER OF THE MORTGAGE LOAN FILES
In connection with the sale of the mortgage loans on the closing date
and subsequent transfer dates or on the date specified in the sale and servicing
agreement, the sponsor will be required to deliver or cause to be delivered to
the indenture trustee a mortgage loan file consisting of, among other things,
(i) original or certified copies of credit line agreements, endorsed by the
originator to the order of the indenture trustee; (ii) originals of all
S-35
<PAGE> 36
intervening assignments, showing a complete chain of title, including
warehousing assignments, with evidence of recording; (iii) originals of all
assumption and modification agreements if any; and (iv) either: (a) the original
mortgage, with evidence of recording, (b) a true and accurate copy of the
mortgage where the original has been transmitted for recording, until the
original is returned by the public recording office or (c) a copy of the
mortgage certified by the public recording office in those instances where the
original recorded mortgage has been lost.
The indenture trustee will agree, for the benefit of the noteholders,
to review each file within 90 days after the closing date to ascertain that all
required documents, or certified copies of documents, have been executed and
received.
The sale and servicing agreement requires that there be prepared and
recorded, within 75 business days of the closing date, or, if original recording
information is unavailable, within the later period permitted by the sale and
servicing agreement, assignments of the mortgages from the originators to the
indenture trustee, in the appropriate jurisdictions in which recordation is
necessary to perfect the lien against creditors of or purchasers from the
originators. These requirements may be waived by the insurer.
HAZARD INSURANCE
The master servicer is required to maintain a level of hazard insurance
on the mortgaged properties relating to the mortgage loans. The terms of the
credit line agreements generally require borrowers to maintain hazard insurance.
For any mortgaged property relating to a mortgage loan acquired upon
foreclosure of a mortgage loan, or by deed in lieu of foreclosure, the master
servicer is required to maintain hazard insurance with extended coverage in an
amount equal to the lesser of (a) the maximum insurable value of the mortgaged
property or (b) the credit limit of the mortgage loan. The master servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket insurance policy insuring against losses on the mortgaged properties.
If the blanket policy contains a deductible clause, the master servicer will be
obligated to deposit in the principal and interest account the sums which would
have been deposited in the account if there was no deductibles clause. The
master servicer will satisfy these requirements by maintaining a blanket
insurance policy. All amounts collected by the master servicer, net of any
reimbursements to the master servicer, under any hazard policy, except for
amounts to be applied to the restoration or repair of the mortgaged property,
will ultimately be deposited in the principal and interest account.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The policy of the master servicer is to initiate foreclosure on a
mortgaged property (i) after a loan has become delinquent and, in the judgment
of the master servicer, satisfactory arrangements cannot be made with the
mortgagor; (ii) if a notice of default on a senior lien is received by the
master servicer; (iii) if circumstances are discovered by the master servicer
which would indicate that a potential for loss exists, or (iv) foreclosure
proceedings may be terminated if the delinquency is cured. Mortgage loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of the loans, including any deficiencies.
The master servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of default on a
senior mortgage loan or restoration of any property unless, in its sole
judgment, the foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The master servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to noteholders or the certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For each Remittance Period the master servicer will receive a portion
of the interest collections as a monthly servicing fee. The servicing fee is
equal to 0.75% per annum on the aggregate Principal Balances of the mortgage
loans as of the first day of the Remittance Period, or as of the cut-off date
for the first Remittance Period. All termination fees, prepayment penalties and
fees, assumption fees, late payment charges and other fees and
S-36
<PAGE> 37
charges, to the extent collected from borrowers, will be retained by the master
servicer as additional servicing compensation.
The master servicer will pay the ongoing expenses associated with the
trust and incurred by it in connection with its responsibilities under the sale
and servicing agreement. In addition, the master servicer will be entitled to
reimbursement for its expenses incurred in connection with defaulted mortgage
loans and in connection with the restoration of mortgaged properties; the right
of reimbursement shall be prior to the rights of the noteholders to receive any
Net Liquidation Proceeds.
REPORTS
Monthly reports concerning the trust and the notes will be made
available to the noteholders. In addition, within 60 days after the end of each
calendar year, beginning with the 2000 calendar year, information for tax
reporting purposes will be made available to each person who has been a
noteholder of record at any time during the preceding calendar year.
EVIDENCE AS TO COMPLIANCE
The master servicer is required to deliver to the indenture trustee, on
or before April 15 of each year, beginning on April 15, 2001, an annual
statement signed by an officer of the master servicer to the effect that the
master servicer has fulfilled its material obligations under the sale and
servicing agreement throughout the preceding fiscal year, except as specified in
the statement.
On or before April 15 of each year, beginning April 15, 2001, the
master servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants, who may also render other services to
the master servicer or the originators, to the indenture trustee, the insurer
and the rating agencies to the effect that the firm has examined a sample of the
documents and the records relating to servicing of the mortgage loans under the
sale and servicing agreement and that, on the basis of the examination, the firm
believes that the servicing was conducted in compliance with the sale and
servicing agreement except for (a) the exceptions that the firm believes to be
immaterial and (b) any other exceptions contained in the report.
MATTERS REGARDING THE MASTER SERVICER
The master servicer may not resign from its obligations and duties
thereunder, except in connection with a permitted transfer of servicing, unless
the duties and obligations are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other activities of a
type and nature presently carried on by it as evidenced by an opinion of counsel
delivered to the indenture trustee and the insurer. No resignation will become
effective until the indenture trustee or appointed successor master servicer has
assumed the master servicer's obligations and duties under the sale and
servicing agreement.
The indenture trustee, the noteholders, each with the consent of the
insurer so long as a default by the insurer shall not have occurred and be
continuing, or the insurer, so long as a default by the insurer shall not have
occurred and be continuing, has the right to remove the master servicer upon the
occurrence of any of (a) events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings regarding the master servicer
and actions by the master servicer indicating its insolvency or inability to pay
its obligations; (b) the failure of the master servicer to perform any one or
more of its material obligations under the sale and servicing agreement as to
which the master servicer shall continue in default with respect thereto for a
specified period, generally of sixty days, after notice by the indenture trustee
or the insurer, if required by the sale and servicing agreement; or (c) the
failure of the master servicer to cure any breach of any of its representations
and warranties set forth in the sale and servicing agreement which materially
and adversely affects the interests of the noteholders or the insurer, for a
specified period, generally of sixty days for (a) and (b) and thirty days for
(c), after the master servicer's discovery or receipt of notice.
The insurer may also remove the master servicer upon the occurrence of
any of the following events unless remedied prior to the time frames stipulated:
(i) the failure by the master servicer to make any required Servicing
S-37
<PAGE> 38
Advance which failure continues for thirty days or more after written notice
from the insurer if the failure has a material and adverse effect on Net
Liquidation Proceeds in the sole determination of the insurer; or (ii) the
failure of the master servicer to perform one or more of its material
obligations under the sale and servicing agreement, which failure continues for
sixty days or more after written notice from the insurer; or (iii) certain other
events described in the insurance agreement; or (iv) failure on the part of the
master servicer to make a payment or deposit required under the sale and
servicing agreement within five Business Days after the date the payment or
deposit is required to be made.
AMENDMENTS
The indenture and the sale and servicing agreement may each be amended
by the parties to these agreements, with the prior approval of the insurer, but
without the giving of notice or the receipt of the consent of the noteholders,
for the purposes of curing any ambiguity or correcting or supplementing any
provision which may be inconsistent with any other provision of these
agreements, or complying with the requirements of the code and the regulations
proposed or promulgated thereunder. These amendments may not reduce the
then-current rating on the notes or materially and adversely affect the
interests of any noteholder, without its written consent.
The indenture and the sale and servicing agreement may also be amended
by the parties to these agreements, with the prior written approval of the
insurer and the majority noteholders, for the purpose of adding any provisions,
changing in any matter or eliminating any of the provisions or modifying in any
manner the rights of the noteholders. No amendment shall change the amount of,
or delay the timing of, payments which are required to be distributed to any
noteholders without the consent of the noteholders, or change the percentage of
the noteholders which is required to consent to any amendments, without the
consent of all of the noteholders affected.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A., a national banking
association with its principal corporate trust office in Irvine, California,
will act as the indenture trustee under the indenture.
The indenture trustee may own notes and have normal banking
relationships with the sponsor, the master servicer, the originators and the
insurer and/or their affiliates.
The indenture trustee may resign at any time, in which event the
sponsor will be obligated to appoint a successor indenture trustee, as approved
by the insurer. The sponsor, with the prior written consent of the insurer so
long as a default by the insurer shall not have occurred and be continuing, or
the insurer may also remove the indenture trustee if the indenture trustee
ceases to be eligible to continue under the indenture or if the indenture
trustee becomes insolvent. Upon becoming aware of these circumstances, the
sponsor will be obligated to appoint a successor indenture trustee, as approved
by the insurer. Any resignation or removal of the indenture trustee and
appointment of a successor indenture trustee will not become effective until
acceptance of the appointment by the successor indenture trustee acceptable to
the insurer. If the sponsor fails to fulfill its obligations to appoint a
successor indenture trustee, the insurer will have the right to do so.
No noteholder will have any right under the indenture to institute any
proceeding under the indenture unless the insurer has given its prior written
consent, so long as a default by the insurer shall not have occurred and be
continuing, the noteholder previously has given to the indenture trustee written
notice of default and unless noteholders evidencing at least 51% of the Note
Balance have made written requests upon the indenture trustee to institute the
proceeding in its own name as indenture trustee thereunder and have offered to
the indenture trustee reasonable indemnity and the indenture trustee for 60 days
has neglected or refused to institute any proceeding. The indenture trustee will
be under no obligation to exercise any of the trusts or powers vested in it by
the indenture or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the noteholders, unless the
noteholders have offered to the indenture trustee reasonable security or
indemnity against the cost, expenses and liabilities which it may incur.
S-38
<PAGE> 39
USE OF PROCEEDS
The net proceeds from the sale of the notes will be used by the sponsor
to acquire the mortgage loans from the originators or to repay temporary
financing facilities. One or more of the underwriters, or their respective
affiliates, may have provided temporary financing facilities to the sponsor or
one or more of its affiliates and may receive a portion of the proceeds as a
repayment of the temporary financing facilities.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion, which summarizes the material U.S. federal
income tax aspects of the purchase, ownership and disposition of the notes, is
based on the provisions of the Internal Revenue Code of 1986, the Treasury
Regulations thereunder, and published rulings and court decisions in effect as
of the date of this prospectus supplement, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to noteholders in light of
their personal investment circumstances or to noteholders subject to special
treatment under the U.S. federal income tax laws, for example, banks and life
insurance companies. Accordingly, investors are encouraged to consult their tax
advisors regarding U.S. federal, state, local, foreign and any other tax
consequences to them of investing in the notes.
References in this section to sections of the Code are references to
the Internal Revenue Code of 1986.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the indenture and other relevant documents and assuming compliance with the
terms of the indenture as in effect on the date of issuance of the notes, Dewey
Ballantine LLP, special tax counsel to the sponsor is of the opinion that the
notes will be treated as debt instruments for federal income tax purposes as of
that date. Accordingly, upon issuance, the notes will be treated as debt
securities as described in the prospectus. In addition, special tax counsel is
of the opinion that the trust will not be treated as an association taxable as a
corporation, or a publicly traded partnership, or a taxable mortgage pool. See
"Material Federal Income Tax Consequences" in the prospectus.
The trust and the noteholders express in the indenture their intent
that, for applicable tax purposes, the notes will be indebtedness secured by the
mortgage loans. The originator, the sponsor and the noteholders, by accepting
the notes, and each beneficial owner by its acquisition of a beneficial interest
in a note, have agreed to treat the notes as indebtedness for federal, state and
local income and franchise tax purposes. Investors should be aware that no
transaction closely comparable to this transaction has been the subject of any
treasury regulation, revenue ruling or judicial decision, and therefore the
matter is subject to interpretation. Because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
originator intends to treat this transaction as a sale of an interest in the
Principal Balances of the mortgage loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service and the courts have set
forth several factors to be taken into account in determining whether the
substance of a transaction is a sale of property or a secured loan, the primary
factor in making this determination is whether the transferee has assumed the
risk of loss or other economic burdens relating to the property and has obtained
the benefits of ownership. Tax counsel has analyzed and relied on these factors
in reaching its opinion that the weight of the benefits and burdens of ownership
of the mortgage loans has been retained by the originator and has not been
transferred to the noteholders.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the notes as debt or otherwise makes the
rationale of those cases inapplicable to this situation.
S-39
<PAGE> 40
TAXATION OF INTEREST INCOME OF NOTEHOLDERS
INTEREST INCOME ON THE NOTES. As a general rule, interest paid or
accrued on the notes will be treated as ordinary income to the noteholders
thereof. A noteholder using the accrual method of accounting for federal income
tax purposes is required to include interest paid or accrued on the notes in
ordinary income as this interest accrues, while a noteholder using the cash
receipts and disbursements method of accounting for federal income tax purposes
must include this interest in ordinary income when payments are received, or
made available for receipt, by the noteholder. The following discussion is based
in part on the rules governing original issue discount which are set forth in
Sections 1271-1275 and the Treasury regulations issued thereunder. A noteholder
should be aware, however, that these regulations do not adequately address a
number of issues relevant to prepayable securities, such as the notes.
It is anticipated, and this discussion assumes, that the notes will not
be issued with original issue discount within the meaning of Section 1273, and
that the trust will not take any original issue discount deduction with respect
thereto. If the notes were issued at more than a de minimis discount, however,
these notes would be treated as issued with original issue discount for federal
income tax purposes. The amount of original issue discount on a note will be
considered to be zero if it is less than a de minimis amount determined under
the code.
In general, original issue discount, if any, will equal the difference
between the stated redemption price at maturity of a note and its issue price.
The issue price of a note is the first price at which a substantial amount of
notes is sold to the public, excluding bond houses, brokers, underwriters or
wholesalers. The issue price of a note also includes the amount paid by an
initial noteholder for accrued interest that relates to a period prior to the
issue date of the note. The stated redemption price at maturity of a note
includes the original principal amount of the note, but generally will not
include distributions of interest if the distributions constitute qualified
stated interest.
Qualified stated interest generally means interest payable at a single
fixed rate or qualified variable rate provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the note. Interest payments are unconditionally payable only if a late
payment or nonpayment is expected to be penalized or reasonable remedies exist
to compel payment. Because the notes will not be entitled to penalty payments of
interest on interest deficiencies other than interest at the coupon rate on the
amount of the deficiencies and do not provide for default or acceleration rights
in the event of interest shortfalls, the interest payments on the notes may not
be treated by the IRS as qualified stated interest, and in this event, the
interest payments would be taxed as original issue discount. Noteholders should
consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a note. While the tax treatment of interest on
the notes is not entirely clear, the trust intends to treat the stated interest
on the notes as qualified stated interest for original issue discount purposes.
A noteholder of a note treated as issued with original issue discount
is required to include in gross income for each taxable year, for all days it
holds the note, the sum of the daily portions of the original issue discount.
The amount of original issue discount includible in income by a noteholder will
be computed by allocating to each day during a taxable year a pro rata portion
of the original issue discount that accrued during the relevant accrual period.
The amount of original issue discount includible in income of a noteholder for
an accrual period, the period over which interest accrues on the debt
instrument, will equal the product of the yield to maturity of the note and the
adjusted issue price of the note at the beginning of the accrual period, reduced
by any payments of qualified stated interest during this accrual period. The
adjusted issue price at the beginning of an accrual period is the sum of its
issue price plus prior accruals of original issue discount, reduced by the total
payments made on the note in all prior periods, other than qualified stated
interest payments.
The amount of original issue discount to be included in income by
holders is computed by taking into account the anticipated rate of prepayments
and the constant draw rate assumed in pricing the debt instrument. The amount of
original issue discount that will accrue during an accrual period for the notes
is any excess of the sum of (a) the present value of all payments remaining to
be made on the notes as of the close of the accrual period and (b) the payments
during the accrual period of amounts included in the stated redemption price of
the notes, over the adjusted issue price of the notes at the beginning of the
accrual period. The present value of the remaining payments is to be determined
on the basis of three factors: (i) the original yield to maturity of the note,
determined on the basis of compounding at the end of each accrual period and
properly adjusted for the length of the accrual period, (ii) events which have
occurred before the end of the accrual period and (iii) the assumption that the
remaining
S-40
<PAGE> 41
payments will be made in accordance with the original anticipated rate of
prepayments and constant draw rate. The effect of this method is to increase the
portions of original issue discount required to be included in income by a
noteholder to take into account prepayments at a rate that exceeds the
anticipated rate of prepayments, and to decrease, but not below zero for any
period, the portions of original issue discount required to be included in
income by a noteholder to take into account prepayments at a rate that is slower
than the anticipated rate of prepayments. Although original issue discount will
be reported to noteholders based on the anticipated rate of prepayments, no
representation is made to noteholders that mortgage loans will be prepaid at
that rate or at any other rate.
A subsequent noteholder of a note will also be required to include
original issue discount in gross income, but a holder who purchases this note
for an amount that exceeds its adjusted issue price will be entitled, as will an
initial holder who pays more than a note's issue price, to offset the original
issue discount by comparable economic accruals of portions of the excess.
VARIABLE RATE NOTES. Because the notes bear interest at a rate that
varies directly, according to a fixed formula, with an objective index, the
amount of original issue discount on a note will accrue in the manner described
under "-- Interest Income on the Notes" by assuming generally that this index
will remain fixed throughout the term of the notes, with appropriate adjustments
made for the actual variable rate.
MARKET DISCOUNT. Noteholders should be aware that the resale of a note
may be affected by the market discount rules of the code. These rules generally
provide that, subject to a de minimis exception, if a noteholder acquires a note
at a market discount, which means, at a price below its adjusted issue price as
defined in the Code, and thereafter recognizes gain upon a disposition of the
note, the lesser of the gain or the portion of the market discount that accrued
while the note was held by the noteholder will be treated as ordinary interest
income realized at the time of the disposition. A taxpayer may instead elect to
include market discount currently in gross income in taxable years to which it
is attributable, computed using either a ratable accrual or a yield to maturity
method.
PREMIUM. A noteholder who purchases a note for more than its stated
redemption price at maturity will be subject to the premium amortization rules
of the code. Under those rules, the noteholder may elect to amortize the premium
on a constant yield method. Amortizable premium reduces interest income on the
note. If the holder does not make this election, the premium paid for the note
generally will be included in the tax basis of the note in determining the gain
or loss on its disposition.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. A noteholder
of a note may elect to accrue all interest, discount, including de minimis
market or original issue discount, in income, as adjusted by any amortizable
premium, as interest, based on a constant yield method. If this election were to
be made for a note with market discount, the noteholder of the note would be
deemed to have made an election to include in income currently market discount
for all other debt instruments having market discount that the noteholder
acquires during the year of the election or thereafter. Similarly, a noteholder
of a note that makes this election for a note that is acquired at a premium will
be deemed to have made an election to amortize bond premium for all debt
instruments having amortizable bond premium that the noteholder owns or
acquires. The election to accrue interest and discount on a constant yield
method for a note is irrevocable.
Each noteholder should consult his own tax advisor regarding the impact
of the original issue discount, market discount, and premium amortization rules.
POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
Although, as described above, it is the opinion of tax counsel that the
notes are properly characterized as debt for federal income tax purposes, the
opinion of tax counsel is not binding on the courts or the IRS and no assurance
can be given that this characterization will prevail. It is possible that the
IRS could assert that the transaction contemplated by this prospectus supplement
constitutes a sale of the mortgage loans, or an interest in the mortgage loans,
to the noteholders and that the proper classification of the legal relationship
between the sponsor, the originator and the noteholders resulting from this
transaction is that of a partnership, including a publicly traded partnership, a
publicly traded partnership treated as a corporation, or an association taxable
as a corporation.
S-41
<PAGE> 42
If it were determined that this transaction created an entity
classified as a publicly traded partnership taxable as a corporation, the trust
would be subject to U.S. federal income tax at corporate income tax rates on the
income it derives from the mortgage loans, which would reduce the amounts
available for distribution to the noteholders. Cash distributions to the
noteholders generally would be treated as dividends for tax purposes to the
extent of the corporation's earnings and profits. If the transaction were
treated as creating a partnership, but not a publicly traded partnership taxable
as a corporation, between the noteholders and the holders of the certificates,
the partnership itself would not be subject to U.S. federal income tax; rather,
each noteholder of a certificate and each holder would be taxed individually on
its respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deductions
of the noteholders and the holder of the certificates could differ if the notes
were held to constitute partnership interests rather than indebtedness.
The sponsor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations as these
requirements would apply if the notes were not treated as indebtedness.
FOREIGN INVESTORS
The IRS recently issued Withholding Regulations which make certain
modifications to withholding, backup withholding and information reporting
rules. The Withholding Regulations attempt to unify certification requirements
and modify certain reliance standards. The Withholding Regulations will
generally be effective for payments made after December 31, 2000. Prospective
investors are urged to consult their own tax advisors regarding the Withholding
Regulations.
In general, subject to various exceptions, interest, including original
issue discount, if any, paid on a note to a person other than: (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity,
treated as a corporation or a partnership for federal income tax purposes,
created or organized in or under the laws of the United States, any state
thereof or the District of Columbia, other than a partnership that is not
treated as a United States person under any applicable Treasury regulations,
(iii) an estate whose income is subject to United States federal income tax
regardless of its source or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial
decisions of the trust, including specified types of trusts in existence on
August 20, 1996 that may elect to be treated as United States persons to the
extent permitted in Treasury regulations, is not subject to U.S. federal income
and withholding tax, but only if the interest is portfolio interest.
Interest paid, or accrued, to a noteholder who is a non-U.S. Person
will be considered portfolio interest, and generally will not be subject to
United States federal income tax and withholding tax, unless (1) the interest is
not effectively connected with the conduct of a trade or business within the
United States by the non-U.S. Person, (2) the non-U.S. Person provides the trust
or other person who is otherwise required to withhold U.S. tax for the note with
an appropriate statement, on Form W-8BEN, Form W-8 or other similar form, signed
under penalties of perjury, certifying that the beneficial owner of the note is
a foreign person and providing that non-U.S. person's name and addresses. Form
W-8BEN is valid for a period of three years beginning on the date that the form
is signed. Form W-8 is valid only until December 31, 2000. If a note is held
through a securities clearing organization or other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8BEN, Form W-8 or substitute form provided by the
non-U.S. Person that owns that interest in the note. If the interest does not
constitute portfolio interest, then it will be subject to U.S. federal income
and withholding tax at a rate of 30%, unless reduced or eliminated under an
applicable tax treaty and the non-U.S. Person provides the trust, or an
organization or financial institution described above, with an appropriate
statement, e.g., a Form W-8BEN, signed under penalties of perjury, to that
effect. In addition, the Withholding Regulations may require that a foreign
beneficial owner, including, in the case of a foreign partnership, the partners
thereof, obtain a United States taxpayer identification number and make certain
certifications if the foreign beneficial owner wishes to claim exemption from,
or a reduced rate of, withholding under an income tax treaty.
If the notes were deemed to be partnership interests, interest payments
on the notes could be treated as guaranteed payments within the meaning of the
partnership provisions of the code. These guaranteed payments could be subject
to a 30% withholding tax, or lower treaty rate, if the trust were engaged in a
U.S. trade or business because guaranteed payments do not appear to satisfy the
requirements to be treated as portfolio interest under the
S-42
<PAGE> 43
code. If the notes were deemed to be partnership interests and the interest
payments were not guaranteed payments, the partnership would be required, on a
quarterly basis, to pay withholding tax equal to the product, for each foreign
partner, of the foreign partner's distributive share of effectively connected
income of the partnership multiplied by the highest rate of tax applicable to
that foreign partner. In addition, the foreign partner also would be subject to
branch profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each foreign
partner would be credited against the foreign partner's U.S. income tax
liability.
If the trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless the rate were reduced by an applicable
tax treaty.
If, contrary to the opinion of tax counsel, the notes are
recharacterized as equity interests in a partnership, or in an association or
publicly traded partnership taxable as a corporation, any taxes required to be
so withheld will be treated for all purposes of the notes and the policy as
having been paid to the noteholder.
BACKUP WITHHOLDING
Noteholders may be subject to backup withholding at the rate of 31% on
interest paid on the notes if the noteholders, upon issuance, failed to supply
the indenture trustee or his broker with his taxpayer identification number,
furnish an incorrect taxpayer identification number, failed to report interest,
dividends, or other reportable payments as defined in the code, properly, or
failed to provide the indenture trustee or his broker with a certified
statement, under penalty of perjury, that he is not subject to backup
withholding.
The indenture trustee will be required to report annually to the IRS,
and to each noteholder of record, the amount of interest paid, and original
issue discount accrued, if any, on the notes, and the amount of interest
withheld for U.S. federal income taxes, if any, for each calendar year, except
as to exempt noteholders. Exempt noteholders are noteholders that are
corporations, tax-exempt organizations or nonresident aliens who provide
certification as to their status as nonresidents. As long as the only noteholder
of record is Cede, as nominee for DTC, holders and the IRS will receive tax and
other information including the amount of interest paid on the notes owned from
direct and indirect participants of the DTC system rather than from the
indenture trustee. The indenture trustee, however, will respond to requests for
necessary information to enable direct and indirect participants of the DTC
system and other persons to complete their reports. Each non-exempt beneficial
owner of a note will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct federal
taxpayer identification number and a statement that he or she is not subject to
backup withholding. Should a non-exempt beneficial owner of a note fail to
provide the required certification, the direct and indirect participants of the
DTC system, or the indenture trustee, will be required to withhold 31% of the
interest and payment of original issue discount, and principal, otherwise
payable to the beneficial owner, and remit the withheld amount to the IRS as a
credit against the beneficial owner's federal income tax liability.
The Withholding Regulations change some of the rules relating to backup
withholding, but are not effective until December 31, 2000. See "Material
Federal Income Tax Consequences -- Foreign Investors" in the prospectus.
TAX-EXEMPT ENTITIES
A tax-exempt noteholder may be subject to less favorable tax treatment
because an interest in a partnership may generate unrelated business taxable
income subjecting the noteholder to the unrelated business taxable income
provisions of the code.
STATE TAXES
The sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the notes under the tax laws of any state.
Investors considering an investment in the notes may wish to consult their own
tax advisors regarding the tax consequences.
S-43
<PAGE> 44
INVESTORS MAY WISH TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE NOTES.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974,
and/or Section 4975 of the Code prohibit pension, profit-sharing and other
employee benefit plans, as well as individual retirement accounts and some types
of Keogh Plans, that are subject to ERISA or to Section 4975 from engaging in
transactions with persons that are parties in interest under ERISA or
disqualified persons under the Code with respect to the benefit plans. A
violation of these prohibited transaction rules may result in an excise tax or
other penalties and liabilities under ERISA and the code for these persons.
Title I of ERISA also requires that fiduciaries of a benefit plan subject to
ERISA make investments that are prudent, diversified, except if prudent not to
do so, and in accordance with governing plan documents.
References in this section to sections of the Code are references to
the Internal Revenue Code of 1986.
Transactions involving the trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the trust were
deemed to be assets of a benefit plan. Under a regulation issued by the United
States Department of Labor, the assets of the trust would be treated as plan
assets of a benefit plan for the purposes of ERISA and the Code only if the
benefit plan acquired an equity interest in the trust and none of the exceptions
contained in this regulation were applicable. An equity interest is defined
under the regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Although there is little guidance on the subject, the sponsor believes
that the notes should be treated as indebtedness without substantial equity
features for purposes of the regulation. This determination is based in part
upon 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 significant losses. However, even if the notes are treated as
indebtedness without substantial equity features under the Code, the acquisition
or holding of notes by or on behalf of a benefit plan could be considered to
give rise to a prohibited transaction if the trust or any of its affiliates is
or becomes a party in interest or a disqualified person for the benefit plan. In
this case, exemptions from the prohibited transaction rules could be applicable,
depending on the type and circumstances of the plan fiduciary making the
decision to acquire a note. Included among these exemptions are: Prohibited
Transaction Class Exemption 90-l, regarding investments by insurance company
pooled separate accounts; Prohibited Transaction Class Exemption 95-60,
regarding investments by insurance company general accounts; Prohibited
Transaction Class Exemption 91-38, regarding investments by bank collective
investment funds; Prohibited Transaction Class Exemption 96-23, regarding
transactions affected by in-house asset managers and Prohibited Transaction
Class Exemption 84-14, regarding transactions effected by qualified professional
asset managers. Each investor using the assets of a benefit plan which acquires
the notes, or to whom the notes are transferred, will be deemed to have
represented that the acquisition and continued holding of the notes will be
covered by one of the exemptions listed above or by another Department of Labor
exemption.
Employee benefit plans that are governmental plans, as defined in
Section 3(32) of ERISA, and church plans, as defined in Section 3(33) of ERISA,
are not subject to ERISA requirements; however, these plans may be subject to
comparable federal, state or local law restrictions.
A benefit plan fiduciary considering the purchase of notes should
consult its tax and/or legal advisors regarding whether the assets of the trust
would be considered plan assets, the availability of exemptive relief from the
prohibited transaction rules and their potential consequences.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the notes will be rated in
the highest rating category of the rating agencies, the notes will not
constitute mortgage related securities for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, because not all of the mortgages securing the
mortgage loans are first mortgages. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgage
S-44
<PAGE> 45
loans may not be legally authorized to invest in the notes, which because they
evidence interests in a pool that includes junior mortgage loans are not
mortgage related securities under SMMEA. See "Legal Matters" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement among the sponsor, Banc of America Securities LLC and Morgan Stanley
Dean Witter, the underwriters and the sponsor have agreed to cause the trust to
sell to the underwriters, and the underwriters have agreed to purchase, the
following principal amounts of notes set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
---------------- ----------------
<S> <C>
Morgan Stanley Dean Witter............................................................ $137,500,000
Banc of America Securities LLC........................................................ $137,500,000
Total........................................................................ $275,000,000
</TABLE>
In the underwriting agreement, each of the underwriters has agreed,
subject to the terms and conditions in the underwriting agreement, to purchase
all of its respective allocation of the notes if any of the notes are purchased.
The underwriters have advised the sponsor that they propose initially
to offer the notes to the public at the price set forth on the cover page
hereof, and to specified dealers at a price less a concession not in excess of
0.15%. The underwriters may allow and these dealers may reallow a concession not
in excess of 0.075%. After the initial public offering, the public offering
price and the concessions and reallowances may be changed.
Until the distribution of the notes is completed, SEC rules may limit
the ability of the underwriters and selling group members to bid for and
purchase the notes. As an exception to these rules, the underwriters are
permitted to engage in transactions that stabilize the price of the notes. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the notes.
If the underwriters create a short position in the notes in connection
with the offering, i.e., if they sell more notes than are set forth on the cover
page of this prospectus supplement, the underwriters may reduce that short
position by purchasing notes in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of these purchases.
Neither the sponsor nor any of the underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the notes. In
addition, neither the sponsor nor any of the underwriters makes any
representation that the underwriters will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
The sponsor has agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act.
The sponsor has been advised by the underwriters that the underwriters
presently intend to make a market in the notes, as permitted by applicable laws
and regulations. The underwriters are not obligated, however, to make a market
in the notes and this market-making may be discontinued at any time at the sole
discretion of the underwriters. Accordingly, no assurance can be given as to the
liquidity of any trading markets for the notes.
LEGAL MATTERS
Legal matters in connection with the issuance of the notes will be
passed upon for the sponsor by Dewey Ballantine LLP, New York, New York. Brown &
Wood LLP, New York, New York, will act as counsel for the underwriters.
S-45
<PAGE> 46
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998 are incorporated by reference in
this prospectus and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, incorporated by reference in
this prospectus, and upon the authority of said firm as experts in accounting
and auditing.
The balance sheet of Advanta Revolving Home Equity Loan Trust 1999-B as
of September 22, 1999, set forth as Exhibit A hereto, has been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their report
with respect thereto, and is included herein in reliance upon the authority of
that firm as experts in giving said reports.
RATINGS
It is a condition to issuance that the notes be rated "AAA" by S&P and
"Aaa" by Moody's.
The ratings assigned to the notes will depend primarily upon the
financial strength of the insurer. Any reduction in a rating assigned to the
financial strength of the insurer below the ratings initially assigned to the
notes may result in a reduction of one or more of the ratings assigned to the
notes.
A securities rating addresses the likelihood of the receipt by
noteholders of distributions on the mortgage loans. The rating takes into
consideration the characteristics of the mortgage loans and the structural and
legal aspects associated with the notes. The ratings on the notes do not,
however, constitute statements regarding the likelihood or frequency of
prepayments on the mortgage loans or the possibility that noteholders might
realize a lower than anticipated yield nor the likelihood of the payment of the
Net Funds Cap Carry-Forward Amount.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-46
<PAGE> 47
GLOSSARY
"ACCELERATED PRINCIPAL PAYMENT" means the amount of the Excess Cashflow
applied as a payment of principal.
"ADDITIONAL BALANCES" means the amounts of draws that are assigned to
the trust.
"AVAILABLE FUNDS" means, for any payment date, any Insured Payments,
the Principal Collections and the Interest Collections, any Capitalized Interest
Requirement, any investment earnings on the amounts on deposit in the
pre-funding account, any amounts transferred from the pre-funding account
following the end of the pre-funding period and other amounts remitted by the
master servicer or any sub-servicer.
"BUSINESS DAY" means any day other than (1) a Saturday or Sunday or (2)
a day on which banking institutions in the State of New York or in the city in
which the principal corporate trust office of the indenture trustee is located,
are authorized or obligated by law or executive order to be closed.
"CAPITALIZED INTEREST REQUIREMENT" will be an amount equal to the
product of (x) the sum of the Note Interest Rate and the rate at which the
insurer premium is calculated and (y) the amount on deposit in the pre-funding
account as of the preceding payment date (or as of the closing date, in the case
of the first payment date), less investment earnings on the amounts on deposit
in the pre-funding account.
"CLEAN-UP CALL DATE" is the first payment date on which the clean-up
call could be exercised.
"DEFICIENCY AMOUNT" means, as of any payment date, the excess, if any,
of Required Payments over the amount of Available Funds minus the owner
trustee's fee, the indenture trustee's fee and the premium payable to the
insurer.
"DUE FOR PAYMENT" shall mean the Business Day immediately preceding the
payment date on which Insured Amounts are due.
"EXCESS CASHFLOW" means the sum of (x) the excess of Interest
Collections over the sum of interest payable on the notes plus fees, and (y)
Principal Collections not required to be applied to principal amortization of
the notes or to Reimbursement Amounts.
"FORMULA RATE" means, (x) for any payment date which occurs on or prior
to the Clean-Up Call Date, the per annum rate equal to the sum of LIBOR and
0.37% and (y) for any payment date thereafter, the sum of LIBOR and 0.74%.
"HELOCS" means home equity revolving credit line loans.
"INSURED AMOUNTS" shall mean, with respect to any payment date, the
Deficiency Amount for such payment date.
"INSURED PAYMENTS" means, for any payment date, the amount actually
paid by the insurer to the indenture trustee equal to (1) the Insured Amount for
that payment date plus (2) Preference Amounts for any given Business Day.
"INTEREST ACCRUAL PERIOD" means the period from the preceding payment
date, or in the case of the first payment date, from the closing date, through
the day preceding the payment date.
"INTEREST COLLECTIONS" means, for any payment date the sum of (i) the
amounts collected on the mortgage loans in respect of interest during the
Remittance Period, including the portion of Net Liquidation Proceeds allocable
to interest and (ii) for mortgage loans that are 180 or more days delinquent the
amount of total Net Liquidation Proceeds.
S-47
<PAGE> 48
"INTEREST DISTRIBUTION AMOUNT" means, for any payment date, the
interest then due on the notes, calculated at the Note Interest Rate and based
on the actual number of days in the Interest Accrual Period and a year of 360
days.
"INTEREST SHORTFALL AMOUNT" means, for any payment date, the sum of (1)
the amount by which the Interest Distribution Amount exceeded the actual amount
distributed in respect of interest and (2) any unreimbursed Interest Shortfall
Amounts from prior payment dates together with interest at the Note Interest
Rate.
"LIBOR" means the London interbank offered rate for one-month
Eurodollar deposits appearing on the Telerate screen page 3750, as of the second
LIBOR Business Day prior to the first day of the Interest Accrual Period, or as
of two LIBOR Business Days prior to the Closing Date, in the case of the first
Interest Accrual Period.
"LIQUIDATED MORTGAGE LOAN" means a defaulted mortgage loan which (1)
the master servicer has determined that it has recovered all amounts it expects
to recover or (2) which is 180 days or more delinquent, whichever is the first
to occur.
"LIQUIDATION PROCEEDS" means the proceeds, excluding any amounts drawn
on the policy, received in connection with the liquidation of any Liquidated
Mortgage Loan, whether through trustee's sale, foreclosure sale or otherwise.
"MAXIMUM PRINCIPAL AMOUNT" means, for any payment date, 95% of
Principal Collections.
"NET FUNDS CAP CARRY-FORWARD AMOUNT" means, on any payment date, the
excess of the amount of interest due based on the Formula Rate, over the
interest due based on the Net Funds Cap Rate, together with interest at the
then-applicable Formula Rate.
"NET FUNDS CAP RATE" means the per annum rate, equal to (x) (A) the
product of (i) twelve and (ii) the interest due on the mortgage loans during the
prior Remittance Period, minus the amount of Prepayment Interest Shortfalls and
Relief Act Shortfalls for the Remittance Period, net of the servicing fee, the
indenture trustee fee, the owner trustee fee and the premium payable to the
insurer under the policy, divided by (B) the Pool Balance as of the opening of
the Remittance Period, less (y) 0.50%.
"NET LIQUIDATION PROCEEDS" means, an amount equal to the Liquidation
Proceeds, reduced by out-of-pocket expenses and advances, but not including the
portion, if any, of the amount that exceeds the sum of (1) the Principal Balance
of the mortgage loan and (2) any accrued and unpaid interest to the end of the
Remittance Period during which the mortgage loan became a Liquidated Mortgage
Loan.
"NET PRINCIPAL COLLECTIONS" means, for any payment date, the excess of
(x) Principal Collections over (y) the aggregate principal amount of all
Additional Balances arising during the Remittance Period. In no event will Net
Principal Collections be less than zero for any payment date.
"NOTE BALANCE" means, as of any date, an amount equal to the Original
Note Balance minus the aggregate of amounts previously distributed as principal
to the noteholders.
"NOTE INTEREST RATE" means, for an Interest Accrual Period, the lesser
of the Formula Rate and the Net Funds Cap Rate.
"ORIGINAL NOTE BALANCE" means $275,000,000.
"OVERCOLLATERALIZATION AMOUNT" means, the amount, if any, by which the
Pool Balance exceeds the Note Balance.
"OVERCOLLATERALIZATION DEFICIT" means, for any payment date, the amount
by which the Note Balance, after giving effect to all other amounts
distributable and allocable as principal on the notes on the payment date,
exceeds the aggregate of the Principal Balances of all of the mortgage loans as
of such payment date.
S-48
<PAGE> 49
"OVERCOLLATERALIZATION REDUCTION AMOUNT" means the dollar amount of any
decrease in the Specified Overcollateralization Amount.
"POOL BALANCE" means, on any day, the aggregate of the Principal
Balances of all mortgage loans as of that day.
"PREFERENCE AMOUNT" means any payment on a note which has become Due
for Payment and which is made to a Holder by or on behalf of the indenture
trustee which has been deemed a preferential transfer and theretofore recovered
from its Holder under the United States Bankruptcy Code in accordance with a
final, nonappealable order of a court of competent jurisdiction.
"PREPAYMENT INTEREST SHORTFALLS" means shortfalls in interest
collections that result from the timing of prepayments.
"PRINCIPAL BALANCE" of any mortgage loan, other than a Liquidated
Mortgage Loan, on any date is equal to its original principal balance as of the
cut-off date plus any Additional Balances minus all collections credited as
principal payments in accordance with the credit line agreement. The Principal
Balance of a Liquidated Mortgage Loan is zero.
"PRINCIPAL COLLECTIONS" means, as to any payment date, the amounts
collected in respect of principal during the Remittance Period, including the
portion of Net Liquidation Proceeds, other than for mortgage loans that are 180
or more days delinquent, allocated to principal under the terms of the credit
line agreements.
"RAPID AMORTIZATION EVENT" means the events described under
"Description of the Notes--Rapid Amortization Events" in this prospectus
supplement.
"REIMBURSEMENT AMOUNTS" means all amounts due and owing to the insurer
and unreimbursed draws on the policy, together with interest.
"RELIEF ACT SHORTFALLS" are interest shortfalls resulting from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940.
"REMITTANCE PERIOD" means, for any payment date, the calendar month
preceding the month of the payment date.
"REQUIRED PAYMENTS" means, as of any payment date, the sum of (a) the
Interest Distribution Amount, excluding any Prepayment Interest Shortfalls and
any Relief Act Shortfalls, plus any Interest Shortfall Amount, (b) for any
payment date, any shortfalls in Available Funds to pay the Overcollateralization
Deficit and (c) on the final scheduled payment date, any shortfall of Available
Funds to pay the outstanding principal amount of the notes.
"SCHEDULED PRINCIPAL DISTRIBUTION AMOUNT" means:
(A) on any payment date during the managed amortization period, the
excess, but in no event less than zero, of (x) the lesser of (1) the Maximum
Principal Payment and (2) the Net Principal Collections over (y) the
Overcollateralization Reduction Amount, if any, for the payment date or
(B) on any payment date during the rapid amortization period, the
excess of (x) the Maximum Principal Payment over (y) the Overcollateralization
Reduction Amount, if any, for the payment date.
"SERVICING ADVANCES" means any out-of-pocket costs and expenses,
incurred by the master servicer in the performance of its servicing obligations,
including, but not limited to, (i) expenditures in connection with a foreclosed
mortgage loan prior to the liquidation of the mortgage loan, including
expenditures for real estate property taxes, hazard insurance premiums and
property restoration or preservation; (ii) the cost of any enforcement or
judicial proceedings, including (a) foreclosures, and (b) other legal actions
and costs associated therewith that potentially affect the existence, validity,
priority, enforceability or collectability of the mortgage loans, including
S-49
<PAGE> 50
collection agency fees and costs of pursuing or obtaining personal judgments,
garnishments, levies, attachment and similar actions, (iii) the cost of the
conservation, management, liquidation, sale or other disposition of any
mortgaged property acquired in satisfaction of the mortgage loan, including
reasonable fees paid to any independent contractor in connection therewith, and
(iv) advances to keep senior liens current unless the master servicer has
determined that the advance would not be recoverable.
"SPECIFIED OVERCOLLATERALIZATION AMOUNT" means a level of
overcollateralization specified by the insurer.
S-50
<PAGE> 51
PROSPECTUS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[ADVANTA LOGO] [ADVANTA LOGO]
ADVANTA CONDUIT RECEIVABLES, INC. ADVANTA MORTGAGE CORP. USA
Sponsor Master Servicer
</TABLE>
Mortgage Loan Asset-Backed Securities,
Issuable in Series
- --------------------------------------------------------------------------------
Advanta Conduit Receivables, Inc. may sell, from time to time, a series of
mortgage loan asset-backed securities backed solely by the assets of the issuing
trust. The assets of each trust consist primarily of a pool of mortgage loans.
<TABLE>
<S> <C>
THE SECURITIES --
- will be issued from time to time in series
WE SUGGEST THAT YOU READ THE SECTION ENTITLED
"RISK FACTORS" ON PAGE 8 OF THIS PROSPECTUS - will be issued by trusts established by Advanta
AND CONSIDER THESE FACTORS BEFORE MAKING A Conduit Receivables, Inc.
DECISION TO INVEST IN THESE SECURITIES.
- will be backed by one or more pools of mortgage
These securities are mortgage loan asset- loans held by the issuing trust
backed securities which represent interests in
or obligations of the trust issuing that - will be rated in one of the four highest rating
series of securities and are not interests in categories by at least one nationally recognized
or obligations of any other person or entity. statistical rating organization
Neither these securities nor the mortgage - may have the benefit of one or more forms of
loans will be insured or guaranteed by any credit enhancement, such as insurance policies,
governmental agency or instrumentality. overcollateralization, subordination or reserve
funds.
Retain this prospectus for future reference. THE ASSETS --
This prospectus may not be used to consummate The assets of each trust will primarily consist of
sales of securities unless accompanied by the a pool of mortgage loans, funds on deposit in one
prospectus supplement relating to the offering or more accounts and forms of credit support
of these securities. described in this prospectus and in the prospectus
supplement.
</TABLE>
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 AUGUST 10, 1999
<PAGE> 52
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
PAGE
----
SUMMARY OF PROSPECTUS ..................................................... 4
RISK FACTORS .............................................................. 8
THE TRUSTS ................................................................ 13
THE MORTGAGE LOANS ........................................................ 13
Interest Payments on the Mortgage Loans ................................ 15
Prepayment Fees; Due on Sale Clauses;
Assumable Mortgage Loans ............................................ 15
Statistical Information Concerning the
Mortgage Loans ...................................................... 15
MORTGAGE LOAN PROGRAM AND UNDERWRITING
GUIDELINES .............................................................. 16
Description of Underwriting Guidelines ................................ 16
Representations and Warranties
Concerning the Mortgage Loans ....................................... 19
The Master Servicer May Act Through
Sub-Servicers ....................................................... 19
DESCRIPTION OF THE SECURITIES ............................................. 20
General Payment Terms of Securities ................................... 21
Payment Date Distributions ............................................ 21
Determination of Principal and Interest on
the Securities ...................................................... 22
Yield Considerations .................................................. 22
Maturity And Prepayment Considerations ................................ 23
Form of Securities .................................................... 24
Assignment of Mortgage Loans .......................................... 25
Pre-Funding Feature; Mandatory
Prepayment .......................................................... 25
Payments on Mortgage Loans; Deposits to
Accounts ............................................................ 26
Withdrawals from the Principal and
Interest Account .................................................... 27
Delinquency Advances and Servicing
Advances ............................................................ 28
Reports to Securityholders ............................................ 29
DESCRIPTION OF CREDIT ENHANCEMENT ......................................... 29
Financial Guaranty Insurance Policies ................................. 29
Cross Support Among Classes ........................................... 30
Overcollateralization ................................................. 30
Subordination of Classes .............................................. 30
Letter of Credit ...................................................... 30
Reserve Accounts ...................................................... 31
Derivative Contracts .................................................. 31
Reduction or Substitution of Credit
Enhancement ......................................................... 31
SERVICING PROCEDURES ...................................................... 31
Collection and Other Servicing Procedures ............................. 31
Realization Upon Defaulted Mortgage
Loans ............................................................... 33
Hazard Insurance Policies ............................................. 34
THE SPONSOR ............................................................... 34
THE MASTER SERVICER ....................................................... 34
AVAILABLE INFORMATION; INCORPORATION OF
INFORMATION BY REFERENCE ................................................ 35
THE AGREEMENTS ............................................................ 35
Servicing and Other Compensation and
Payment of Expenses ................................................. 36
Evidence as to Compliance ............................................. 36
Removal and Resignation of the Master
Servicer ............................................................ 36
Amendments to the Agreements .......................................... 37
Retirement of Securities; Redemption .................................. 37
The Trustee ........................................................... 38
LEGAL ASPECTS OF MORTGAGE LOANS ........................................... 38
Enforcement of the Mortgage Note ...................................... 39
Deeds of Trust or Mortgages ........................................... 40
Cooperative Loans ..................................................... 40
Foreclosure of Mortgage Loans ......................................... 40
Foreclosure on Cooperative Loans ...................................... 41
Rights of Redemption .................................................. 41
Environmental Legislation ............................................. 42
Enforceability of Mortgage Loans
Provisions .......................................................... 42
California Deeds of Trust ............................................. 43
2
<PAGE> 53
Applicability of Usury Laws ........................................... 43
Soldiers' and Sailors' Civil Relief Act of
1940 ................................................................ 43
MATERIAL FEDERAL INCOME TAX CONSEQUENCES .................................. 44
Grantor Trust Securities .............................................. 44
REMIC Securities ...................................................... 46
Special Tax Attributes ................................................ 46
Debt Securities ....................................................... 52
Partnership Interests ................................................. 52
FASIT Securities ...................................................... 54
Discount and Premium .................................................. 56
Backup Withholding .................................................... 59
Foreign Investors ..................................................... 59
STATE TAX CONSIDERATIONS .................................................. 60
ERISA CONSIDERATIONS ...................................................... 60
Certificates .......................................................... 61
Notes ................................................................. 62
Consultation With Counsel ............................................. 63
REPORTS ................................................................... 63
INVESTMENT MATTERS ........................................................ 63
USE OF PROCEEDS ........................................................... 64
METHODS OF DISTRIBUTION ................................................... 64
LEGAL MATTERS ............................................................. 64
FINANCIAL INFORMATION ..................................................... 64
ADDITIONAL INFORMATION .................................................... 64
ANNEX I ................................................................... A-1
3
<PAGE> 54
SUMMARY OF PROSPECTUS
- - 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, carefully read this entire prospectus and the accompanying
prospectus supplement.
- - This summary provides an overview of the structural elements, calculations,
cash flows and other information to aid your understanding and is qualified by
the full description of these calculations, cash flows and other information in
this prospectus and the accompanying prospectus supplement.
SECURITIES
Mortgage loan asset-backed certificates and mortgage loan asset-backed
notes issuable from time to time in series, in fully registered form or book
entry only form, in authorized denominations, as described in the prospectus
supplement.
THE SPONSOR
Advanta Conduit Receivables, Inc. is a Nevada corporation whose
principal offices are located at 10790 Rancho Bernardo Road, San Diego,
California 92127 and its telephone number is (858) 676-3099.
THE MASTER SERVICER
Advanta Mortgage Corp. USA or its successors and assigns.
THE SUB-SERVICERS
The master servicer may appoint sub-servicers, who may be affiliates,
to perform its servicing duties.
ISSUER OF SECURITIES
The issuer of each series of securities will be a trust established by
the sponsor or one of its affiliates. The securities will either be notes or
certificates. Notes will represent indebtedness of the trust. Certificates will
represent beneficial ownership interests in the trust.
THE MORTGAGE LOANS
Each trust will hold one or more pools of mortgage loans, which may
include:
- - conventional, non-government insured mortgage loans secured by
one-to-four family residential properties;
- - mortgage loans secured by condominiums or security interests in shares
in cooperative housing corporations;
- - mortgage loans on manufactured homes;
- - mortgage loans secured by junior liens on mortgaged properties;
- - non-conforming mortgage loans;
- - mortgage loans with loan-to-value ratios in excess of 100% of the
appraised value of the related mortgaged property but not in excess of
125%; and
- - revolving home equity lines of credit.
The mortgage loans may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The sponsor will direct each trust to acquire the mortgage loans from
affiliated originators, unaffiliated originators or warehouse trusts.
- - Mortgage loans originated by affiliated originators will have been
originated in accordance with the sponsor's underwriting guidelines.
- - Mortgage loans originated by unaffiliated originators and purchased by
the sponsor or its affiliates will have been originated either in
accordance with the sponsor's guidelines or in accordance with
guidelines approved by the sponsor.
- - Mortgage loans may have been purchased by the sponsor in bulk
acquisitions and those loans will have been originated in accordance
with the original originator's guidelines.
4
<PAGE> 55
The majority of the mortgage loans will be non-conforming mortgage
loans in that they have credit characteristics or principal balances that do not
meet Fannie Mae or Freddie Mac underwriting guidelines.
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 of
each series:
- - may be entitled to receive distributions allocable only to principal,
only to interest or to any combination of principal and interest;
- - may only be entitled to receive distributions of prepayments of
principal throughout the lives of the securities or during specified
periods;
- - may be subordinated in its right to receive distributions of scheduled
payments of principal, prepayments of principal, and payments of
principal and interest to one or more other classes of the same series
throughout the life of the securities or during specified 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
principal distributions for a period: subordinated classes could be
entitled to receive payments of principal only after a specified
overcollaterization target had been met;
- - 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 rate that is
subject to change from time to time;
- - may accrue, and not pay, interest until other classes of the series
have been paid in full; the accrued interest will be added to the
principal or notional amount of the securities and will be payable only
after the other classes have been paid; and
- - may be entitled to distributions allocable to interest only after the
occurrence of specified events; the accrued interest will be added to
the principal or notional amount of the securities until the specified
events occur.
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 the prepayment speed of the underlying pool of
mortgage loans, optional or mandatory prepayment features of the securities, and
the price paid for the securities. Some investors in these 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.
DISTRIBUTIONS ON THE SECURITIES
Owners of securities will be entitled to receive payments in the manner
described in the prospectus supplement. The prospectus supplement will specify:
- - whether distributions will be made monthly, quarterly, semi-annually or
at other intervals;
- - the amount allocable to payments of principal and the amount allocable
to payments of interest on any distribution date; and
- - the priorities which govern the distributions of principal and
interest.
PRE-FUNDING FEATURE
A trust may enter into agreements with the sponsor, in which the
sponsor will request or direct the trust to acquire mortgage loans after the
securities are issued. The transfer of mortgage loans after the date the
securities are issued is known as the pre-funding feature. Any subsequent
mortgage loans will be required to conform to the requirements described in the
prospectus supplement. If the pre-funding feature is used, the trustee or
indenture 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 mortgage loans will be transferred to the trust in exchange for money
5
<PAGE> 56
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 REMIC or 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.
OPTIONAL REDEMPTION
The master servicer or any of its affiliated sub-servicers or, if
applicable, the credit enhancement provider may, at their respective options,
cause the early redemption of a series of securities through the purchase of the
mortgage loans in the trust. The optional redemption may only occur on a date
following the date when the aggregate outstanding principal balance of either
the securities or the mortgage loans is reduced below a specified percentage of
their respective original balances.
MANDATORY REDEMPTION
The trustee or the indenture trustee, as applicable, the master
servicer or any of its affiliated sub-servicers or other persons specified in
the prospectus supplement may be required to cause the early redemption of a
series of securities by soliciting competitive bids for the purchase of the
assets of the trust or otherwise.
If a pre-funding feature is used for any series of securities, at the
end of the pre-funding period any unused amounts will be applied as a mandatory
redemption of a class or classes of securities.
ADVANCES
The servicer of the mortgage loans may be obligated to advance
delinquent installments of interest, or principal and interest, less applicable
servicing fees, on the mortgage loans. The obligation to make advances may be
limited to amounts due to the owners of securities of the series, amounts deemed
to be recoverable from late payments or liquidation proceeds, specified periods
or to any combination of these considerations. The extent of the obligation to
make advances will be specified in the prospectus supplement. The advance will
be recoverable as specified in the prospectus supplement.
In addition, the servicer may be obligated, in some months to pay
interest shortfalls which arise due to prepayments on the mortgage loans in the
month in which the prepayment occurs. The payment must come from the servicer's
own funds without any right of reimbursement but are limited to the servicing
fee the master servicer collected that month.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect
the owners of securities against losses due to defaults on the mortgage 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 including but not limited to,
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 in more senior classes of securities;
- - the allocation of losses on the mortgage loans to the lower classes of
securities; and
- - the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees, letters of credit and similar instruments and
arrangements.
The protection against losses afforded by any credit enhancement will
be limited in the manner described in the prospectus supplement.
BOOK ENTRY REGISTRATION
One or more classes of a series of securities may be issued in book
entry form in the name of a clearing agency registered with the Securities and
Exchange Commission or its nominee. Transfers and pledges of book entry
securities may be made only through entries on the books of the clearing agency.
All references to the holders or owners of securities mean the beneficial
owners, unless the context specifically requires otherwise.
FEDERAL INCOME
TAX CONSEQUENCES
The securities of each series will, for federal income tax purposes,
constitute one of the following:
6
<PAGE> 57
- - interests in a trust treated as a grantor trust under applicable
provisions of the Internal Revenue Code,
- - regular interests or residual interests in a trust treated as a real
estate mortgage investment conduit or REMIC under Sections 860A through
860G of the Internal Revenue Code,
- - debt issued by a trust,
- - 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
Sections 860H through 860L of the Internal Revenue Code.
We suggest that you review Material Federal Income Tax Consequences
beginning on page 56 in this prospectus and in the prospectus supplement. In
addition, you may wish to 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 Section 4975 of 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 79 in this prospectus and in the
prospectus supplement.
LEGAL INVESTMENT MATTERS
The prospectus supplement will state whether or not the securities will
constitute mortgage related securities under the Secondary Mortgage Market
Enhancement Act of 1984.
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.
RISK FACTORS
Investment in the securities will be subject to one or more risk
factors, including declines in the value of mortgaged properties, prepayment of
mortgage loans, higher risks of defaults on particular types of mortgage loans,
limitations on security for the mortgage loans, limitations on credit
enhancement and various other factors. We suggest that you read Risk Factors
beginning on page 9 in this prospectus and in the prospectus supplement for a
discussion of these and other risk factors that you may wish to consider before
investing in the securities.
7
<PAGE> 58
RISK FACTORS
You may wish to consider the following risk factors prior to any purchase
of any class of securities. You may also wish to consider the information under
the caption "Risk Factors" in the accompanying prospectus supplement.
YOU MAY NOT BE ABLE TO SELL YOUR SECURITIES, AND MAY HAVE TO HOLD YOUR
SECURITIES TO MATURITY EVEN THOUGH YOU MAY WANT TO SELL IT.
A secondary market for these securities is unlikely to develop. If it does
develop, it may 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 MORTGAGE LOANS COULD CAUSE YOU TO BE PAID EARLIER THAN YOU
EXPECT, WHICH MAY ADVERSELY AFFECT YOUR YIELD TO MATURITY.
- - The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the mortgage
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.
- - The yield to maturity on interest only securities will be extremely
sensitive to the rate of prepayments on the mortgage loans. If the
mortgage loans prepay very quickly the yield on an interest only
security could be dramatically reduced.
- - The mortgage loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay a prepayment
penalty or premium. These penalties will generally not be property of
the trust, and will not be available for distributions to you.
- - 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 mortgage market interest rates, the availability
of alternative financing, local and regional economic conditions and
homeowner mobility. Therefore, we can give no assurance as to the level
of prepayments that a trust will experience.
- - Prepayments may result from mandatory redemptions relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, payments in connection with refinancings of the first
mortgages, sales of mortgaged properties subject to due-on-sale
provisions and liquidations due to default, as well as the receipt of
proceeds from mortgage insurance policies, credit life and disability
insurance policies. In addition, repurchases or purchases of mortgage
loans from the trust or the payment of substitution adjustments will
have the same effect on the securities as a prepayment of the loans.
- - 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 mortgage loans or the securities is less than a
specified amount or percentage.
Any of the foregoing principal prepayments may adversely affect the yield to
maturity of the prepaid securities. Since prevailing interest rates are subject
to fluctuation, there can be no assurance that you will be able to reinvest
these prepaid 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.
8
<PAGE> 59
CREDIT ENHANCEMENT, IF PROVIDED, WILL BE LIMITED IN BOTH AMOUNT AND SCOPE OF
COVERAGE, AND MAY NOT BE SUFFICIENT TO COVER ALL LOSSES OR RISKS ON YOUR
INVESTMENT.
Credit enhancement may be provided in limited amounts to cover some, but not
all, types of losses on the mortgage loans and may reduce over time 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 directly or
indirectly guarantee to the investors 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.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES ON THE MORTGAGE LOANS.
An investment in securities which are backed by residential real estate loans
may be affected by a decline in real estate values and changes in the borrowers'
financial condition. If property values decline, the rates of delinquencies and
foreclosures could rise, increasing the likelihood of loss. If these losses are
not covered by any credit enhancement, you will bear the risk of these losses
and will have to look primarily to the value of the mortgaged properties for
recovery of the outstanding principal and unpaid interest on the defaulted
loans.
MORTGAGE LOANS WITH BALLOON PAYMENT FEATURES MAY HAVE GREATER DEFAULT RISK.
Some of the mortgage loans may be balloon loans that provide for the payment of
a large remaining principal balance in a single payment at maturity. The
mortgagor on this type of loan may not be able to pay the large payment, and may
also be unable to refinance the mortgage loan at maturity. As a result, the
default risk associated with balloon loans may be greater than that associated
with fully amortizing loans because of the large payment at maturity.
MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE RATIOS MAY NOT HAVE ADEQUATE SECURITY IN
THE EVENT OF A DEFAULT, WHICH MAY RESULT IN MORE SEVERE LOSSES.
Even though all of the mortgage loans will be secured by residential real
estate, in some cases the value of the real estate may be close to, or even less
than, the amount of the mortgage loan. As a result, the mortgaged properties may
not provide adequate security for these high loan-to-value loans. The
underwriting analysis for high loan-to-value loans relies more heavily on the
mortgagor's creditworthiness than on the protection afforded by the security
interest in the mortgaged property.
Additionally, there is also the risk that if mortgagor sells the property, he or
she may be unable to pay the mortgage loan in full from the proceeds of the sale
and may default. The costs incurred by the servicer in the collection and
liquidation of high loan-to-value loans may be higher than for other loans,
because the servicer may be required to pursue collection solely against the
mortgagor and not the property. Consequently, the losses on defaulted high
loan-to-value loans may be more severe as there is no assurance that proceeds
from the sale will be sufficient to repay the mortgage loan.
MORTGAGE LOANS SECURED BY JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF
DELINQUENCIES AND LOSSES.
Some of the mortgage loans will be secured by second, or even more junior, liens
which are subordinate to the rights of the more senior mortgagees. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims of all senior mortgagees have been satisfied in full. In
addition, a mortgagee secured by a junior lien may not foreclose on the
mortgaged property unless it either pays off the senior mortgage or undertakes
to make payments on the senior mortgage. The trust will not have any source of
funds to satisfy any senior mortgage or make payments due to any senior
mortgagee. This lack of funds could prevent the trust from foreclosing on a
junior lien mortgage in a timely manner which may lead to increased loss.
9
<PAGE> 60
FORECLOSURE OF MORTGAGED PROPERTIES INVOLVE DELAYS AND EXPENSE AND COULD CAUSE
LOSSES ON THE MORTGAGE LOANS.
Even if the mortgaged properties provide adequate security for the mortgage
loans, substantial delays could be encountered and substantial costs could be
incurred in connection with the foreclosure of defaulted loans, and
corresponding delays in the receipt of the foreclosure proceeds could occur. The
master servicer will have limited discretion to permit delinquent loans to
remain delinquent for an extended period of time prior to instituting
foreclosure proceedings, which will delay the receipt of net proceeds to the
trust. Foreclosures are regulated by state statutes, rules and judicial
decisions and are subject to many of the delays and expenses of other lawsuits,
sometimes requiring several years to complete. The master servicer will in most
cases be entitled to reimburse itself for any expenses it has paid in attempting
to recover amounts due on the liquidated loans, including payments to prior
lienholders, accrued fees of the master servicer, legal fees and costs of legal
action, real estate taxes, and maintenance and preservation expenses, all which
will reduce the amount of the net proceeds to the trust and the amount available
to make distributions to you.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF
PARTICULAR REGIONS EXPERIENCE DOWNTURNS.
Some geographic regions from time to time will experience weaker regional
economic conditions and housing markets than will other regions, and,
consequently, will experience higher rates of loss and delinquency. The mortgage
loans series of securities may be concentrated in these weaker regions, and
these concentrations may present risks in addition to those present for similar
asset-backed securities without these concentrations. Information about
geographic concentration of mortgaged properties will be specified in the
accompanying prospectus supplement.
ENVIRONMENTAL CONDITION OF THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY FOR
THE TRUST, WHICH COULD REDUCE THE AMOUNTS AVAILABLE TO PAY YOU ON YOUR
SECURITIES.
Real property pledged as security to the trust may be subject to environmental
risks which could cause losses on your securities. Under the laws of some
states, contamination of a mortgaged property may give rise to a lien on the
mortgaged property to assure the costs of clean up. In several states, this type
of lien has priority over the lien of an existing mortgage or owner's interest
against the property. In addition, under the laws of some states and under
federal law, a lender may be liable for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender such as a trust also will
increase its risk of environmental liability upon the foreclosure of the
mortgaged property, since the trust may then become the legal owner of the
property.
SECURITY INTERESTS IN MANUFACTURED HOMES MAY NOT BE PERFECTED AND THE TRUST MAY
NOT REALIZE UPON THE FULL AMOUNT DUE UNDER THE MORTGAGE LOAN.
Some of the mortgage loans may be secured by manufactured homes and, in some
cases, the real estate on which the manufactured home is located. Some federal
and state laws, which do not apply to other types of mortgage loans, limit the
master servicer's ability to foreclose on manufactured homes or may limit the
amount realized to less than the amount due under the mortgage loan. These
limitations could cause losses on your securities.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE MORTGAGE LOANS.
Residential mortgage lending is highly regulated at both the federal and state
levels and violations of these laws, policies and principles may limit the
ability of the servicer to collect all or part of the amounts due on the
mortgage loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the trust, as the owner of the mortgage loan, to
claims for damages and to administrative enforcement. The occurrence of any of
the foregoing could cause losses on your securities.
10
<PAGE> 61
THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT MAY LIMIT THE MASTER SERVICER'S
ABILITY TO COLLECT ON THE MORTGAGE LOANS.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or similar
state mortgage legislation, benefit mortgagors who enter military service,
including a mortgagor who is a member of the National Guard or is in reserve
status at the time of the origination of the mortgage loan and is later called
to active duty. These mortgagors may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. The
implementation of the Soldiers' and Sailors' Civil Relief Act could have an
adverse effect, for an indeterminate period of time, on the ability of the
servicer to collect full amounts of interest on these mortgage loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes limitations
that would impair the ability of the master servicer to foreclose on loans
during the mortgagor's period of active duty status. Thus, in the event that
these mortgage loans go into default, there may be delays and losses occasioned
by the inability to foreclose on the mortgaged property in a timely fashion.
THE RATINGS ASSIGNED TO YOUR SECURITIES BY THE RATING AGENCIES MAY BE LOWERED OR
WITHDRAWN AT ANYTIME, WHICH MAY AFFECT YOUR ABILITY TO SELL YOUR SECURITIES.
The ratings assigned to the securities will be based on, among other things, the
adequacy of the assets of the trust and any credit enhancement for 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 anytime, which may affect your
ability to sell your securities.
THE SPONSOR'S UNDERWRITING STANDARDS ARE LESS STRINGENT THAN THOSE USED BY
FEDERAL AGENCIES, WHICH MAY INCREASE RISK OF DEFAULT.
The sponsor's and its affiliates' underwriting standards consider, among other
things, a mortgagor's credit history, repayment ability and debt-to-income
ratio, as well as the value of the mortgaged property. The sponsor's and its
affiliates' mortgage loan program provides for the origination of mortgage loans
with credit characteristics that do not meet Fannie Mae or Freddie Mac
underwriting guidelines. These mortgage loans may be more likely to become
delinquent or go into default than mortgage loans which are eligible under
Fannie Mae or Freddie Mac guidelines, and may experience higher rates of
delinquency and default.
A TRUST WITH A PRE-FUNDING FEATURE MAY NOT BE ABLE TO ACQUIRE ENOUGH ADDITIONAL
MORTGAGE LOANS, LEADING TO AN UNEXPECTED PREPAYMENT.
In the event that the sponsor does not have enough subsequent mortgage loans to
deliver to a trust on or before the end of the pre-funding period, the
securityholders will receive a prepayment of principal. Any principal prepayment
may adversely affect the yield to maturity of your securities if you purchased
them at a premium. Prevailing interest rates are subject to fluctuation, so you
may not be able to reinvest a prepayment at yields at or above the yields on
your securities.
A TRUST MAY INCLUDE MORTGAGE LOANS PURCHASED IN BULK FROM ANOTHER ORIGINATOR,
THESE MORTGAGE LOANS MAY NOT PERFORM AS WELL AS THE MORTGAGE LOANS ORIGINATED BY
THE SPONSOR OR ITS AFFILIATES.
A trust may include mortgage loans acquired in a bulk purchase. These mortgage
loans may be of a different credit quality than the sponsor's and its
affiliates' own mortgage loans, and may only be reviewed by the sponsor on a
sample basis. These mortgage loans may experience higher rates of delinquencies
and defaults.
11
<PAGE> 62
ADJUSTABLE RATE MORTGAGE LOANS MAY BE MORE LIKELY TO DEFAULT WHEN THE LOAN
PAYMENTS INCREASE.
Adjustable rate mortgage loans may be underwritten on the basis of an low
initial interest rate and an assessment that mortgagors will have the ability to
make higher payments as a result of a higher interest rate after relatively
short periods of time. In some instances, mortgagors' income may not be
sufficient to enable them to continue to make their loan payments as the amount
of the payments increase, therefore the likelihood of default will increase.
PAY-FOR-PERFORMANCE MORTGAGE LOANS MAY REDUCE AMOUNT OF COLLECTIONS ON THE
MORTGAGE LOANS WHICH MAY ADVERSELY AFFECT INVESTMENT.
Some of the mortgage loans may constitute pay-for-performance mortgage loans
which are originated with a stated coupon rate which may decrease if the
mortgagor maintains a steady history of timely payments over a specified period
of time. A decrease in coupon rate, although indicative of good payment
performance, may result in decreased cash proceeds received by the trust and as
a result, less cash will be available for distribution to securityholders.
INTEREST ONLY FEATURE OF REVOLVING HOME EQUITY LINES OF CREDIT MAY ADVERSELY
AFFECT INVESTMENT.
The home equity lines of credit have an interest only feature during the initial
three or five year draw period, and borrowers are only required to pay the
greater of $50.00 or the finance charge that accrued on the outstanding balance
of the home equity line of credit during the billing period. No principal
payments are required during the draw period. As a result, amounts collected by
the trust attributable to principal payments may be minimal during the draw
period and little or no principal will be paid to holders of securities issued
by the trust during the draw period.
The master servicer or the originator may each extend the draw period of a
revolving home equity line of credit in accordance with the terms of the loan
agreement. The decision to extend the draw period may include a review of
specific credit criteria. The ability to postpone the amortization of principal
by extending the draw period may have the additional effect of increasing the
combined loan-to-value ratio of the mortgage loan which in turn may increase the
likelihood of default.
12
<PAGE> 63
THE TRUSTS
From time to time, Advanta Conduit Receivables, Inc., in its capacity as
the sponsor of the trusts, will cause a separate trust to issue one or more
series of mortgage loan asset-backed certificates or mortgage loan asset-backed
notes. The primary assets of each trust will consist of a segregated pool of
one- to four-family residential mortgage loans, acquired by that trust from one
or more originators, the sponsor, its affiliates or from trusts created by the
sponsor or its affiliates to finance the origination of mortgage loans. The
certificates issued by a trust will represent beneficial ownership interests in
the mortgage loans held by that trust, and the notes will represent debt secured
by the mortgage loans.
Each trust will be established by to a trust agreement between the
sponsor and the designated trustee.
Securities that represent debt of a trust will be issued under an
indenture and securities that represent beneficial ownership interests in a
trust will be issued under a trust agreement.
The mortgage loans held by each trust will be master serviced by Advanta
Mortgage Corp. USA.
Each security will be backed only by the assets of the trust that issued
the security, and not the assets of any other trust except that in limited
situations, collections on mortgage loans in one trust in excess of amounts
needed to pay the securities may be used to make payments on securities issued
by other trusts, or may be reallocated as directed by the sponsor.
In the case of any individual trust, the contractual arrangements
relating to the establishment of the trust, the servicing of the mortgage loans
and the issuance of the securities may be contained in a single agreement, or in
several agreements which combine aspects of the trust agreement, the servicing
agreement and the indenture. For purposes of this prospectus, the term
agreements means all of the agreements relating to the establishment of the
trust, the servicing of the mortgage loans held by the trust and the issuance of
the securities by the trust.
THE MORTGAGE LOANS
TYPES OF MORTGAGE LOANS WHICH WILL BE HELD BY THE TRUSTS.
Each pool will consist primarily of mortgage loans, minus any portion of
the accrued interest payments due that may have been retained by any originator
or broker, or any other interest retained by the sponsor or any affiliate of the
sponsor, including interest accrued and principal collected prior to the cut-off
date. The mortgage loans will be evidenced by mortgage notes secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on one- to four-family residential properties. The mortgaged properties
will consist primarily of attached or detached single-family dwelling units,
two- to four-family dwelling units, condominiums, townhouses, row houses,
individual units in planned-unit developments, cooperative apartment loans
secured by security interests in shares issued by cooperatives, small mixed use
properties, and manufactured houses. The mortgaged properties may be owner
occupied properties, which includes second and vacation homes, and non-owner
occupied properties. A mortgage loan may also be secured by the pledge of a
limited amount of non real estate collateral, such as fixtures or personal
property that includes, but is not limited to, furniture and appliances.
The mortgaged properties may be located in any one of the fifty states,
the District of Columbia, Puerto Rico or any other territories of the United
States. The mortgage loans will be what are commonly referred to as conventional
loans, meaning loans that are not insured or guaranteed by any governmental
agency. Mortgage loans with loan-to-value ratios or principal balances greater
than a specified amount may be covered wholly or partially by primary mortgage
insurance policies.
Each mortgage loan will be selected by the sponsor for inclusion in a
trust from among mortgage loans originated by one or more institutions
affiliated with the sponsor, or purchased by the sponsor from banks, savings and
loan associations, mortgage bankers, mortgage brokers, investment banking firms,
the FDIC and other mortgage
13
<PAGE> 64
loan originators or purchasers not affiliated with the sponsor. The
characteristics of the mortgage loans in a trust will be described in the
prospectus supplement.
All of the mortgage loans will have payments that are due monthly or
bi-weekly, and will consist of one or more of the following types:
- - Fixed-rate, fully-amortizing mortgage loans which may include mortgage
loans converted from adjustable-rate mortgage loans or otherwise
modified providing for level monthly payments of principal and interest
and terms at origination or modification of generally not more than 30
years;
- - Adjustable rate mortgage loans having original or modified terms to
maturity of generally not more than 30 years with a coupon rate that
adjusts periodically, at the intervals described in the mortgage note
over the term of the mortgage loan. The adjustable coupon rate is equal
to the sum of a fixed margin and a specified index such as, by way of
example:
- - U.S. treasury securities of a specified constant maturity,
- - weekly auction average investment yield of U.S. treasury bills of
specified maturities,
- - prime,
- - the cost of funds of member institutions for the Federal Home Loan Bank
of San Francisco, or
- - London Interbank Offered Rate.
The prospectus supplement will describe the relevant index, and aggregate
information regarding the highest, lowest and weighted average margins with
respect to the adjustable rate loans in the trust. An adjustable rate loan may
include a provision that allows the mortgagor to convert the adjustable coupon
rate to a fixed rate at some point during the term.
- - Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of generally not more than 30 years with
monthly payments during the first year calculated on the basis of an
assumed coupon rate that will be lower than the coupon rate for to the
mortgage loan in subsequent years. Deferred interest, if any, will be
added to the principal balance of the mortgage loans;
- - Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of generally not more than 30 years with
monthly payments in subsequent years that are calculated on the basis
of an assumed coupon rate that will be lower than the coupon rate for
the loan in the first year or first two years. These mortgage loans
require that the mortgagor qualify under certain positive criteria,
including, but not limited to, a good payment history;
- - Balloon mortgage loans, which are mortgage loans having original or
modified terms to maturity of generally 5 to 15 years, which may have
level monthly payments of principal and interest based generally on a
10- to 30- year amortization schedule. The amount of the monthly
payment may remain constant until the maturity date, upon which date
the full outstanding principal balance on the balloon loan will be due
and payable;
- - Modified mortgage loans, which are fixed or adjustable rate mortgage
loans providing for terms at the time of modification of generally not
more than 30 years. Modified mortgage loans may have been consolidated
or have had various terms changed, mortgage loans which have been
converted from adjustable rate mortgage loans to fixed rate mortgage
loans, or construction loans which have been converted to permanent
mortgage loans;
- - Hybrid mortgage loans which are originated having original or modified
terms to maturity of not more than 30 years with monthly payments
during the first two, three, four, or five years, as applicable,
calculated at a fixed
14
<PAGE> 65
coupon rate, which fixed coupon rate then converts to an adjustable
rate for the remainder of the term of the loan. Hybrid loans are
included in adjustable rate mortgage loan pools in most instances;
- - Revolving home equity loans. Interest on each revolving home equity
loan may be computed and payable monthly on the average daily
outstanding principal balance of the loan. From time to time prior to
the expiration of the draw period, additional principal amounts on the
revolving home equity loan may be borrowed up to a maximum amount set
forth in the credit line agreement. Under a revolving home equity loan,
during the draw period, the borrower is obligated to pay only the
amount of interest which accrues on the loan during the billing cycle,
but may also elect to pay all or a portion of the principal. Following
the conclusion of the draw period, the borrower must begin to make
regular scheduled payments of principal and interest commence;
- - Mortgage loans, which contain a feature permitting the coupon rate to
be adjusted one or more times, but not below a specified floor,
depending on the mortgagor's history of payments over a specified
period or periods of time; or
- - Convertible mortgage loans, which can be either adjustable rate loans,
which allow the mortgagors to convert the adjustable rates to a fixed
rate at some point during the life of the mortgage loans or fixed rate
mortgage loans, which allow the mortgagors to convert the fixed rates
to an adjustable rate.
INTEREST PAYMENTS ON THE MORTGAGE LOANS
Interest will be calculated on each mortgage loan by one of three
methods:
Date of Payment or Simple Interest. This method provides that interest is
charged to the mortgagor at the applicable coupon rate on the outstanding
principal balance of the mortgage note and calculated based on the number of
days elapsed between receipt of the mortgagor's last payment through receipt of
the mortgagor's most current payment. The interest is deducted from the
mortgagor's payment amount and the remainder, if any, of the payment is applied
as a reduction to the outstanding principal balance of the mortgage note.
Actuarial Loans. This method provides that interest is charged to the
mortgagor, and payments are due from the mortgagor, as of a scheduled day of
each month which is fixed at the time of origination.
Rule of 78's Loans. This method provides for the payment by the mortgagor
of a specified total amount of payments, payable in equal monthly installments
on each due date, which total represents the principal amount financed and
add-on interest in an amount calculated on the basis of the stated coupon rate
for the term of the mortgage loan. The rate at which the amount of add-on
interest is earned and, correspondingly, the amount of each fixed monthly
payment allocated to reduction of the outstanding principal are calculated in
accordance with the rule of 78's.
PREPAYMENT FEES; DUE ON SALE CLAUSES; ASSUMABLE MORTGAGE LOANS
Prepayments of principal may be subject to a prepayment fee, which may
be fixed for the life of the mortgage loan, may decline over time or may be
prohibited for a period of time. The mortgage loans may include due-on-sale
clauses which permit the mortgagee to demand payment of the entire mortgage loan
in connection with the sale or transfer of the mortgaged property. Other
mortgage loans may be assumable by persons meeting the then applicable
underwriting standards of the originator.
STATISTICAL INFORMATION CONCERNING THE MORTGAGE LOANS
The prospectus supplement for each series of securities will contain
statistical information on the characteristics of the mortgage loans held by the
trust. This statistical information may be based on a sample of the mortgage
loans, and will be presented as of a statistical calculation date, which may
also be the cut-off date. The statistical information may include, among other
things, to the extent applicable to the particular trust:
- - the aggregate outstanding principal balance;
15
<PAGE> 66
- - the average outstanding principal balance;
- - the range of loan-to-value ratios and combined loan-to-value ratios;
- - the range of the coupon rates; and
- - the geographical distribution of the mortgage loans.
If the statistical information presented in a prospectus supplement is
calculated as of a date earlier than the cut-off date for the trust, the actual
statistical characteristics as of the cut-off date will not deviate by more than
5% from the information that is presented.
Preliminary or more general information about the mortgage loans may be
included in the prospectus supplement, and specific or final information about
the mortgage loans may be contained in the agreements, which will be filed with
the Securities and Exchange Commission and will be made available to holders of
the series within fifteen days after the initial issuance of the securities.
The loan-to-value ratio of a mortgage loan is equal to the ratio,
expressed as a percentage, of the original principal balance of the mortgage
loan to the appraised value of the mortgaged property at the time of origination
of the mortgage loan. The combined loan-to-value ratio of a mortgage loan at any
given time is the ratio, expressed as a percentage of the sum of the original
principal balance of the mortgage loan plus, if applicable, the then current
principal balance of all mortgage loans secured by liens on the mortgaged
property having priorities senior to that of the lien which secures the mortgage
loan to the appraised value of the mortgaged property at the time of origination
of the mortgage loan. In general, for purchase money mortgage loans, the
loan-to-value and the combined loan-to-value ratios are calculated using the
lower of the purchased price or appraised values of the mortgaged properties at
the time of origination.
MORTGAGE LOAN PROGRAM AND UNDERWRITING GUIDELINES
As a general matter, the sponsor's mortgage loan program will consist of
the origination and purchase of mortgage loans to mortgagors with non-conforming
credit. A borrower with non-conforming credit is a borrower who does not meet
the standard underwriting guidelines of Fannie Mae or Freddie Mac. However, each
trust may contain mortgage loans which do conform to Fannie Mae or Freddie Mac
standard underwriting guidelines.
The mortgagors generally will have obtained the mortgage loans for one or
more of four reasons:
- - to purchase the mortgaged property,
- - to refinance an existing mortgage loan on more favorable terms,
- - to consolidate debt, or
- - to obtain cash proceeds by borrowing against the mortgagor's equity in
the mortgaged property. It is the sponsor's practice to solicit
existing mortgagors for the possible refinancing of their existing
mortgages if the mortgagors indicate that they are looking for more
favorable terms.
DESCRIPTION OF UNDERWRITING GUIDELINES
The following is a description of the underwriting guidelines customarily
employed by the sponsor and its affiliates in originating or acquiring mortgage
loans. The sponsor's and its affiliates' underwriting guidelines are less
stringent than the standards generally acceptable to Fannie Mae and Freddie Mac
with regard to the mortgagor's credit standing and repayment ability. Mortgagors
who qualify under the sponsor's underwriting guidelines may not satisfy Fannie
Mae and Freddie Mac underwriting guidelines for any number of reasons,
including, without
16
<PAGE> 67
limitation, unsatisfactory payment histories or debt-to-income ratios, or a
record of derogatory credit items such as outstanding judgments or prior
bankruptcies.
The underwriting guidelines to be used in originating or acquiring the
mortgage loans are primarily intended to assess the creditworthiness of the
mortgagor, the value of the mortgaged property and the adequacy of the property
as collateral for the mortgage loans.
Originators' underwriting procedures customarily utilize one of two types
of underwriting guidelines: the sponsor guidelines, which are guidelines of the
sponsor and its affiliated originators and approved guidelines, which are
guidelines of approved unaffiliated originators.
Mortgage loans that are originated by the sponsor and its affiliated
originators are underwritten using the sponsor's guidelines. Mortgage loans that
are purchased by the sponsor and its affiliated originators are underwritten
utilizing either the sponsor's guidelines or the approved guidelines.
SPONSOR'S GUIDELINES
The sponsor's guidelines consider the value and adequacy of the mortgaged
property as collateral for the proposed mortgage loan but also takes into
consideration the mortgagor's credit standing and repayment ability. There are
three major steps in the sponsor's underwriting process: (1) identify the
eligibility and appropriate credit grade of the mortgagor, (2) evaluate the
eligibility and lendable equity of the mortgaged property, and (3) ensure the
loan terms meet those acceptable for that credit grade. On a case by case basis
the sponsor may determine that, based on compensating factors, a prospective
mortgagor may not strictly qualify under a particular underwriting credit grade
risk category but warrants an underwriting exception. Compensating factors may
include, without limitation, relatively low loan-to-value ratio, relatively low
debt-to-income ratio, stable employment and amount of time borrower has lived in
the same residence. It is anticipated that a number of the mortgage loans
underwritten in accordance with the sponsor's guidelines will have been
originated based on underwriting exceptions. The sponsor's guidelines are
revised continuously based on opportunities and prevailing conditions in the
nonconforming credit residential mortgage market, as well as the expected market
for the securities.
In addition to mortgage loans originated by the sponsor and its
affiliated originators, the sponsor and its affiliated originators may purchase
mortgage loans from unaffiliated originators which were underwritten in
accordance with the sponsor's guidelines. The sponsor generally will review or
cause to be reviewed only a limited portion of the mortgage loans purchased from
unaffiliated originators for conformity with the sponsor's guidelines.
The sponsor's guidelines permit the origination and purchase of mortgage
loans with multi-tiered credit characteristics tailored to individual credit
profiles. In general, the sponsor's guidelines require an analysis of the equity
in the mortgaged property, the payment history of the borrower, the borrower's
ability to repay debt, the property type, and the characteristics of the
underlying first mortgage, if any. A lower maximum combined loan-to-value ratio
is required for lower gradations of credit quality and higher property values.
The mortgage loans generally are secured by either owner occupied
properties, including second and vacation homes, or non-owner occupied
properties which, in either case are single-family residences, which may be
detached, part of a two- to four-family dwelling, a condominium unit, coop or a
unit in a planned unit development. The sponsor's guidelines generally require
that the combined loan-to-value ratio of a mortgage loan not exceed 100%, after
taking into account the amount of any primary mortgage insurance applicable to
the mortgage loan.
One of the sponsor's programs specifically relates to mortgage loans with
combined loan-to-value ratios in excess of 100%, but with a maximum of 125%.
This program is known as the high LTV program. Under this high LTV program,
relatively more emphasis in the underwriting analysis is placed on the
borrower's payment history and ability to repay debt, rather than on the
property value of the mortgaged property. High LTV loans are generally targeted
as debt consolidation loans for borrowers with generally strong credit ratings.
Lending decisions for these loans are based on an analysis of the prospective
mortgagor's documented cash flow and credit history supplemented by a property
value evaluation deemed appropriate by the sponsor.
17
<PAGE> 68
For high LTV loans which are senior liens, the sponsor requires hazard
insurance. For high LTV loans which are in a junior lien position, the sponsor
requires verification of the existence of hazard insurance at the time of
origination, but does not generally track hazard insurance after origination.
The value of each property proposed as security for a mortgage loan is
determined by either a full appraisal, a limited appraisal conducted on a
drive-by basis, or a statistical valuation. Two full appraisals are generally
required for properties valued over $500,000.
The sponsor's guidelines provide for the origination of loans under three
general loan programs:
- - a full verification program for salaried or self-employed borrowers,
- - a lite documentation program for borrowers who may have income which
cannot be verified by traditional methods and
- - a non-income verification program for salaried and self-employed
borrowers.
However, the sponsor's guidelines allow for some borrowers with existing loans
to refinance loans with either limited, or no, verification of income. The
sponsor may also purchase pools of mortgage loans which may include some
mortgage loans originated under a non-income verification program for non
salaried or self-employed borrowers.
A credit report by an independent, nationally recognized credit reporting
agency is required reflecting the applicant's complete credit history. The
credit report should reflect delinquencies of 30 days or more, repossessions,
judgments, foreclosures, garnishments, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. All taxes
and assessments not included in the payment are required to be verified as
current. For junior loan mortgages, verification of the outstanding balance, the
payment status and whether local taxes, interest, insurance and assessments are
included in the applicant's monthly payment is required.
In connection with purchase-money loans, the sponsor's guidelines
generally require an acceptable source of funds for downpayment, verification of
the source of the downpayment and adequate cash reserves for owner occupied
second homes and non-owner occupied homes. Adequate equity in the mortgaged
property is used as a countervailing consideration to the first three
requirements.
Loan applicants are protected by laws which offer them a time frame after
loan documents are signed during which the applicant has the right to cancel the
mortgage loan. This time frame is known as the rescission period. The rescission
period must have expired prior to funding a loan and may not be waived by the
applicant except as permitted by law.
The sponsor's guidelines generally require title insurance coverage
issued by an approved ALTA or CLTA title insurance company on each mortgage loan
it purchases. Any of the sponsor, the originator, or their assignees must be
named as the insured party. Where title insurance is not required the sponsor's
guidelines require a property report and title search to evidence that the title
or lien position is as indicated on the mortgage loan application.
The applicant is required to secure property insurance in an amount
sufficient to cover the mortgage loan and any senior mortgage. If the sum of any
outstanding senior mortgage and the mortgage loan exceeds the cost of rebuilding
the mortgaged property, which generally does not include land value, insurance
equal to replacement value may be accepted. The respective originator or its
designee is required to ensure that its name and address is properly added to
the mortgagee clause of the insurance policy. In the event the sponsor or the
originator's name is added to a loss payee clause and the policy does not
provide for written notice of policy changes or cancellation, an endorsement
adding the provision is required.
APPROVED GUIDELINES
The sponsor and its affiliated originators may purchase mortgage loans or
pools of mortgage loans, in whole or in part, from originators that are not
affiliated with the sponsor, unaffiliated originators. The underwriting
18
<PAGE> 69
guidelines employed by unaffiliated originators may deviate from the sponsor's
guidelines but are approved by the sponsor prior to their purchasing the
mortgage loans or pools of mortgage loans and are documented as part of the loan
sale purchase agreement. The sponsor or its affiliated originators will
reunderwrite a representative sample of the mortgage loans to ensure that the
mortgage loans, on a sample basis, are in conformity with the approved
guidelines. There can be no assurance that every mortgage loan was originated in
conformity with the approved guidelines, or that the quality or performance of
mortgage loans underwritten under to the approved guidelines will be equivalent
under all circumstances.
BULK PURCHASES
Mortgage loans purchased in bulk may be originated by a variety of
originators under several different underwriting guidelines. The purchase of
bulk mortgage loans may not conform to either the requirements of the sponsor's
guidelines or the approved guidelines. The sponsor will reunderwrite the
mortgage loans acquired in a bulk purchase on a sample basis. This
reunderwriting may be performed by the sponsor or its affiliated originators or
a third party acting at the direction of the sponsor.
REPRESENTATIONS AND WARRANTIES CONCERNING THE MORTGAGE LOANS
The sponsor will make a number of representations and warranties to the
trust regarding the mortgage loans. The assignment of the mortgage loans to the
trustee will be without recourse, except in the event of a breach of one of
these representations or warranties. The material representations and warranties
state that the schedule of mortgage loans is correct, all material loan
documentation has been provided, not more than a specified amount of loans are
delinquent, and that the mortgage loans were originated in accordance with
applicable laws.
If a breach of any representation or warranty occurs in respect of a
mortgage loan, that materially and adversely affects the interests of the
securityholders in the mortgage loan, the sponsor or the originator may be
obligated to purchase, or cause to be purchased, unqualified mortgage loan from
the trust.
To a limited extent the sponsor, or the originator, may substitute a
qualifying replacement mortgage loan for an unqualified mortgage loan, rather
than repurchase it.
The master servicer will be required to enforce the purchase or
substitution obligations for the benefit of the trustee and the securityholders,
following the practices it would employ in its good faith business judgment if
it were the owner of the mortgage loan. This purchase or substitution obligation
will not, however, become an obligation of the master servicer in the event the
sponsor or the originator fails to honor the obligation. The foregoing will
constitute the sole remedy available to securityholders or the trustee for a
breach of representation.
THE MASTER SERVICER MAY ACT THROUGH SUB-SERVICERS
An originator of a mortgage loan that is affiliated with the sponsor may
act as the sub-servicer for its mortgage loans. A third party acting as a
sub-servicer for the mortgage loans will be required to meet additional
standards concerning its mortgage loan servicing portfolio, including a minimum
tangible net worth under generally accepted accounting principles and other
qualifications.
A sub-servicer may be obligated to make advances to the trust for
- - delinquent installments of principal or interest or principal and
interest, net of any sub-servicing or other compensation, on mortgage
loans,
- - taxes and insurance premiums not paid by the mortgagor on a timely
basis,
- - interest shortfalls resulting from prepayments of the outstanding
principal balance of a mortgage loan to zero. The sub-servicer will be
entitled to reimbursement for servicing-related expenditures that it
makes to the same extent that the master servicer would be reimbursed.
19
<PAGE> 70
No assurance can be given that the sub-servicers will be able to, or
will, carry out their advancing or payment obligations, however the master
servicer will remain obligated as if they were servicing the mortgage loans.
As compensation for its servicing duties, the sub-servicer may be
entitled to receive a fee. The sub-servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties. See "The Agreements--Servicing and Other Compensation and Payment of
Expenses" and "Description of the Securities--Delinquency Advances and Servicing
Advances" for more information.
A sub-servicer may transfer its servicing obligations to another entity
but only with the prior written approval of the master servicer.
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 mortgage loans held by the trust or in the
form of notes representing debt secured by the mortgage 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
mortgage 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 mortgage loans backing that series;
- - the terms of any credit enhancement for that series;
20
<PAGE> 71
- - 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.
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
remittance period, prior to each payment date. Interest accrued and principal
collected on the mortgage loans during a remittance period will be required to
be remitted by the master 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 mortgage loans may be applied by the trustee to the acquisition
of subsequent mortgage 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. Any
interest only or revolving period may terminate prior to the end of the
specified period and result in an earlier than expected amortization of the
securities.
None of the securities or the mortgage loans will be guaranteed or
insured by any governmental agency or instrumentality, the sponsor, the master
servicer, any sub-servicer, the trustee, any originator or any of their
respective affiliates.
PAYMENT DATE DISTRIBUTIONS
On each payment date, distributions of principal and accrued 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.
21
<PAGE> 72
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 accrual period over 360 or on the basis of the
actual number of days in the accrual period over 365 or as described in the
prospectus supplement.
On each payment date for a series of securities, the trustee or the
paying agent will distribute to each securityholder of record 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, and the credit enhancement provider, in most instances,
will be required to fund the deficiency.
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 payments of interest at a fixed,
variable maximum interest rate, commonly referred to as an available funds cap,
which is calculated based on the weighted average of the mortgage loan coupon
rates minus any interest strips retained by the originator and all trust fees,
if so specified in the prospectus supplement, or at another maximum interest
rate as may be described in the prospectus supplement.
The yield on the securities also will be affected by liquidations of
mortgage loans following mortgagor defaults and by purchases of mortgage 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 mortgage loans than other classes of
securities. See "Mortgage Loan Program and Underwriting Guidelines--
Representations and Warranties Concerning the Mortgage Loans" above
and "Description of the Securities--Assignment of Mortgage Loans" below.
The timing of changes in the rate of principal payments on or repurchases
of the mortgage 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.
For some of the adjustable rate loans, the coupon rate at origination may
be a teaser rate which is below the rate that would result if the index and
margin were applied at origination. The repayment of any mortgage loan with a
teaser rate may be dependent on the ability of the mortgagor to make larger
monthly payments following the adjustment of the coupon rate.
22
<PAGE> 73
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the mortgage loans in a given trust
will vary depending upon the type of mortgage loans included in the trust. The
prospectus supplement for a series of securities will contain information
concerning the types and maturities of the mortgage loans in the trust. The
mortgage loans may be prepaid in full or in part at any time although the
mortgagor may be required to pay a prepayment penalty or premium. These
prepayment penalties will generally not be property of the trust. The prepayment
experience of the mortgage loans in a trust will affect the maturity, average
life and yield of the securities.
Payment of the full outstanding principal balance of a balloon loan will
generally depend on the mortgagor's ability to obtain refinancing of the
mortgage loan or to sell the mortgaged property prior to the maturity of the
balloon loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the mortgagor's financial situation,
prevailing mortgage loan coupon rates, the mortgagor's equity in the mortgaged
property, tax laws and prevailing general economic conditions. Neither the
sponsor, the master servicer, nor any of their affiliates will be obligated to
refinance or repurchase any mortgage loan or to sell any mortgaged property
because of a maturing balloon payment.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. The mortgage loans
that contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the mortgage loan upon transfer of the underlying mortgaged
property. The master servicer will enforce any due-on-sale clause to the extent
it has knowledge of the transfer if it is entitled to do so under applicable
law. The master servicer will not take any action to enforce a due-on-sale
provision which would adversely affect or jeopardize coverage under any
applicable insurance policy. The extent to which adjustable rate loans are
assumed by purchasers of the mortgaged properties rather than prepaid by the
mortgagors in connection with the sales of the mortgaged properties will affect
the weighted average life of the series of securities. For a description of
provisions of the agreements and certain legal developments that may affect the
prepayment experience on the mortgage loans. See "Serving Procedures--Collection
and Other Servicing Procedures" and "Legal Aspects of the Mortgage
Loans--Enforceability of Mortgage Loan Provisions".
There can be no assurance as to the rate of prepayment of the mortgage
loans. The sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans over an extended period of time. All statistics known to the
sponsor for prepayment experience on mortgage loans indicates that while some
mortgage loans may remain outstanding until their stated maturities, a
substantial number will be paid prior to their respective stated maturities.
Although the coupon rates on adjustable rate loans will be subject to
periodic adjustments, these adjustments will not increase or decrease the coupon
rates by more than a fixed percentage amount on each adjustment date, not
increase the coupon rates over a fixed percentage amount and be based on an
index which may not rise and fall consistently with mortgage market interest
rate rates plus the margin. As a result, the coupon rates on the adjustable rate
loans in a trust at any time may not equal the prevailing rates for similar,
newly originated adjustable rate mortgage loans. In some rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then current coupon rates on adjustable rate loans that the rate
of prepayment of adjustable rate loans may increase as a result of refinancings.
There can be no certainty as to the rate of prepayments on the mortgage loans
during any period or over the life of any series of securities.
All or a portion of the collected principal may be retained by the
trustee, and held in temporary investments, including mortgage loans, for a
specified period prior to being distributed payments of principal to
securityholders. The result of the retention and temporary investment by the
trustee of principal would be to slow the amortization rate of the securities
relative to the amortization rate of the mortgage loans, or to attempt to match
the amortization rate of the securities to an amortization schedule established
at the time the securities are issued. Those features may terminate upon the
occurrence of events to be described in the prospectus supplement, resulting in
the need to make principal payments to the securityholders and an acceleration
of the amortization of the securities.
23
<PAGE> 74
FORM OF SECURITIES
We expect that the securities of each series will be issued in
uncertificated book-entry form, and will be registered in the name of Cede, the
nominee of the DTC. The prospectus supplement will state if the securities will
be in physical rather than book-entry form. DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a clearing corporation within the meaning of the Uniform
Commercial Code and a clearing agency registered under the Securities Exchange
Act. DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes in their accounts, eliminating the need
for physical movement of certificates. DTC's participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. Indirect access to the DTC system also is available
to indirect participants such as brokers, dealers, banks and trust companies
that clear through or maintain a custodial relationship with a DTC participant,
either directly or indirectly.
Under a book-entry format, securityholders that are not DTC participants
or indirect participants but desire to purchase, sell or otherwise transfer
ownership of securities registered in the name of Cede, as nominee of DTC, may
do so only through participants and indirect participants. In addition, these
securityholders will receive all distributions of principal of and interest on
the securities from the trustee through DTC and its participants.
Securityholders may receive payments after the payment date because DTC will
forward these payments to its participants, which thereafter will be required to
forward these payments to indirect participants or securityholders. Unless and
until physical securities are issued, it is anticipated that the only
securityholder will be Cede, as nominee of DTC, and that the beneficial holders
of securities will not be recognized by the trustee as securityholders under the
agreements. Securityholders which are not DTC participants will only be
permitted to exercise their rights under the agreements through DTC or through
its participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among its
participants and is required to receive and transmit payments of principal of
and interest on the securities. DTC's participants and indirect participants are
required to make book-entry transfers and receive and transmit payments on
behalf of their respective securityholders. Accordingly, although
securityholders will not possess physical securities, the rules provide a
mechanism by which securityholders will receive distributions and will be able
to transfer their interests.
Unless and until physical securities are issued, securityholders who are
not DTC participants may transfer ownership of securities only through DTC
participants by instructing those participants to transfer securities, through
DTC for the account of the purchasers of the securities, which account is
maintained with their respective participants. Under DTC's rules and in
accordance with DTC's normal procedures, transfers of ownership of securities
will be executed through DTC and the accounts of the respective participants at
DTC will be debited and credited. Similarly, the respective participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing securityholders.
Because DTC can only act on behalf of its participants, who in turn act
on behalf of indirect participants and some banks, the ability of a
securityholder to pledge securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of the
securities may be limited due to the lack of a physical certificate for the
securities.
DTC in general advises that it will take any action permitted to be taken
by a securityholder under the agreements only at the direction of one or more of
its participants to whose account the securities are credited. Additionally, DTC
advises that it will take actions only at the direction of and on behalf of its
participants whose holdings include current principal amounts of outstanding
securities that satisfy the minimum percentage established in the agreements.
DTC may take conflicting actions if directed by its participants.
Any securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to securityholders or
their nominees, rather than to DTC or its nominee only under the events
specified in the agreements and described in the prospectus supplement. Upon the
occurrence of any of the events specified in the agreements and the prospectus
supplement, DTC will be required to notify its participants of the availability
through DTC of physical certificates. Upon surrender by DTC of the securities
and receipt of
24
<PAGE> 75
instruction for reregistration, the trustee will issue the securities in the
form of physical certificates, and thereafter the trustee will recognize the
holders of the physical certificates as securityholders. Thereafter, payments of
principal of and interest on the securities will be made by the trustee directly
to securityholders in accordance with the procedures set forth in the
agreements. The final distribution of any security whether physical certificates
or securities registered in the name of Cede, however, will be made only upon
presentation and surrender of the securities on the final payment date at the
office or agency specified in the notice of final payment to securityholders.
None of the sponsor, the originators, the master servicer or the trustee
will have any liability for any actions taken by DTC or its nominee or Cedel or
Euroclear, including, without limitation, actions for any aspect of the records
relating to or payments made on account of the securities held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to the securities.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of securities, the sponsor will
direct or request the mortgage loans to be acquired by the trust to be assigned
to the trustee together with all interest accrued and principal collected in
respect of the mortgage loans on or after the cut-off date. Each mortgage loan
will be identified in a schedule appearing as an exhibit to the agreements.
In connection with the establishment of a trust, the sponsor may first
transfer the mortgage loan to an affiliate and the affiliate will then transfer
the mortgage loan to the trust. The prospectus supplement will describe any
requirements for the delivery of mortgage documents, such as mortgage notes and
assignments of mortgage, in connection with the establishment of the trust.
The trustee will be authorized to appoint a custodian to maintain
possession of and, if applicable, to review the documents relating to the
mortgage loans as the agent of the trustee.
PRE-FUNDING FEATURE; MANDATORY PREPAYMENT
A trust may contain a feature which allows the sponsor or its affiliates
to transfer subsequent mortgage loans to the trust following the date the trust
is established and the securities are issued. Any mortgage loans subsequently
transferred to a trust will be required to conform to required mortgage loan
characteristics, and satisfaction of the conditions in the agreements.
If the pre-funding feature is to be used, then the trustee will be
required to deposit a portion of the net proceeds received in connection with
the sale of one or more classes of securities in a segregated account. The
subsequent mortgage loans will be transferred to the trust in exchange for money
released by the trustee from this segregated pre-funding account. These
transfers must occur within a specified period, not to exceed one year, from the
date the trust was established. If a trust elects federal income treatment as a
REMIC or as a grantor trust, the pre-funding period will be limited to three
months.
During the pre-funding period, the monies deposited to the pre-funding
account will be invested in one or more of the following eligible investments:
- - Direct general obligations of the United States or the obligations of any
agency or instrumentality of the United States fully and unconditionally
guaranteed, the timely payment or the guarantee of which constitutes a
full faith and credit obligation of the United States.
- - Federal Housing Administration debentures rated Aa2 or higher by Moody's
and AA or better by Standard & Poor's.
- - Freddie Mac senior debt obligations rated Aa2 or higher by Moody's and AA
or better by Standard & Poor's.
25
<PAGE> 76
- - Federal Home Loan Banks' consolidated senior debt obligations rated Aa2
or higher by Moody's and AA or better by Standard & Poor's.
- - Federal funds, certificates of deposit, time and demand deposits, and
bankers' acceptances which have original maturities of not more than 365
days of any domestic bank, the short-term debt obligations of which are
rated A-1 or better by Standard & Poor's and P-1 by Moody's.
- - Investment agreements approved by the credit enhancement provider or the
trustee.
- - Commercial paper which has an original maturities of not more than 365
days rated A-1 or better by Standard & Poor's and P-1 or better by
Moody's.
- - Investments in money market funds rated AAAm or AAAM-G by Standard &
Poor's and Aaa by Moody's.
- - Other investments approved in writing by the credit enhancement provider
or the trustee and acceptable to the rating agencies.
The agreements will require that, if all monies originally deposited to a
pre-funding account are not used by the end of the pre-funding period, then any
remaining monies will be applied as a mandatory prepayment of principal on the
securities.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
As set forth in the agreements, the master servicer will deposit or will
cause to be deposited into one or more accounts, known as the principal and
interest account, the following amounts for the mortgage loans:
- - all payments on account of principal, including principal prepayments;
- - all payments on account of accrued interest, net of the portion of each
payment thereof retained by the master servicer, if any, as its servicing
fee or other compensation and any interest accrued prior to the cut-off
date;
- - all net liquidation proceeds received and retained, if any, in connection
with the liquidation of any defaulted mortgage loan, by foreclosure, deed
in lieu of foreclosure or otherwise. All proceeds of any mortgage
insurance policy and proceeds from any alternative arrangements
established in lieu of any insurance, other than proceeds to be applied
to the restoration of the mortgaged property or released to the mortgagor
in accordance with the master servicer's normal servicing procedures. The
deposit shall be net of unreimbursed liquidation expenses, insured
expenses incurred and unreimbursed advances by the master servicer or by
the sub-servicer and net of the premiums paid for, or the proceeds of,
credit life insurance policies;
- - all proceeds of any mortgage loan purchased from the trust or, in the
case of a mortgage loan substitution, amounts representing a principal
adjustment;
- - any amounts required to be deposited by the master servicer in connection
with losses realized on investments of funds held in the principal and
interest account;
- - any amounts required to be deposited in connection with the liquidation
of the trust property; and
- - any amounts required to be transferred from the distribution account to
the principal and interest account.
All deposits shall be made on a daily basis, but no later than two
business days following receipt of those amounts.
26
<PAGE> 77
The portion of any payment received by the master servicer in respect of
a mortgage loan that is allocable to any interest strip retained by the
originator or other person will not be deposited into the principal and interest
account, but will be paid over to the parties entitled to those amounts.
In addition to the principal and interest account, the sponsor shall
cause to be established and the trustee will maintain, at the corporate trust
office of the trustee, in the name of the trust for the benefit of the holders
of each series of securities a distribution account to be used for the
disbursement of payments on each series of securities. The principal and
interest account and the distribution account each must be maintained with an
institution whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund of the FDIC, which is acceptable to the rating
agencies.
In addition, the trustee will cause all payments received by it from any
credit enhancement provider to be deposited in the distribution account not
later than the payment date.
All funds in the distribution account will be invested and reinvested by
the trustee for the benefit of the securityholders and any credit enhancement
provider, as directed by the master servicer, in designated eligible
investments. The principal and interest account may contain funds relating to
more than one series of securities as well as payments received on other
mortgage loans serviced or master serviced by it that have been deposited into
the principal and interest account. All funds in the principal and interest
account will be required to be held either uninvested, up to limits insured by
the FDIC or invested by the master servicer in the designated eligible
investments. The master servicer will be entitled to net investment proceeds on
the funds in the principal and interest account and the distribution account
held by the trustee.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
On a day preceding each payment date, the master servicer will withdraw
from the principal and interest account and remit to the trustee for deposit in
the distribution account;
- - the amount to be distributed to securityholders on that payment date;
- - any amounts required to be transferred to any reserve account established
for that series;
- - any amounts required to be paid by the master servicer out of its own
funds due to the operation of a deductible clause in any blanket
insurance policies maintained by the master servicer to cover losses on
the mortgage loans;
- - any other amounts as specifically set forth in the agreements; and
- - the amount of any advances made by the master servicer.
In addition, the master servicer may from time to time make withdrawals
from the principal and interest account for the following purposes:
- - to reimburse itself or any sub-servicer for any accrued and unpaid
servicing fees and for reimbursable advances, out of late payments or
collections on the mortgage loan, including liquidation proceeds,
mortgage insurance proceeds and other amounts collected by the master
servicer from the mortgagor or otherwise relating to the mortgage loan;
- - to reimburse itself from any funds for any advances determined in good
faith not to be recoverable from the mortgage loan;
- - to withdraw investment earnings on amounts on deposit in the account;
- - to pay the sponsor or its assignee all amounts allocable to any interest
strip retained by the originator out of collections or payments which
represent interest on the mortgage loan;
27
<PAGE> 78
- - to pay to the sponsor interest accrued and principal collected prior to
the cut-off date only if these amounts were previously deposited;
- - to withdraw amounts that have been deposited in error;
- - to clear and terminate the account in connection with the termination of
the trust; and
- - to invest in eligible investments as defined in the "Pre-Funding;
Mandatory Repayment" section.
DELINQUENCY ADVANCES AND SERVICING ADVANCES
In the event of a delinquency, the master servicer or any sub-servicer
will be required to deposit into the principal and interest account an advance
in an amount equal to delinquent interest, net of the servicing fees and any
interest strips retained by an originator. This advance is known as a
delinquency advance. Delinquency advances are only required if, in its good
faith business judgment, the master servicer believes that this amount will
ultimately be recovered from the mortgage loan. The master servicer may also be
required to advance delinquent payments of principal. The master servicer will
be permitted to fund its payment of delinquency advances from collections of
another mortgage loan deposited into the principal and interest account after
the remittance period. A delinquency advance later determined by the master
servicer not to be recoverable will be reimbursable from any amounts on deposit
in the principal and interest account prior to any distributions to the
securityholders. A sub-servicer will be permitted to fund its payment of
delinquency advances as set forth in the sub-servicing agreement.
A mortgage loan is delinquent if any payment due on the mortgage loan is
not made by the close of business on the day the payment is scheduled to be due
plus any applicable grace period.
If a full principal prepayment occurs, the master servicer or
sub-servicer will be required to deposit in the principal and interest account
an amount of interest equal to the difference between (1) 30 days' interest at
the mortgage loan's coupon rate, less the related servicing fees and the amount
of any interest strip retained by an originator, on the principal balance of the
mortgage loan as of the first day of the remittance period and (2) to the extent
not previously advanced, the interest paid by the mortgagor during that
remittance period, less the servicing fee and the amount of any interest strip
retained by an originator. This interest advance is known as compensating
interest. The master servicer is not required to pay compensating interest
during any remittance period in an amount in excess of the aggregate servicing
fees received by it for trust.
Neither delinquency advances nor compensating interest will be paid by
the master servicer or any sub-servicer for revolving home equity loans.
The master servicer or sub-servicer will also be obligated to make
servicing advances for any out-of-pocket costs and expenses, incurred in the
performance of its servicing obligations, including, but not limited to,
- - expenditures in connection with a foreclosed mortgage loan prior to the
liquidation thereof, including expenditures for real estate property
taxes, hazard insurance premiums and property restoration or
preservation,
- - the cost of any enforcement or judicial proceedings, including
foreclosures and other legal actions and costs that potentially affect
the existence, validity, priority, enforceability or collectibility of
the mortgage loan, including collection agency fees and costs of pursuing
or obtaining personal judgments, garnishments, levies, attachment and
similar actions,
- - the cost of the conservation, management, liquidation, sale or other
disposition of any mortgaged property acquired in satisfaction of the
mortgage loan, including reasonable fees paid to any independent
contractor in connection therewith, and
- - advances to keep liens current, unless the master servicer has determined
that the advance would not be recoverable.
28
<PAGE> 79
No servicing advance will be required to be made by the master servicer
or sub-servicer, if in its good faith judgment it would not be recoverable from
the mortgage loan. Any nonrecoverable servicing advance made by the master
servicer or sub-servicer will be reimbursable from any amounts on deposit in the
principal and interest account prior to any distribution being made to
securityholders.
If the master servicer or one of its affiliated sub-servicers exercises
its option to purchase the assets of a trust under a clean-up call, the master
servicer or sub-servicer will net from the purchase price all advances
previously made by it and not theretofore reimbursed.
REPORTS TO SECURITYHOLDERS
With each distribution to securityholders of a particular class of
securities the trustee will forward or cause to be forwarded to each holder a
statement or statements setting forth the information specifically described in
the prospectus supplement.
In addition, on each payment date the trustee will forward or cause to be
forwarded additional information concerning the trust, as of the close of
business on the last day of the remittance period, as more specifically
described in the prospectus supplement, which generally will include information
about the number and percentage of delinquent mortgage loans, the number of
mortgage loans in foreclosure, or the number of mortgagors in bankruptcy
proceedings and the number of real estate owned properties.
DESCRIPTION OF CREDIT ENHANCEMENT
Various forms of credit enhancement may be provided for one or more
classes of a series of securities or for the mortgage loans in the trust. Credit
enhancement may be in the form of:
- - one or more classes of subordinate securities which provide credit
support to one or more classes of senior securities,
- - a financial guaranty insurance policy, surety bond, reserve account,
letter of credit or other third party guarantees,
- - a cross support feature or overcollateralization, or
- - any combination of the foregoing.
Credit Enhancement may be provided in only a limited amount and may not
provide protection against all risks of loss. If losses occur that exceed the
amount covered by credit enhancement or are not covered by the credit
enhancement, holders of one or more classes of securities will bear their
allocable share of losses.
The following sections describe the material provisions of the various
types of credit enhancement.
FINANCIAL GUARANTY INSURANCE POLICIES
A financial guaranty insurance policy or surety bond may be obtained and
maintained for each class or series of securities. A description, including
financial information, of the issuer of any financial guaranty insurance policy
will be included in the prospectus supplement.
A financial guaranty insurance policy will unconditionally and
irrevocably guarantee to securityholders that an amount equal to each full and
complete insured payment will be received by the trustee on behalf of
securityholders, for distribution by the trustee to each securityholder. The
insured payment will be defined in the prospectus supplement, and in most
instances will be equal to the minimum distribution of interest due to
securityholders.
29
<PAGE> 80
Financial guaranty insurance policies may apply only to some classes, or
may apply at the mortgage loan level and only to specified mortgage loans.
Financial guaranty insurance policies may have limitations on the
financial guaranty insurer's duty to guarantee the obligations of the
originators to repurchase or substitute for any mortgage loans. Financial
guaranty insurance policies will not guarantee any specified rate of
prepayments. In addition, amounts payable under financial guaranty insurance
policies will generally not be available to cover interest shortfalls arising
from the application of the Soldier's and Sailors' Civil Relief Act, or from any
failure of the master servicer to fund compensating interest.
Subject to the terms of the agreements, the financial guaranty insurer
may be subrogated to the rights of each securityholder to receive payments under
the securities to the extent of any payment by the financial guaranty insurer
under the financial guaranty insurance policy.
CROSS SUPPORT AMONG CLASSES
A trust may contain groups of mortgage loans which provide support for
separate classes of securities. In this case, credit support would be in the
form of a cross support feature which allows distribution for one class of
securities to be made from excess amounts available from other groups of
mortgage loans within the same trust. The prospectus supplement for a series
that includes a cross support feature will describe the manner and conditions
for applying the cross support feature.
The credit enhancement provided by one or more forms of cross support may
apply concurrently to two or more separate trusts. The prospectus supplement
will identify the trusts benefiting from any cross support, the manner of
determining the amount and application of the cross support.
OVERCOLLATERALIZATION
Provisions of a trust may allow for the acceleration of the amortization
of one or more classes of securities relative to the amortization of the group
of mortgage loans. The accelerated amortization is achieved by the application
of excess interest to the payment of principal of one or more classes of
securities. This acceleration feature creates overcollateralization which
results from the excess of the aggregate principal balance of the group of
mortgage loans over the principal balance of the class of securities. This
acceleration may continue for the life of the security, or may be limited. In
the case of limited acceleration, once the required level of
overcollateralization is reached, this limited acceleration feature may cease.
The acceleration feature may be activated again if necessary to maintain the
required level of overcollateralization.
SUBORDINATION OF CLASSES
The subordination of one or more classes of securities provides credit
support to the senior classes of the same securities. In a senior/subordinate
structure, the total amount available for distribution on each payment date, as
well as the method for allocating this amount among the various classes of
securities included in the series, will be as set forth in the prospectus
supplement. The amount available for contribution will be allocated first to the
senior securities up to the amounts determined as specified in the prospectus
supplement, prior to allocation of interest or principal to the subordinate
securities of the series. In the event of any realized losses on mortgage loans,
the rights of the subordinate securityholders to receive distributions will be
subordinate to the rights of the senior securityholders.
LETTER OF CREDIT
If any component of credit enhancement as to any series of securities is
to be provided by a letter of credit, the bank issuing the letter of credit will
deliver it to the trustee. The letter of credit may provide direct coverage on
the securities or support the sponsor's or any other person's obligation to make
payments to the trustee. The letter of credit bank, the amount available under
the letter of credit and the expiration date of the letter of credit will be
specified in the prospectus supplement. On or before each payment date, either
the letter of credit bank or the trustee may be required to make the payments
specified in the prospectus supplement after notification from the trustee.
30
<PAGE> 81
The payments required to be made under the terms of the letter of credit shall
be deposited in the distribution account.
RESERVE ACCOUNTS
A trust may create a reserve account to hold any combination of cash, one
or more irrevocable letters of credit or one or more eligible investments in
specified amounts, amounts otherwise distributable to subordinate
securityholders or owners of the residual interest. The amounts held in a
reserve account will be applied to fund shortfalls in amounts due on the
securities in the manner and under the conditions specified in the prospectus
supplement. Reserve account monies may also be applied to reimburse the master
servicer for outstanding advances or may be used for other purposes.
DERIVATIVE CONTRACTS
A trust may hold an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks. These derivate contracts may provide the trust with additional amounts
which will be available to pay interest on the securities, to build up
overcollateralization, or both.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
In most cases, the amount available under any credit enhancement will be
subject to periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis as the aggregate outstanding principal balance of the
mortgage loans declines. Additionally, credit support may be replaced, reduced
or terminated upon the written assurance from each applicable rating agency that
the then current rating of the series of securities will not be adversely
affected. In the event that the credit rating of the issuer of any applicable
credit enhancement is downgraded, the credit rating of the securities may be
downgraded to a corresponding level, and the sponsor will not be obligated to
obtain replacement credit support in order to restore the rating of the
securities.
The sponsor may be permitted to replace one form of credit enhancement
with another form of credit enhancement, or credit enhancement of the same form
but from a different provider, but only if the then current rating of the series
of securities is maintained.
Where the credit support is in the form of a reserve account, a permitted
reduction in the amount of credit enhancement will result in a release of all or
a portion of the assets in the reserve account to any of the holders of the
residual interest in the trust, the sponsor, the master servicer, one or more
originators or the other person that is entitled to receive those amounts. Any
assets so released will not be available to fund distribution obligations in
future periods.
SERVICING PROCEDURES
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer will service the mortgage loans, either directly or
through sub-servicers, who may be affiliates of the master servicer, and will
receive a fee for its services. If any mortgage loans are serviced by the master
servicer through a sub-servicer, the master servicer will remain liable for its
servicing obligations as if the master servicer alone were servicing the
mortgage loans.
The master servicer's obligations will consist principally of its
contractual servicing obligations under the agreements, including its obligation
to enforce the obligations of sub-servicers and of originators. The master
servicer or sub-servicer may also be obligated to make advances of interest
payments in the event of delinquencies and interest shortfalls due to prepayment
of mortgage loans. The obligation of the master servicer to make delinquency
advances will be limited to the extent, in its good faith business judgment that
the delinquency advances would be ultimately recoverable from the mortgage
loans. See "Description of the Securities--Delinquency Advances and Serving
Advances" for more information concerning the advancing obligation.
31
<PAGE> 82
The master servicer acting directly or through one or more sub-servicers
is required to service and administer the mortgage loans in accordance with the
agreements and with reasonable care, and using that degree of skill and
attention that the master servicer exercises for comparable mortgage loans that
it services for itself or others.
The duties of the master servicer include collecting and posting all
payments, responding to inquiries of mortgagors or federal, state or local
government authorities, investigating delinquencies, reporting tax information
to mortgagors, accounting for collections, furnishing monthly and annual
statements to the trustee, and making advances to the extent described in the
agreements. The master servicer is required to follow its customary standards,
policies and procedures in performing its duties as master servicer.
The master servicer is authorized and empowered to execute and deliver,
on behalf of itself, the securityholders, any credit enhancement provider, and
the trustee or any of them, any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge and all other
comparable instruments;
The agreements will require the master servicer or sub-servicer to follow
the collection procedures it follows from time to time for mortgage loans in its
servicing portfolio that are comparable to the mortgage loans. The master
servicer or sub-servicer, however, is always required to follow collection
procedures that are consistent with or better than standard industry practices.
The master servicer may in its discretion:
- - consent to any modification of the terms of any mortgage note not
expressly prohibited by the agreements if the effect of the modification
(1) will not materially and adversely affect the security afforded by the
mortgaged property or the timing of receipt of any payments required
thereunder except for a modification or forbearance permitted by the
agreements; and (2) will not cause a trust which is a REMIC to fail to
qualify as a REMIC.
- - waive any assumption fees, late payment charges, charges for checks
returned for insufficient funds, prepayment fees, if any, or the fees
which may be collected in the ordinary course of servicing the mortgage
loans,
- - if a mortgagor is in default or about to be in default because of a
mortgagor's financial condition, arrange with the mortgagor a schedule
for the payment of delinquent payments due on the mortgage loan; in most
instances the master servicer will not be permitted to reschedule the
payment of delinquent payments more than one time in any twelve
consecutive months for any single mortgagor.
When a mortgaged property has been or is about to be transferred by the
mortgagor, the master servicer will be required, to the extent it has knowledge
of the prospective transfer, to exercise its rights to accelerate the maturity
of the mortgage loan under any due-on-sale clause contained in the mortgage or
note. The master servicer will not, however, be required to exercise this right
if the due-on-sale clause, in the reasonable belief of the master servicer, is
not enforceable under applicable law or if the master servicer reasonably
believes that to permit an assumption of the mortgage loan would not materially
and adversely affect the interests of securityholders, any credit enhancement
provider, or jeopardize coverage under any primary insurance policy or
applicable credit enhancement arrangements. In this event, the master servicer
will be required to enter into an assumption and modification agreement with the
person to whom the mortgaged property has been or is about to be transferred.
Under the assumption agreement, the transferee becomes liable under the mortgage
note and, unless prohibited by applicable law or the agreements, the original
mortgagor remains liable. If the foregoing is not permitted under applicable
law, the master servicer or sub-servicer will be authorized to enter into a
substitution of liability agreement with the transferee, under which the
original mortgagor is released from liability and the transferee is substituted
as mortgagor and becomes liable under the mortgage note. The assumed loan must
conform in all respects to the requirements and representations and warranties
of the agreement and may require the consent of any credit enhancement provider.
Any fee collected by the master servicer or sub-servicer for entering
into an assumption or substitution of liability agreement will be retained by
the master servicer or sub-servicer as additional servicing compensation. See
"Legal Aspects of Mortgage Loans--Enforceability of Mortgage Loan Provisions".
32
<PAGE> 83
The master servicer or sub-servicer will generally have the right to
approve applications of mortgagors seeking consent for partial releases of
mortgages, removal, demolition or division of mortgaged properties.
No application for consent may be approved by the master servicer unless:
- - the provisions of the mortgage note and mortgage have been complied with;
- - the credit profile of the mortgage loan after any release is generally
consistent with the sponsor's guidelines then applicable to the mortgage
loan; and
- - the lien priority of the mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The master servicer will be required to foreclose upon or otherwise
comparably effect the ownership of mortgaged properties relating to defaulted
mortgage loans as to which no satisfactory arrangements can be made for
collection of delinquent payments and which the Master Servicer has not acquired
as an REO property on behalf of the trust. In connection with this foreclosure
or other conversion, the master servicer shall exercise the rights and powers
vested in it, and use the same degree of care and skill in their exercise or use
that prudent mortgage lenders would exercise or use under the circumstances in
the conduct of their own affairs, including, but not limited to, making
servicing advances for the payment of taxes, amounts due on senior liens, and
insurance premiums. The master servicer will be required to sell any foreclosure
property within three years of its acquisition by the trust. The master servicer
generally will be permitted to charge-off a mortgage loan, and to cease further
collection and foreclosure activity on a mortgage loan if it reasonably
determines that further activity would not increase collections or recoveries to
be received by the trust. In the case of revolving home equity mortgage loans,
the master servicer's policy is to charge off mortgage loans, in most instances,
after they have become 180 day delinquent. In addition, any required advancing
may be permitted to cease at this point.
For trusts treated as REMICs, the master servicer will be required to
manage, conserve, protect and operate each foreclosure property for the
securityholders solely for the purpose of its prompt disposition and sale as
foreclosure property within the meaning of Section 860G(a)(8) of the Internal
Revenue Code or to prevent the receipt by the trust of any income from
non-permitted assets within the meaning of Section 860F(a)(2)(B) of the Internal
Revenue Code or any net income from foreclosure property which is subject to
taxation under the REMIC provisions.
The master servicer will, either itself or through an agent protect and
conserve any foreclosure property in the same manner and to the extent as is
customary in the locality where the foreclosure property is located and may,
incident to its conservation and protection of the interests of the
securityholders, rent the same, or any part thereof, as the master servicer
deems to be in the best interest of the securityholders for the period prior to
the sale of the foreclosure property.
The master servicer will take into account the existence of any hazardous
substances, hazardous wastes or solid wastes, as these terms are defined in the
Comprehensive Environmental Response Compensation and Liability Act, the
Resource Conservation and Recovery Act of 1976, or other federal, state or local
environmental legislation, on a mortgaged property in determining whether to
foreclose upon or acquire ownership of the mortgaged property.
If, upon the final liquidation of a defaulted mortgage loan or a
foreclosure property a loss is realized that is not covered by any applicable
form of credit enhancement or other insurance, the securityholders will bear the
loss. However, if a gain results from the final liquidation of a foreclosure
property that is not required by law to be remitted to the mortgagor, the master
servicer will generally be entitled to retain the gain as additional servicing
compensation. For a description of the master servicer's obligations to maintain
and make claims under applicable forms of credit enhancement and insurance
relating to the mortgage loans, see "Description of Credit Enhancement."
33
<PAGE> 84
HAZARD INSURANCE POLICIES
The terms of the mortgage loans require each mortgagor to maintain a
hazard insurance policy for the mortgage loan. If a high LTV mortgage loan is in
a junior lien position, the sponsor requires that a hazard insurance policy
exists at the time the high LTV mortgage loan is originated; however, the master
servicer may not track hazard insurance after origination. Additionally, the
master servicer will cause to be maintained for each mortgage loan, except for
certain high LTV and condominium mortgage loans, a hazard insurance policy with
a generally acceptable carrier that provides for fire and extended coverage
relating to the mortgage loan in an amount not less than the least of the
outstanding principal balance of the mortgage loan, the minimum amount required
to compensate for damage or loss on a replacement cost basis and the full
insurable value of the premises. The master servicer may obtain a blanket policy
to satisfy the requirement for hazard insurance.
If a mortgage loan at the time of origination relates to a mortgaged
property in an area identified in the federal register by the Federal Emergency
Management Agency as having special flood hazards, the master servicer will
maintain with respect thereto a flood insurance policy in a form meeting the
requirements of the then current guidelines of the Federal Insurance
Administration with a generally acceptable carrier. The flood insurance policy
should provide for recovery by the master servicer on behalf of the trust of
insurance proceeds relating to the mortgage loan of not less than the least of
the outstanding principal balance of the mortgage loan, the minimum amount
required to compensate for damage or loss on a replacement cost basis and the
maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973. The master servicer will be required to indemnify the
trust out of the master servicer's own funds for any loss to the trust resulting
from the master servicer's failure to maintain the flood insurance if the
mortgage loan is not covered by the master servicer's blanket policy.
In the event that the master servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the mortgage loans, then, to the extent the policy names the master
servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid principal balance on the mortgage loans without co-insurance, and
otherwise complies with specified requirements, the master servicer shall be
deemed conclusively to have satisfied its obligations to maintain fire, flood
and hazard insurance coverage. The blanket policy may contain a deductible
clause, in which case the master servicer will be required, in the event that
there shall not have been maintained on the mortgaged property a complying
policy, and there shall have been a loss that would have been covered by the
policy, to deposit in the principal and interest account from the master
servicer's own funds the difference, if any, between the amount that would have
been payable under a separate policy and the amount paid under the blanket
policy.
THE SPONSOR
The sponsor, Advanta Conduit Receivables, Inc., was incorporated in the
State of Nevada in March, 1994. It is a direct subsidiary of Advanta Mortgage
Conduit Services, Inc., and an affiliate of Advanta Mortgage Corp. USA. The
sponsor was formed as a special purpose finance subsidiary to facilitate the
issuance of these securities.
The sponsor maintains its principal office at 10790 Rancho Bernardo Road,
San Diego, California 92127. Its telephone number is (858) 676-3099.
THE MASTER SERVICER
Advanta Mortgage Corp. USA or its affiliates will act as the master
servicer for a series of securities. Advanta Mortgage Corp. USA is a Delaware
corporation incorporated in 1983. It is a nationwide servicer of first and
junior lien loans. Advanta Mortgage Corp. USA has centralized servicing
functions located in San Diego, California.
Advanta Mortgage Corp. USA was acquired by Advanta Corp., a Delaware
corporation in September, 1986 and is an indirect subsidiary of Advanta Corp.
The master servicer is an affiliate of Advanta National Bank, a national banking
association domiciled in Delaware and Advanta Bank Corp., a Utah industrial loan
corporation, and the parent of Advanta Mortgage Corp. Midatlantic, Advanta
Mortgage Corp. Midatlantic II, Advanta Mortgage
34
<PAGE> 85
Corp. Midwest, Advanta Mortgage Corp. Northeast, Advanta Finance Corp. and
Advanta Mortgage Conduit Services, Inc.
AVAILABLE INFORMATION; INCORPORATION OF INFORMATION BY REFERENCE
The sponsor has filed a registration statement under the Securities Act
of 1933, with the Securities and Exchange Commission with respect to these
securities. This prospectus contains, and the prospectus supplement for each
series of securities will contain, a summary of the material terms of the
securities, but neither contains nor will contain all of the information
contained in the registration statement of which this prospectus is a part. For
further information, we suggest that you read the registration statement and any
amendments thereof and exhibits to the registration statement. You may obtain a
copy of the registration statement from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of the prescribed charges, or you may examine the
registration statement free of charge at the Securities and Exchange
Commission's offices, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the
regional offices of the Securities and Exchange Commission located at Room 1400,
75 Park Place, New York, New York 10007 and Northwestern Atrium Center, 500 West
Madison Street, Suite 400, Chicago, Illinois 60661-2511. In addition, the
Securities and Exchange Commission maintains a site on the World Wide Web
containing reports, proxy and information statements and other items. The
address is http://www.sec.gov.
We suggest that, in making your investment decision, you rely only on the
information contained in this document and the prospectus supplement. We have
not authorized anyone to provide any information that is different. This
prospectus and any prospectus supplement do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities offered
by this prospectus and that prospectus supplement nor an offer of the securities
to any person in any state or other jurisdiction in which the offer would be
unlawful.
This prospectus incorporates by reference all documents and reports filed
for a series under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act after the date of this prospectus and prior to the termination of the
offering for that series. Information in this prospectus, the accompanying
prospectus supplement or any document that is subsequently incorporated by
reference may modify or supercede information incorporated by reference in this
prospectus. The modified or superceded information will be a part of this
prospectus only in its modified or superceded form.
The sponsor will provide or cause to be provided without charge to each
person to whom this prospectus is delivered in connection with the offering of
one or more classes of securities, a list identifying all filings for that
series under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
since the trust's latest fiscal year covered by its annual report on Form 10-K
and a copy of any or all documents or reports incorporated by reference in this
prospectus for that series, excluding any exhibits to those documents or
reports.
We include cross references in this prospectus to captions where you can
find further discussions. The table of contents located on page 2 of this
prospectus provides the pages on which these captions appear.
You can obtain from the sponsor, free of charge, a copy of the financial
information incorporated by reference by making an oral or written request to
Advanta Conduit Receivables, Inc., Attention: General Counsel, Welsh & McKean
Roads, Spring House, Pennsylvania 19477, (215) 657-4000.
THE AGREEMENTS
Each series of securities will be issued under one or more agreements
which will establish the trust, pool the mortgage loans, provide for the
servicing of the mortgage loans and issue the securities. The following
paragraphs describe the material provisions common to the agreements but are
subject to the more detailed discussion in the prospectus supplement.
35
<PAGE> 86
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Each servicer, whether the master servicer or any sub-servicer, will
retain a servicing fee in connection with its servicing activities equal to the
percentage per annum specified in the prospectus supplement. The servicing fee
is payable monthly and is based on the outstanding principal amount of the
mortgage loans.
In addition to the servicing fee, the master servicer will be entitled to
retain additional servicing compensation in the form of prepayment charges,
release fees, bad check charges, assumption fees, modification fees, late
payment charges, any other servicing type fees, net liquidation proceeds not
required to be deposited in the principal and interest account and similar
items.
The master servicer will pay or cause to be paid some of the ongoing
expenses associated with each trust and incurred by it in connection with its
servicing responsibilities including, without limitation:
- - the fees and disbursements of the trustee, any firm of independent,
nationally recognized certified public accountants, the custodian
appointed by the trustee, the security registrar, any paying agent,
- - expenses incurred in enforcing the obligations of sub-servicers and
originators and
- - any fee or other amount payable in respect of any alternative credit
enhancement arrangements.
The master servicer may be entitled to reimbursement of expenses incurred
in enforcing the obligations of sub-servicers and originators under some limited
circumstances. In addition, the master servicer will be entitled to
reimbursements for some of the expenses incurred by it in connection with
liquidated mortgage loans and in connection with the restoration of mortgaged
properties, the right of reimbursement being prior to the rights of
securityholders to receive any liquidation proceeds, including insurance
proceeds.
EVIDENCE AS TO COMPLIANCE
The agreements will require the master servicer to deliver annually to
the trustee and any credit enhancement provider:
- - an annual officers' certificate to the effect that the master servicer
has fulfilled its obligations under the agreements throughout the
preceding calendar year, and
- - a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the credit
enhancement provider, if applicable, stating that it has examined a
sample of the documents and records of the master servicer and that,
based on the examination, it is of the opinion that the servicing has
been conducted in compliance with the agreements except for immaterial
exceptions and any other exceptions set forth in the letter.
Copies of the annual accountants' statement and the annual officer's
certificate may be obtained by securityholders without charge upon written
request to the master servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
The master servicer may not resign from its obligations and duties,
except in connection with a permitted transfer of servicing, unless the duties
and obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities of a
type and nature presently carried on by it. No resignation of the master
servicer will become effective until the trustee or a successor master servicer
has assumed the master servicer's obligations and duties.
The trustee, the securityholders or any credit enhancement provider, will
have the right to remove the master servicer upon the occurrence of any of the
following
36
<PAGE> 87
- - events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the master servicer and
actions by the master servicer indicating its insolvency or inability to
pay its obligations;
- - the failure of the master servicer to perform any one or more of its
material obligations under the agreements as to which the master servicer
shall continue in default with respect thereto for a period, after notice
of this failure; or
- - the failure of the master servicer to cure any breach of any of its
representations and warranties set forth in the agreements which
materially and adversely affects the interests of the securityholders or
any credit enhancement provider, for a period, after the master
servicer's discovery or receipt of notice.
The agreements may also provide that the credit enhancement provider may
remove the master servicer upon the occurrence of any of these events, subject
to the applicable cure periods:
- - on any payment date, if the total available funds are less than the
amount of any required distribution then due on the credit enhanced
securities, unless the master servicer can demonstrate to the reasonable
satisfaction of the credit enhancement provider that the event was due to
circumstances beyond the control of the master servicer;
- - the failure by the master servicer to make any required advance, or to
pay any required compensating interest; or
- - the failure of the master servicer to perform one or more of its material
obligations under the agreements.
AMENDMENTS TO THE AGREEMENTS
The trustee, the sponsor and the master servicer may amend the
agreements, for the purposes of (1) curing any ambiguity, or correcting or
supplementing any provision of the agreements which may be inconsistent with any
other provision of the agreements, (2) allowing transfers, or complying with the
requirements of the Internal Revenue Code or (3) adding to the trust property,
or further perfecting the trustee's interests in the trust property, with the
prior consent of the trustee or any credit enhancement provider, but without the
giving of notice to or the receipt of the consent of the securityholders under
the agreements. No amendment adopted without securityholder consent will, as
evidenced by an opinion of counsel delivered to the trustee, materially and
adversely affect the interests of any securityholder.
The agreements may also be amended by the trustee, the sponsor and the
master servicer with the prior written consent of any credit enhancement
provider, and not less than a majority of the securityholders represented by
each class of securities then outstanding or, if the amendment does not affect
all classes, then just the affected classes, for the purpose of (1) adding or
changing any provisions, (2) eliminating any of the provisions of the agreements
or (3) modifying in any manner the rights of the securityholders. No amendment
can change the amount of, or delay the timing of, payments which are required to
be distributed to any securityholders without the consent of the
Securityholders. In addition, no amendment can change the percentages of
securityholders which are required to consent to amendments, without the
unanimous consent of the holders of all the effected class or classes of
securities then outstanding.
RETIREMENT OF SECURITIES; REDEMPTION
Each trust will terminate upon the earlier of:
- - the payment to the securityholders and any credit enhancement provider of
all amounts due to them;
- - receipt by the trust of the final payment or other liquidation of the
last mortgage loan in the trust, or following the disposition of all
property acquired in respect of any mortgage loan remaining in the trust;
and
- - any time when a liquidation of the trust is effected.
37
<PAGE> 88
In no event, will any trust continue beyond the expiration of 21 years
from the death of the survivor of persons named in the agreements. Written
notice of termination of a trust will be given to each securityholder of that
series, and the final distribution will be made only upon surrender and
cancellation of the securities at an office or agency designated by the trustee
of that trust. If the securityholders are permitted to terminate the trust under
the applicable agreements, a penalty may be imposed upon the securityholders
based upon the fee that would be foregone by the master servicer because of the
termination.
Each trust may also allow for an early redemption or clean-up call. The
clean-up call may occur at the option of the master servicer or any of its
affiliated sub-servicers or, if applicable, the credit enhancement provider, and
will result in the early redemption of the securities at a price at least equal
to the outstanding principal balance of the securities plus accrued interest.
The holders of any interest only security may not receive any payment in
connection with a clean-up call. The exercise of these rights may cause the
securities to prepay earlier than expected on any date the aggregate principal
balance of the mortgage loans or the securities, as applicable, for a given
series is less than a specified percentage of the initial balance.
THE TRUSTEE
The trustee under the agreements will be named in the prospectus
supplement. The trustee will have no obligation to exercise any of the rights or
powers vested in it by the agreements at the request or direction of any of the
securityholders, unless the securityholders shall have offered to the trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with the request or direction.
The trustee may execute any of the trusts or powers granted by the
agreements or perform any duties thereunder either directly or by or through
agents or attorneys. The trustee will not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it.
The trustee will not be liable for any action it takes or omits to take
in good faith which it reasonably believes to be authorized by an authorized
officer of any person or within its rights or powers under the agreements.
Each agreement will permit the removal of the trustee if the upon the
occurrence and continuance of events listed in the agreement, including the
failure of the trustee to satisfy the relevant eligibility requirements, the
trustee's becoming insolvent or the trustee breaches any representation or
warranty made by it.
If an event permitting the removal of the trustee occurs and is
continuing, then, the sponsor, the securityholders, acting on the terms of the
agreements, or any credit enhancement provider may, whether or not the trustee
has resigned, appoint a successor trustee.
The trustee will be liable under the agreements only to the extent of the
obligations specifically imposed upon and undertaken by it. Neither the trustee
nor any of the directors, officers, employees or agents will be under any
liability on any security or to the sponsor, the master servicer or any
securityholder for any action taken or for refraining from the taking of any
action in good faith under the agreements, or for errors in judgment. The
trustee, however, will not be protected against any liability it incurs by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of its duties or by reason of reckless disregard of its duties.
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of the material legal aspects
of mortgage loans that are general in nature. These legal aspects are governed
in part by state laws, which may be different in the various states.
Consequently, these summaries are not complete, do not reflect the laws of any
particular state and do not encompass the laws of all states in which the
mortgaged properties may be located.
The mortgage loans will be represented by a mortgage note and an
accompanying mortgage. According to the mortgage note, the mortgagor is
personally liable to repay the indebtedness evidenced by the mortgage loan. The
mortgage secures the indebtedness by a lien on the mortgaged property.
38
<PAGE> 89
ENFORCEMENT OF THE MORTGAGE NOTE
In some states, the lender on a note secured by a lien on real property
has the option of bringing a personal action against the borrower on the debt
without first exhausting all remedies against the mortgaged property, such as
foreclosure. In some of these states the lender, after it has received a
personal judgment, may be deemed to have elected a remedy and may be precluded
from exercising remedies against the mortgaged property. Consequently, the
practical effect of the election requirement, in those states permitting this
election, is that lenders will usually proceed against the property first rather
than bringing a personal action against the borrower on the note.
Some states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage for
example:
- - statutes that limit the right of the beneficiary or mortgagee, to obtain
a deficiency judgment against the borrower following foreclosure; a
deficiency judgment is a personal judgment against the former borrower
equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale of the real
property;
- - other statutes require the beneficiary or mortgagee to exhaust all
remedies against the mortgaged property in an attempt to satisfy the full
debt before bringing a personal action against the borrower;
- - statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure to the excess of the outstanding debt
over the fair value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of a trust to realize upon collateral or enforce a
deficiency judgment. For example, a federal bankruptcy law may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court prior to the
filing of the debtor's bankruptcy petition, if no sale of the residence had yet
occurred. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have held that the terms
of a mortgage loan secured by property of the debtor may be modified. These
courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
A number of states have imposed general equitable principles upon
judicial foreclosure. These equitable principles are generally designed to
relieve the borrower from the legal effect of the borrower's default under the
loan documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, the courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Tax liens arising under the Internal Revenue Code may be prior to the
lien of a mortgage or deed of trust. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
39
<PAGE> 90
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include, by example, the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and other statutes and state laws,
such as the California Fair Debt Collection Practices Act. These laws and
regulations impose specific statutory liabilities upon lenders who originate
mortgage loans and fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
DEEDS OF TRUST OR MORTGAGES
The mortgage loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the mortgaged
property subject to a mortgage loan is located. In some states, a mortgage
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage conveys legal title to the property to the mortgagee
subject to the payment of the indebtedness. The mortgage is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages depends on their terms in
some cases or on the terms of separate subordination or intercreditor
agreements, and generally on the order of recordation of the mortgage in the
appropriate recording office. There are two parties to a mortgage, the
mortgagor, who is the borrower and homeowner, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower is the beneficiary; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties; the borrower and homeowner called the trustor, a lender
called the beneficiary, and a third-party grantee called the trustee. Under a
deed of trust, the borrower grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage, and, in some cases, the directions
of the beneficiary.
COOPERATIVE LOANS
If specified in the prospectus supplement of a series of securities, the
mortgage loans may consist of cooperative loans evidenced by cooperative notes
secured by security interests in shares issued by cooperatives and in any leases
or occupancy agreements allowing the mortgagor the right to occupy specific the
cooperative unit. The security agreement will create a lien upon, or grant a
title interest in, the property which it covers, the priority of which will
depend on the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. These liens or
title interests are not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each cooperative owns or leases the real property and owns or leases the
building and all separate units. The cooperative is directly responsible for
property management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is a
blanket mortgage or blanket lease on the cooperative apartment building or
underlying land, the cooperative, as mortgagor or lessee also is responsible for
meeting these mortgage or rental obligations. If the cooperative is unable to
meet the payment obligations under a blanket mortgage, the mortgagee holding a
blanket mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements. Similarly, if the cooperative is
unable to meet the payment obligations under a land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. A foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender who
financed the purchase by an individual tenant-stockholder of cooperative shares
or, in the case of the mortgage loans, the collateral securing the cooperative
loans.
FORECLOSURE OF MORTGAGE LOANS
Foreclosure of a deed of trust is generally accomplished by a non
judicial trustee's sale under the deed of trust and state laws which authorize
the trustee to sell the property upon default by the borrower under the terms of
the note or deed of trust. Beside the non judicial remedy, a deed of trust may
be judicially foreclosed. In addition to any notice requirements contained in a
deed of trust, in some states, the trustee must record a notice of default and
40
<PAGE> 91
within a period of time send a copy to the trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within a specified period, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more local newspapers. In addition, some
state laws require that a copy of the notice of sale be posted on the property
and sent to all parties having an interest of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Typically, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming.
In some states, the trustor has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In these states,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for the new
purchaser. It is more common for the lender to purchase the property from the
trustee or referee for an amount that is less than or equal to the sum of the
unpaid principal amount of the mortgage loan, plus accrued and unpaid interest
and the expense of foreclosure. Typically, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender.
Subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including obtaining hazard insurance and making repairs at its own
expense as are necessary to render the property suitable for sale. The lender
will commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property and, in some states, the lender may be
entitled to a deficiency judgment. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
FORECLOSURE ON COOPERATIVE LOANS
If a cooperative loan must be foreclosed on, the cooperative will usually
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due or sums that
have become liens on the shares relating to the proprietary lease or occupancy
agreement. The total amount owed to the cooperative by the borrower could reduce
the amount realized upon a sale of the cooperative mortgage loan below the
outstanding principal balance of the cooperative mortgage loan plus accrued and
unpaid interest.
The documentation governing cooperative loans generally also provide
that, in the event of a foreclosure, the lender must obtain the approval or
consent of the cooperative before transferring the cooperative shares to a new
buyer. Typically, the lender is not limited in any rights it may have to
dispossess the tenant stockholder.
RIGHTS OF REDEMPTION
In some states, after the foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period to redeem the property
from the foreclosure sale. In some states, redemption may occur only upon
payment of the entire principal balance plus accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser
subsequent to foreclosure or sale under a deed of trust. Consequently, the
41
<PAGE> 92
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
ENVIRONMENTAL LEGISLATION
A number of states impose a statutory lien for associated costs on
property that is the subject of a cleanup action by the state on account of
hazardous wastes or hazardous substances released or disposed of on the
property. This lien may have priority over all subsequent liens on the property
and, in some states, will have priority over prior recorded liens including the
lien of a mortgage. In some states this lien will not have priority over prior
recorded liens of a deed of trust. In addition, under federal environmental
legislation and under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or assumes active control over the operation or management of a
property may be liable for the costs of cleaning up a contaminated site.
Although these costs could be substantial, it is unclear whether they would be
imposed on a lender such as a trust, secured by residential real property. In
the event that a trust acquired a mortgaged property through foreclosure or
otherwise, and cleanup costs were incurred in respect of the mortgaged property,
the holders of the securities might realize a loss if these costs were required
to be paid by the trust.
ENFORCEABILITY OF MORTGAGE LOANS PROVISIONS
Generally all of the mortgage loans contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of the loan if the borrower
sells, transfers or conveys the property. The enforceability of these clauses
has been the subject of legislation or litigation in many states including
California, and in some cases the enforceability of these clauses was limited or
denied. However, federal law preempts state constitutional, statutory and case
law that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to limited
exceptions. This federal law encourages lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
This federal law also provides for specific instances in which a mortgage
lender may not exercise a due-on-sale clause, notwithstanding the fact that a
transfer of the property may have occurred. These include intra-family
transfers, transfers by operation of law, leases of fewer than three years and
the creation of a junior encumbrance. Regulations also prohibit the imposition
of a prepayment penalty upon the acceleration of a loan under a due-on-sale
clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing a coupon rate below the current market rate being assumed by a new
home buyer rather than being paid off, that may have an impact upon the average
life of the mortgage loans and the number of mortgage loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles generally are designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
42
<PAGE> 93
CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust that
confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply these proceeds and awards to any debt
secured by the deed of trust, in the order specified by the beneficiary.
California law prohibits the beneficiary from applying insurance and
condemnation proceeds to the debt secured by the deed of trust unless the
beneficiary's security has been impaired by the casualty or condemnation. If the
security has been impaired, California law permits these proceeds to be applied
to the extent of the impairment. In the event improvements on the property are
damaged or destroyed by fire or other casualty, or if the property is taken by
condemnation, and the beneficiary's security is impaired, the beneficiary under
the first deed of trust will have the prior right to collect any insurance
proceeds and any damage award from the condemnation. Proceeds in excess of the
amount of debt secured by a first deed of trust will, in most cases, be applied
to the indebtedness of a junior deed of trust.
Another provision typically found in California deeds of trust obligates
the mortgagor to pay all taxes and assessments on the property, to provide and
maintain fire insurance on the property, and to maintain and repair the
property. Upon a failure of the mortgagor to perform any of these obligations,
the beneficiary is given the right under the deed of trust to perform those
obligations, and the mortgagor agrees to reimburse the beneficiary for any sums
expended by the beneficiary on behalf of the mortgagor. All sums expended by the
beneficiary become part of the indebtedness secured by the deed of trust.
APPLICABILITY OF USURY LAWS
Federal law provides that state usury limitations do not apply to some
types of residential first mortgage loans. The federal law authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
In addition, even where this federal law is not rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by the law. A number of states have taken
action to reimpose interest rate limits or to limit discount points or other
charges.
The sponsor will represent that each mortgage loan was originated in
compliance with applicable state laws in effect at the time of origination,
including usury laws, in all material respects. However, the coupon rates on the
mortgage loans will be subject to applicable usury laws as in effect from time
to time.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
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% per annum on
obligations, including mortgage loans, incurred prior to the commencement
of active duty and for the duration of active duty,
- - may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on the obligations entered
into prior to active duty for the duration of active duty and
- - may have the maturity of the obligations incurred prior to active duty
extended, the payments lowered and the payment schedule readjusted for a
period of time after the completion of active duty.
These benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with the obligations is
not materially impaired by active duty, the court may apply equitable
principles. If a mortgagor's obligation to repay amounts otherwise due on a
mortgage loan is relieved by the Soldiers' and Sailors' Civil Relief Act,
neither the trust, the master servicer, the sponsor, any credit enhancement
provider nor the trustee will be required to advance the amounts that would
otherwise be due. Any loss resulting from the Soldiers' and Sailors' Civil
Relief Act may reduce the amounts available to be paid to the securityholders.
In the event that the Soldiers' and Sailors' Civil Relief Act or similar
legislation or regulations apply to any mortgage loan which goes into default,
there may be delays in payment and losses on the securities. Any interest
shortfalls, deferrals or
43
<PAGE> 94
forgiveness of payments on the mortgage loans resulting from similar legislation
or regulations may result in delays in payments or losses to securityholders of
the series.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material federal income tax
consequences to the original purchasers of the securities of the purchase,
ownership and disposition of the securities. The discussion below does not
purport to deal with all federal tax considerations applicable to all categories
of investors. The tax consequences to holders subject to special rules,
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, are not discussed.
In particular, this discussion applies only to investors that purchase
securities directly from the sponsor and hold the securities as capital assets.
The discussion is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. Investors may wish to 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
securities. As used in this section and the "ERISA Considerations" section, code
means the Internal Revenue Code of 1986 and IRS means the Internal Revenue
Service.
We will file an unqualified tax opinion for a series with the Securities and
Exchange Commission on Form 8-K prior to the sale of the securities.
The following discussion addresses securities of five general types:
- - grantor trust securities,
- - REMIC securities,
- - debt securities,
- - partnership interests, and
- - FASIT securities.
The prospectus supplement for each series of securities will indicate
whether a REMIC or FASIT election or elections will be made for the trust and,
if a REMIC or FASIT election is to be made, will identify all regular interests
and residual interests in the REMIC or all regular interests, high-yield
interests or ownership interests 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 transactions involving a financial instrument that have the
effect of substantially eliminating the taxpayer's risk of loss and opportunity
for gain. These provisions apply only to classes of securities that do not have
a principal balance.
GRANTOR TRUST SECURITIES
If a series of securities is being issued by a grantor trust, special tax
counsel to the sponsor will deliver its opinion to the sponsor that the trust
will be classified as a grantor trust and not as a partnership or an association
taxable as a corporation. Accordingly, each beneficial owner of a grantor trust
security will generally be treated as the owner of an interest in the 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
mortgage loans together with interest 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
44
<PAGE> 95
portion of the difference between interest paid on the mortgage loans and
interest paid on grantor trust fractional interest securities will be referred
to as a grantor trust strip security.
SPECIAL TAX ATTRIBUTES
Special tax counsel to the sponsor will deliver its opinion to the
sponsor that (a) grantor trust fractional interest securities will represent
interests in (1) loans . . . secured by an interest in real property within the
meaning of section 7701(a)(19)(C)(v) of the code; and (2) obligations, including
any participation or certificate of beneficial ownership, which . . . are
principally secured by an interest in real property within the meaning of
section 860G(a)(3)(A) of the code; and (b) interest on grantor trust fractional
interest securities will be considered interest on obligations secured by
mortgages on real property or on interests in real property within the meaning
of section 856(c)(3)(B) of the code. In addition, the grantor trust strip
securities will be obligations, including any participation or certificate of
beneficial ownership therein . . . principally secured by an interest in real
property within the meaning of section 860G(a)(3)(A) of the code.
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 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, 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. Individuals holding a grantor
trust fractional interest security directly or through pass-through entities
will be allowed a deduction for reasonable servicing fees and expenses only to
the extent that the aggregate of the beneficial owner's miscellaneous itemized
deductions exceeds 2% of the 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, the beneficial owner will be required to treat the excess of
the total amount of payments on the security over the amount paid for the
security as original issue discount and to include the discount in income as it
accrues over the life of the security.
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 the security, and perhaps all stated interest, 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. 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 loans and (2) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security. See "--Discount and Premium."
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a grantor trust security,
which equal to the difference between the amount realized on the sale and the
adjusted basis of the 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 seller, 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.
45
<PAGE> 96
Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a grantor trust
fractional interest security with each distribution a statement detailing the
amount of the distribution allocable to principal on the underlying loans and to
interest, based on the interest rate on the security. 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 that 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.
REMIC SECURITIES
If described in a prospectus supplement, an election will be made to
treat a trust as a REMIC under the code. Qualification as a REMIC requires
ongoing compliance with a number of conditions. If a series of securities is
being issued by a REMIC, special tax counsel to the sponsor will deliver its
opinion to the sponsor that, assuming compliance with the agreements, the trust
will be treated as a REMIC for federal income tax purposes. The securities of
each class will be designated as regular interests in the REMIC trust except
that a separate class will be designated as the residual interest in the REMIC
trust. The prospectus supplement for each series of securities will state
whether the securities of each class will constitute a REMIC regular interest or
a REMIC residual interest.
A REMIC trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances.
Generally, the total income from the loans in a REMIC trust will be taxable to
the beneficial owners of the securities of that series. See "--Taxes on a REMIC
Trust."
The REMIC regulations issued by the Treasury Department on December 23,
1992 provide some guidance regarding the federal income tax consequences
associated with the purchase, ownership and disposition of REMIC securities.
While certain material provisions of the REMIC regulations are discussed below,
investors may wish to consult their own tax advisors regarding the possible
application of the REMIC regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC regular interests and REMIC residual interests will be regular or
residual interests in a REMIC within the meaning of section 7701(a)(19)(C)(xi)
of the code and real estate assets within the meaning of section 856(c)(5)(A) of
the code. If at any time during a calendar year less than 95% of the assets of a
REMIC trust consist of qualified mortgages within the meaning of section
860G(a)(3) of the code then the portion of the REMIC regular interests and REMIC
residual interests that are qualifying assets under those sections during the
calendar year may be limited to the portion of the assets of the REMIC trust
that are qualified mortgages. Similarly, income on the REMIC regular interests
and REMIC residual interests will be treated as interest on obligations secured
by mortgages on real property within the meaning of section 856(c)(3)(B) of the
code, subject to the same limitation as set forth in the preceding sentence. For
purposes of applying this limitation, a REMIC trust should be treated as owning
the assets represented by the qualified mortgages. The assets of the trust will
include, in addition to the loans, payments on the loans held pending
distribution on the REMIC regular interests and REMIC residual interests and any
reinvestment income. REMIC regular interests and REMIC residual interests held
by a financial institution to which section 585, 586 or 593 of the code applies
will be treated as evidences of indebtedness for purposes of section 582(c)(1)
of the code. REMIC regular interests will also be qualified mortgages suitable
for investment by other REMICs and FASITs.
TAXATION OF BENEFICIAL OWNERS OF REMIC REGULAR INTERESTS
Except as indicated below in this federal income tax discussion, the
REMIC regular interests will be treated for federal income tax purposes as debt
instruments issued by the REMIC trust on the date the securities are first sold
to the public and not as ownership interests in the REMIC trust or its assets.
beneficial owners of REMIC regular interests that otherwise report income under
a cash method of accounting will be required to report income with respect to
the securities under an accrual method. For additional tax consequences relating
to REMIC regular interests purchased at a discount or with premium, see
"--Discount and Premium."
46
<PAGE> 97
TAXATION OF BENEFICIAL OWNERS OF REMIC RESIDUAL INTERESTS
Daily Portions.
Except as indicated below, a beneficial owner of a REMIC residual
interest for a REMIC trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC trust for each day during
a calendar quarter that the beneficial owner owned the REMIC residual interest.
For this purpose, the daily portion shall be determined by allocating to each
day in the calendar quarter its ratable portion of the taxable income or net
loss of the REMIC trust for the quarter and by allocating the amount so
allocated among the residual beneficial owners, on this day, in accordance with
their percentage interests on this day. Any amount included in the gross income
or allowed as a loss of any residual beneficial owner by virtue of this
paragraph will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC residual interest
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual interest may have received
full payment of the stated interest and principal on its REMIC residual
interest.
The trustee will provide to beneficial owners of REMIC residual interests
of each series of securities (1) the information as is necessary to enable them
to prepare their federal income tax returns and (2) any reports regarding the
Securities of a series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust.
The taxable income or net loss of a REMIC trust will be the income from
the qualified mortgages it holds and any reinvestment earnings less deductions
allowed to the REMIC trust. This taxable income or net loss for a given calendar
quarter will be determined in the same manner as for an individual having the
calendar year as the taxable year and using the accrual method of accounting,
with the following four modifications. The first modification is that a
deduction will be allowed for accruals of interest, including any original issue
discount, but without regard to the investment interest limitation in section
163(d) of the code, on the REMIC regular interests, but not the REMIC residual
interests, even though REMIC regular interests are for non-tax purposes
evidences of beneficial ownership rather than indebtedness of a REMIC trust.
Second, market discount or premium equal to the difference between the total
stated principal balances of the qualified mortgages and the basis to the REMIC
trust generally will be included in income, in the case of discount, or
deductible, in the case of premium, by the REMIC trust as it accrues under a
constant yield method, taking into account the prepayment assumption specified
in the prospectus supplement. The basis to a REMIC trust in the qualified
mortgages is the aggregate of the issue prices of all the REMIC regular
interests and REMIC residual interests in the REMIC trust on the settlement
date. If, however, a substantial amount of a class of REMIC regular interests or
REMIC residual interests has not been sold to the public, then the fair market
value of all the REMIC regular interests or REMIC residual interests in that
class as of the date of the prospectus supplement should be substituted for the
issue price. See "--Discount and Premium--Original Issue Discount."
The third modification is that no item of income, gain, loss or deduction
allocable to a prohibited transaction will be taken into account. Fourth, a
REMIC trust generally may not deduct any item that would not be allowed in
calculating the taxable income of a partnership by virtue of section 703(a)(2)
of the code. Finally, the limitation on miscellaneous itemized deductions
imposed on individuals by section 67 of the code will not be applied at the
REMIC trust level to any servicing and guaranty fees. In addition, under the
REMIC regulations, any expenses that are incurred in connection with the
formation of a REMIC trust and the issuance of the REMIC regular interests and
REMIC residual interests are not treated as expenses of the REMIC trust for
which a deduction is allowed. If the deductions allowed to a REMIC trust exceed
its gross income for a calendar quarter, this excess will be a net loss for the
REMIC trust for that calendar quarter. The REMIC regulations also provide that
any gain or loss to a REMIC trust from the disposition of any asset, including a
qualified mortgage or permitted investment, as defined in section 860G(a)(5) of
the code, will be treated as ordinary gain or loss. See "--Taxes on a REMIC
Trust--Prohibited Transactions" and "--Pass-Through of Servicing and Guaranty
Fees to Individuals."
47
<PAGE> 98
A beneficial owner of a REMIC residual interest may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC trust at a discount, some or all of the
REMIC regular interests are issued at a discount, and the discount included as a
result of a prepayment on a loan that is used to pay principal on the REMIC
regular interests exceeds the REMIC trust's deduction for unaccrued original
issue discount relating to the REMIC regular interests. Taxable income may also
be greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC regular interests,
may increase over time as the earlier classes of REMIC regular interests are
paid, although the interest income on any given loan expressed as a percentage
of the outstanding principal amount of that loan will remain constant over time.
BASIS RULES AND DISTRIBUTIONS.
A beneficial owner of a REMIC residual interest has an initial basis in
its security equal to the amount paid for the REMIC residual interest. This
basis is increased by amounts included in the income of the beneficial owner and
decreased by distributions and by any net loss taken into account on the REMIC
residual interest. A distribution on a REMIC residual interest to a beneficial
owner is not included in gross income to the extent it does not exceed the
beneficial owner's basis in the REMIC residual interest, adjusted as described
above, and, to the extent it exceeds the adjusted basis of the REMIC residual
interest, shall be treated as gain from the sale of the REMIC residual interest.
A beneficial owner of a REMIC residual interest is not allowed to take
into account any net loss for any calendar quarter if the net loss exceeds the
beneficial owner's adjusted basis in its REMIC residual interest as of the close
of the calendar quarter, determined without regard to the net loss. Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC residual interest.
EXCESS INCLUSIONS.
Excess inclusions on a REMIC residual interest are subject to special tax
rules. Beneficial owner of a REMIC residual interest, the excess inclusion for
any calendar quarter is defined as the excess, if any, of the daily portions of
taxable income over the sum of the daily accruals for each day during the
quarter that the REMIC residual interest was held by the beneficial owner. The
daily accruals are determined by allocating to each day during a calendar
quarter its ratable portion of the product of the adjusted issue price of the
REMIC residual interest at the beginning of the calendar quarter and 120% of the
federal long-term rate in effect on the settlement date, based on quarterly
compounding, and properly adjusted for the length of the quarter. For this
purpose, the adjusted issue price of a REMIC residual interest as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
residual interest, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made on the REMIC residual interest
before the beginning of the quarter. The issue price of a REMIC residual
interest is the initial offering price to the public, excluding bond houses and
brokers, at which a substantial number of the REMIC residual interests was sold.
The federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
In general, beneficial owners of REMIC residual interests with excess
inclusion income cannot offset the income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income, as defined in section 511 of the code, an excess inclusion of the
beneficial owner is treated as unrelated business taxable income. The REMIC
regulations indicate that if a beneficial owner of a REMIC residual interest is
a member of an affiliated group filing a consolidated income tax return, the
taxable income of the affiliated group cannot be less than the sum of the excess
inclusions attributable to all residual interests in REMICS held by members of
the affiliated group. For a discussion of the effect of excess inclusions on
foreign investors that own REMIC residual interests, see "--Foreign Investors."
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC trust as excess inclusions if the
REMIC residual interest does not have significant value. Although the Treasury
Department did not exercise this authority in the REMIC regulations, future
regulations may contain that rule. If that rule were adopted, it is unclear how
significant value would be determined for these purposes. If no rule is
applicable, excess inclusions should be calculated as discussed above.
48
<PAGE> 99
In the case of any REMIC residual interests that are held by a real
estate investment trust, the aggregate excess inclusions on REMIC residual
interests reduced, but not below zero, by the real estate investment trust
taxable income, within the meaning of section 857(b)(2) of the code, excluding
any net capital gain, will be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT, and any
allocated amounts will be treated as an excess inclusion on a REMIC residual
interest as if held directly by the shareholder. Similar rules will apply in the
case of regulated investment companies, common trust funds and some cooperatives
that hold a REMIC residual interest.
PASS-THROUGH OF SERVICING AND GUARANTY FEES TO INDIVIDUALS.
A beneficial owner of a REMIC residual interest who is an individual will
be required to include in income a share of any servicing and guaranty fees. A
deduction for these fees will be allowed to a beneficial owner only to the
extent that the fees, along with of the beneficial owner's other miscellaneous
itemized deductions exceed 2% of the beneficial owner's adjusted gross income.
In addition, a beneficial owner of a REMIC residual interest may not be able to
deduct any portion of the fees in computing the beneficial owner's alternative
minimum tax liability. A beneficial owner's share of the fees will generally be
determined by (1) allocating the amount of the expenses for each calendar
quarter on a pro rata basis to each day in the calendar quarter, and (2)
allocating the daily amount among the beneficial owners in proportion to their
respective holdings on this day.
TAXES ON A REMIC TRUST
Prohibited Transactions.
The code imposes a tax on a REMIC equal to 100% of the net income derived
from prohibited transactions. In general, a prohibited transaction means the
disposition of a qualified mortgage other than under specified exceptions, the
receipt of investment income from a source other than a loan or other permitted
investments, the receipt of compensation for services, or the disposition of an
asset purchased with the payments on the qualified mortgages for temporary
investment pending distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day.
The code imposes a tax on a REMIC equal to 100% of the value of any
property contributed to the REMIC after the startup day, which is usually the
same day that settlement occurs. Exceptions are provided for cash contributions
to a REMIC (1) during the three month period beginning on the startup day, (2)
made to a qualified reserve fund by a beneficial owner of a residual interest,
(3) in the nature of a guarantee, (4) made to facilitate a qualified liquidation
or clean-up call, and (5) as otherwise permitted by treasury regulations.
Net Income from Foreclosure Property.
The Code imposes a tax on a REMIC equal to the highest corporate rate on
net income from foreclosure property. The terms foreclosure property, which
includes property acquired by deed in lieu of foreclosure, and net income from
foreclosure property are defined by reference to the rules applicable to real
estate investment trusts. Generally, foreclosure property would be treated as
such for a period of three years, with possible extensions. Net income from
foreclosure property generally means gain from the sale of foreclosure property
that is inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
SALES OF REMIC SECURITIES
If a regular or residual interest is sold, the seller will recognize gain
or loss equal to the difference between the amount realized in the sale and its
adjusted basis, except in the case of multiple sales of REMIC residual interests
within six months, and sales of noneconomic residual interests. The adjusted
basis of a REMIC regular interest generally will equal the cost of the security
to the seller, increased by any original issue discount or market discount
included in the seller's gross income from the security and reduced by
distributions on the security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium
49
<PAGE> 100
that has reduced the seller's interest income from the security. Except as
described in the following paragraph or under section 582(c) of the code, this
gain or loss will be capital gain or loss if the security is held as a capital
asset, generally, property held for investment, within the meaning of section
1221 of the code.
Gain from the sale of a REMIC regular interest that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the income of the beneficial owner of a REMIC regular interest had income
accrued at a rate equal to 110% of the applicable federal rate, generally, an
average of current yields on Treasury securities, as of the date of purchase
over (2) the amount actually includible in the beneficial owner's income. In
addition, gain recognized on this sale by a beneficial owner of a REMIC regular
interest who purchased a security at a market discount would also be taxable as
ordinary income in an amount not exceeding the portion of the discount that
accrued during the period the security was held by the beneficial owner, reduced
by any market discount includible in income under the rules described under
"--Discount and Premium."
If a beneficial owner of a REMIC residual interest sells its REMIC
residual interest at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC residual interest, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool, as defined in section 7701(i) of the Code, comparable to
a residual interest in a REMIC. This disallowed loss would be allowed upon the
sale of the other residual interest, or comparable interest, if the rule
referred to in the preceding sentence does not apply to that sale. While this
rule may be modified by Treasury regulations, no regulations have yet been
published.
Transfers of REMIC Residual Securities.
Section 860E(e) of the Code imposes a substantial tax, payable by the
transferor, or, if a transfer is through a broker, nominee, or other middleman
as the transferee's agent, payable by that agent, upon any transfer of a REMIC
residual interest to a disqualified organization and upon a pass-through entity,
including regulated investment companies, real estate investment trusts, common
trust funds, partnerships, trusts, estates, some cooperatives, and nominees,
that owns a REMIC residual interest if the pass-through entity has a
disqualified organization as a record-holder. A transfer includes any transfer
of record or beneficial ownership.
The term disqualified organization includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing, other than some
taxable instrumentalities, any cooperative organization furnishing electric
energy or providing telephone service to persons in rural areas, or any
organization, other than a farmers' cooperative, that is exempt from federal
income tax, unless the organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (1) residual interests in the
entity are not held by disqualified organizations and (2) information necessary
for the application of the tax will be made available. Restrictions on the
transfer of a REMIC residual interest are described in the agreements, and will
be discussed more fully in the prospectus supplement relating to the offering of
any REMIC residual interest. In addition, a pass-through entity, including a
nominee, that holds a REMIC residual interest may be subject to additional taxes
if a disqualified organization is an owner of the pass-through entity. A
transferor of a REMIC residual interest, or an agent of a transferee of a REMIC
residual interest will be relieved of this tax liability if (1) the transferee
furnishes to the transferor, or the transferee's agent, an affidavit that the
transferee is not a disqualified organization, and (2) the transferor, or the
transferee's agent, does not have actual knowledge that the affidavit is false
at the time of the transfer. Similarly, this tax will not be imposed on a
pass-through entity in which a disqualified organization is an owner if (1) the
owner furnishes to the pass-through entity an affidavit that it is not a
disqualified organization, and (2) during the period, the pass-through entity
has no actual knowledge that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an electing large partnership. If an electing large partnership holds a
residual interest, all interests in the electing large partnership are treated
as held by disqualified organizations for purposes of the tax imposed upon a
pass-through entity by section 860E(e) of the Code. An exception to this tax,
otherwise available to a pass-through entity that receives affidavits from its
owners and that does not know the affidavits are false, is not available to an
electing large partnership.
50
<PAGE> 101
Under the REMIC regulations, a transfer of a noneconomic residual
interest to a U.S. person will be disregarded for all federal tax purposes
unless no significant purpose of the transfer is to impede the assessment or
collection of tax. A REMIC residual interest would be treated as constituting a
noneconomic residual interest unless, at the time of the transfer, (1) the
present value of the expected future distributions on the REMIC residual
interest is no less than the product of the present value of the anticipated
excess inclusions and the highest corporate rate of tax for the year in which
the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the applicable REMIC trust in an
amount sufficient to satisfy the liability for income tax on any excess
inclusions at or after the time when the liability accrues. Anticipated excess
inclusions are the excess inclusions that are anticipated to be allocated to
each calendar quarter, or portion thereof, following the transfer of a REMIC
residual interest, determined as of the date the security is transferred and
based on events that have occurred as of that date and on the prepayment
assumption. See "--Discount and Premium" and "--Taxation of beneficial owners of
REMIC Residual Interests--Excess Inclusions;" and"--Foreign Investors--Grantor
Trust Securities and REMIC regular interests".
The REMIC regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC residual interest has improper knowledge, which means that
the transferor, either knew, or should have known, that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC trust. A transferor is presumed not to have improper knowledge if (1) the
transferor conducts, at the time of a transfer, a reasonable investigation of
the financial condition of the transferee and, as a result of the investigation,
the transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (2) the
transferee makes representations to the transferor in its affidavit relating to
disqualified organizations. Transferors of a REMIC residual interest may wish to
consult with their own tax advisors for further information regarding these
transfers.
Reporting and Other Administrative Matters.
For purposes of the administrative provisions of the code, each REMIC
trust will be treated as a partnership and the beneficial owners of REMIC
residual interests will be treated as partners. The trustee will prepare, sign
and file federal income tax returns for each REMIC trust, which returns are
subject to audit by the IRS. Moreover, within a reasonable time after the end of
each calendar year, the trustee will furnish to each beneficial owner that
received a distribution during the year a statement describing the portions of
any distributions that constitute interest distributions, original issue
discount, and any other information as is required by Treasury regulations and,
for owners of REMIC residual interests, information necessary to compute the
daily portions of the taxable income or net loss of the REMIC trust for each day
during the year. The trustee may also act as the tax matters partner for each
REMIC trust, either in its capacity as a beneficial owner of a REMIC residual
interest or in a fiduciary capacity. Each beneficial owner of a REMIC residual
interest, by the acceptance of its REMIC residual interest, agrees that the
trustee will act as its fiduciary in the performance of any duties required of
it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC residual interest is required to treat
items on its return consistently with the treatment on the return of the REMIC
trust, unless the beneficial owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC trust level.
TERMINATION
In general, no special tax consequences will apply to a beneficial owner
of a REMIC regular interest upon the termination of a REMIC trust by virtue of
the final payment or liquidation of the last loan remaining in the trust estate.
If a beneficial owner of a REMIC residual interest's adjusted basis in its REMIC
residual interest at the time the termination occurs exceeds the amount of cash
distributed to the beneficial owner in liquidation of its interest, although the
matter is not entirely free from doubt, it would appear that the beneficial
owner of the REMIC residual interest is entitled to a loss equal to the amount
of the excess.
51
<PAGE> 102
DEBT SECURITIES
For each series of debt securities, special tax counsel to the sponsor
will deliver its opinion to the sponsor that the securities will be classified
as debt of the sponsor secured by the mortgage loans. Consequently, debt
securities will not be treated as ownership interests in the loans or the trust.
Beneficial owners will be required to report income received on debt securities
in accordance with their normal method of accounting. It is the opinion of the
special tax counsel to the sponsor that a trust issuing debt securities will not
be treated as an association separately taxable as a corporation, a publicly
traded partnership or a taxable mortgage pool. For additional tax consequences
relating to debt securities purchased at a discount or with premium, see
"--Discount and Premium."
SPECIAL TAX ATTRIBUTES
As described above, grantor trust securities will possess special tax
attributes by virtue of their being ownership interests in the mortgage loans.
Similarly, REMIC regular and residual interests will possess similar attributes
by virtue of the REMIC provisions of the Code. In general, debt securities will
not possess these special tax attributes. Investors to whom such attributes are
important may wish to consult their own tax advisors regarding investment in
debt securities.
SALE OR EXCHANGE 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 from 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 for certain 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. See "--Discount and Premium--Market Discount."
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 the distribution
allocable to principal on the underlying loans and to interest at the 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 that the
master servicer deems necessary or desirable to enable beneficial owners of debt
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, special tax counsel to the
sponsor will deliver its opinion to the sponsor that the trust will be treated
as a partnership and not an association taxable as a corporation for federal
income tax purposes. Accordingly, each beneficial owner a partnership interest
will generally be treated as the owner of an interest in the loans.
SPECIAL TAX ATTRIBUTES
As described above, REMIC securities will possess special tax attributes
by virtue of the REMIC provisions of the Code. In general, partnership interests
will not possess these special tax attributes. Investors to whom the special
attributes are important may wish to consult their own tax advisors regarding
investment in partnership interests.
52
<PAGE> 103
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.
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 loans. The trust's deductions will consist primarily of interest
accruing on any indebtedness issued by the trust, servicing and other fees, and
losses or deductions upon collection or disposition of the trust's assets.
In some 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 this 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
In most cases, 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 on this 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, this excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under Section 754 of
the code.
Partnership Reporting
The trustee is required to (1) keep complete and accurate books of the
trust, (2) file IRS form 1065, a partnership information return, with the IRS
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
in the next paragraph and the nominees will be required to forward the
information to the beneficial
53
<PAGE> 104
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. This information includes (1) the
name, address and taxpayer identification number of the nominee and (2) as to
each beneficial owner (x) the name, address and identification number of the
person, (y) 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 (z) 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 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 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 some 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 not connected with the trust.
FASIT SECURITIES
If described in a prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of Code Section 860L(a).
Qualification as a FASIT requires ongoing compliance with a number conditions.
If a FASIT election is made, special tax counsel to the sponsor will deliver its
opinion to the sponsor that, assuming compliance with the agreements, the trust
will be treated as a FASIT for federal income tax purposes. It is the opinion of
the special tax counsel to the sponsor that a trust issuing FASIT securities
will not be treated as an association separately taxable as a corporation, a
publicly traded partnership or a taxable mortgage pool. 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 be a regular
interest, a high-yield regular interest or an ownership interest.
Special Tax Attributes
FASIT securities held by a real estate investment trust will constitute
real estate assets within the meaning of code sections 856(c)(5)(A) and
856(c)(6) and interest on the FASIT regular securities will be considered
interest on obligations secured by mortgages on real property or on interests in
real property within the meaning of code section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the FASIT trust and the income
on those assets would be so treated. FASIT regular securities held by a domestic
building and loan association will be treated as regular interest[s] in a FASIT
under code section 7701(a)(19)(C)(xi), but only in the proportion that the FASIT
trust holds loans . . . secured by an interest in real property which is . . .
residential real property within the meaning of code section 7701(a)(19)(C)(v).
If at all times 95% or more of the assets of the FASIT trust or the income
qualify for the foregoing treatments, the FASIT regular securities will qualify
for the corresponding status in their entirety. For purposes of code section
856(c)(5)(A), payments of principal and interest on a loan that are reinvested
pending distribution to holders of FASIT regular securities should qualify for
this treatment. FASIT regular securities held by a regulated investment company
will not constitute government securities within the meaning of Code Section
851(b)(4)(A)(i). FASIT regular securities held by some financial institutions
will constitute an evidence of indebtedness within the meaning of code section
582(c)(1).
54
<PAGE> 105
Taxation of Beneficial Owners of FASIT Regular Interests
A FASIT trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances. The FASIT
regular interests 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 interest 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
interest will be treated as a return of capital to the extent of the beneficial
owner's basis. Beneficial owners must use the accrual method of accounting on
their FASIT regular interests, 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,
after an initial three month period 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 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 also require the FASIT ownership interest and some of the high-yield
regular interests to be held only by fully taxable domestic corporations.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet a number of requirements. All of the interests in a FASIT
must be either one or more classes of regular interests or 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 five percentage
points higher than the applicable federal rate.
A regular interest that is described in the preceding sentence except
that if fails to meet one or more of requirements (1), (2), (3), (4) or (5) is a
high-yield regular interest. 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 on that interest are subordinated
to payments on other regular interests or the ownership interest in the FASIT,
and are dependent on the absence of defaults or delinquencies on permitted
assets lower than reasonably expected returns on permitted assets, unanticipated
expenses incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing requirements
of the Code for status as a FASIT during any taxable year, the Code provides
that the entity or applicable potion thereof will not be treated as a FASIT
thereafter. In this event, any entity that holds mortgage loans and is the
obligor on debt obligations with two or more maturities, may be treated as a
separate association taxable as a corporation, and the FASIT regular securities
may be treated as equity interests. 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
55
<PAGE> 106
requirements mandated Treasury regulations are met. Loss of FASIT status results
in retirement of all regular interests and their reissuance. If the resulting
instruments would be treated as equity under general tax principles,
cancellation of debt income may result.
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 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 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
elects, premium may be amortized over the life of the security and offset
against inclusions of interest income. These tax consequences are discussed in
greater detail below.
Original Issue Discount
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its stated redemption price at
maturity over its issue price The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the settlement date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an accrual security is equal to the sum of
all distributions to be made under 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 settlement date to the
first payment date. The trustee will supply, required information the original
issue discount accruing on the securities.
Original issue discount will be treated as zero if the discount is less
than 0.25% of the stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a security is apparently computed for
this purpose as the sum, for all distributions included in the stated redemption
price at maturity of the amounts determined by multiplying (1) the number of
complete years, rounding down for partial years, from the settlement date until
the date each distribution is expected to be made under the assumption that the
mortgage loans prepay at the rate specified in the prospectus supplement 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. If
original issue discount is treated as zero under this rule, the actual amount of
original issue discount must be allocated to the principal distributions on the
security and, when each the 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 directly applicable to REMIC securities and debt securities. The Taxpayer
Relief Act of 1997 extends application of section 1272(a)(6) to the grantor
trust securities for tax years beginning after August 5, 1997. Under these
rules, described in greater detail below, (1) the amount and rate of accrual of
original issue discount on each series of securities will be based on the
prepayment assumption, and in the case of a security having 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 settlement date, and (2)
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 sponsor anticipates that the prepayment assumption
for each series of securities will be consistent with this standard. The sponsor
makes no representation, however, that the mortgage loans for a given series
will prepay at the rate reflected in the prepayment assumption for that
56
<PAGE> 107
series or at any other rate. We suggest that each investor 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 securityholder 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 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. The trustee
will supply, at the time and in the manner required by the IRS, to
securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the securities. The trustee will report original
issue discount based on accrual periods of one month, each beginning on a
payment date, or, in the case of the first period, the settlement date, and
ending on the day before 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 (1) the sum of 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 the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (2) 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
settlement 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 settlement
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 on 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 and some REMIC securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of the negative amounts. The
legislative history to section 1272(a)(6) indicates that the 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
may wish to consult their own tax advisors concerning the treatment of the
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 it holds the security, the
daily portion of original issue discount on 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 the daily portion and 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
57
<PAGE> 108
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. If securities 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.
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.
Securities Purchased at a 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 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 this 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 the period based
on the security's yield to maturity. The legislative history of the Tax Reform
Act of 1986 states that the premium amortization should be made under principles
analogous to those governing the accrual of market discount. If the 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 the fully taxable bonds thereafter acquired by it,
and is irrevocable without the consent of the IRS. If this election is not made,
a beneficial owner must include the full amount of each interest payment in
income as it accrues, and the premium must be allocated to the principal
distributions on the 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 security.
Some securities may provide for only nominal distributions of principal
in comparison to the distributions of interest. It is possible that the IRS or
the Treasury Department may issue guidance excluding the securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that this security will be treated as having original
issue discount equal to the excess of the total payments to be received thereon
over its issue price. In this case, section 1272(a)(6) of the code would govern
the accrual of original issue discount, but a beneficial owner would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2) of the code. Unless and until the
Treasury Department or the IRS publishes specific guidance relating to the tax
treatment of the securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
Special Election
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all interest that accrues on the security
by using a constant yield method. For purposes of the election, the term
interest includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
58
<PAGE> 109
acquisition premium. A beneficial owner may wish to consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the backup withholding
tax under section 3406 of the code at a rate of 31% if recipients of the
distributions fail to furnish to the payor required 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 final withholding regulations, which change a
number of the rules relating to the 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, although
valid withholding certificates that are held on December 31, 2000 remain valid
until the earlier of December 31, 2001 or the date of expiration of the
certificate under the rules as currently in effect.
FOREIGN INVESTORS
The withholding regulations would require, in the case of securities held
by a foreign partnership, that the certification described above be provided by
the partners rather than by the foreign partnership and the partnership provide
required information, including a United States taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
persons may wish to consult their own tax advisors regarding the application to
them of the withholding regulations.
Grantor Trust Securities and REMIC Regular Interests
Distributions made on a grantor trust security or a REMIC regular
interest 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. A U.S.
person means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject to
U.S. federal income tax regardless of the source of its income, or a trust if a
court within the United States can exercise primary supervision over its
administration and at least one United States fiduciary has the authority to
control all substantial decisions of the trust. This exemption is applicable if
- - 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,
- - 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
- - the last U.S. person in the chain of payment to the beneficial owner
receives the statement from the beneficial owner or a financial
institution holding on its behalf and does not have actual knowledge
that the statement is false.
The IRS might take the position that this exemption does not apply to a
beneficial owner that also owns 10% or more of the REMIC residual interests of
any REMIC trust, or to a beneficial owner that is a controlled foreign
corporation described in section 881(c)(3)(C) of the code.
59
<PAGE> 110
REMIC Residual Securities
Amounts distributed to a beneficial owner of a REMIC residual interest
that is a not a U.S. person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual interest to a beneficial owner that is not a
U.S. person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions applicable to distributions on grantor trust
securities and REMIC regular interests, as described above, but only to the
extent that the mortgage loans underlying the REMIC trust that issued the REMIC
residual interest were issued after July 18, 1984. REMIC income that constitutes
an excess inclusion is not entitled to any exemption from the withholding tax or
a reduced treaty rate for withholding. See "--REMIC Securities--Taxation of
beneficial owners of REMIC Residual Securities--Excess Inclusions."
Partnership Interests
A trust may be considered to be engaged in a trade or business in the
United States for purposes of non-U.S. persons subject to federal withholding
taxes. If the trust is considered to be engaged in a trade or business in the
United States for these 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 these cases, a non-U.S. beneficial owner of a
partnership interest that is a corporation may be subject to the branch profits
tax. If the trust is notified that a beneficial owner of a partnership interest
is a foreign person, the trust may withhold as if it were engaged in a trade or
business in the United States in order to protect the trust from possible
adverse consequences of a failure to withhold. A foreign holder generally would
be entitled to file with the IRS a claim for refund for withheld taxes, taking
the position that no taxes were due because the trust was not in a U.S. trade or
business.
FASIT Regular Interests
High-yield FASIT regular interests 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 the high-yield FASIT regular interests
will be restored to ownership. The last preceding owner will, in any event, be
taxable on all income on the high-yield FASIT regular securities for federal
income tax purposes. The agreements will provide that, as a condition to
transfer of a high-yield FASIT regular security, the proposed transferee must
furnish an affidavit as to its status as a U.S. person and otherwise as a
permitted transferee.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences, we suggest that
potential investors 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 may wish to consult
their own tax advisors the various state and local tax consequences of an
investment in the securities.
The federal income tax discussions are included for general information
only and may not be applicable depending upon an investor's particular tax
situation. Prospective purchasers may wish to consult their tax advisers the tax
consequences to them of the purchase, ownership and disposition of the
securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, commonly referred to
as ERISA and the code prohibit a pension, profit sharing or other employee
benefit plan and some individual retirement arrangements from
60
<PAGE> 111
engaging in a number of transactions involving plan assets with persons that are
parties in interest or disqualified persons with respect to the plan, unless a
statutory or administrative exemption applies to the transaction. ERISA and the
code also prohibit some actions involving conflicts of interest by persons who
are fiduciaries of plans or arrangements. A violation of these rules may
generate excise tax and other liabilities under ERISA and the code for these
persons. In addition, investments by plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a plan's investments be made in
accordance with the documents governing the plan. Employee benefit plans that
are governmental plans and church plans are not subject to ERISA or these
sections of the code. Accordingly, assets of those plans may be invested in
securities without regard to the ERISA considerations, subject to the provisions
of other applicable federal, state and local law. Any of these types of plans
which are qualified and exempt from taxation under section 401(a) and 501(a) of
the code, however, are subject to the prohibited transaction rules set forth in
Section 503 of the code.
Some of the transactions involving a trust might constitute prohibited
transactions under ERISA and the code for a plan, including an individual
retirement arrangement, that purchased securities if the assets of the trust
were deemed to be assets of the plan. Under a regulation issued by the United
States Department of Labor, the assets of the trust would be treated as assets
of a plan for the purposes of ERISA and the code only if the plan acquired an
equity interest in the trust and none of the exceptions contained in the
regulation were applicable. An equity interest is defined under the regulation
as an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. In addition,
the United States Supreme Court has ruled that assets held in an insurance
company's general account may be deemed to be plan assets for ERISA purposes
under certain circumstances. Therefore, in the absence of an exemption, the
purchase, sale or holding of a security by a plan, including some individual
retirement arrangements, subject to ERISA or the code might result in prohibited
transactions and the imposition of excise taxes and civil penalties.
CERTIFICATES
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of Section 406(a), Section 406(b)(1),
Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the code, a number of transactions
concerning the initial purchase, the holding and the subsequent resale by plans
of asset-backed securities meet the conditions and requirements of these
underwriter exemptions. These underwriter exemptions will only be available for
securities that are certificates.
Among the conditions that must be satisfied in order for these
underwriter exemptions to apply to offered certificates are the following:
- - the acquisition of the certificates by a plan is on terms, including the
price for the certificates, that are at least as favorable to the plan
as they would be in an arm's-length transaction with an unrelated party;
- - the rights and interests evidenced by the certificates acquired by the
plan are not subordinated to the rights and interests evidenced by other
certificates of the trust;
- - the certificates acquired by the plan have received a rating at the time
of the acquisition that is one of the three highest generic rating
categories from Standard & Poor's, Moody's Investors Service, Duff &
Phelps Credit Rating Co. or Fitch IBCA, Inc.;
- - the trustee is not an affiliate of any other member of the restricted
group defined below;
- - the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum
of all payments made to and retained by the originators and the sponsor
pursuant to the assignment of the obligations to the trust estate
represents not more than the fair market value of these obligations; the
sum of all payments made to and retained by any servicer represents not
more than reasonable compensation for the person's services under the
agreements and reimbursement of the person's reasonable expenses in
connection therewith;
61
<PAGE> 112
- - the plan investing in the certificates is an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act; and
- - if all of the obligations used to fund the trust have not been
transferred to the trust on the closing date, additional obligations of
the types specified in the prospectus supplement or the agreements having
an aggregate value equal to no more than 25% of the total principal
amount of the certificates being offered by the trust may be transferred
to the trust, in exchange for amounts credited to the account funding the
additional obligations, within a funding period of no longer than 90 days
or 3 months following the closing date.
The trust must also meet the following requirements:
- - the corpus of the trust estate 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 a rating agency for at least one
year prior to the plan's acquisition of certificates; and
- - certificates evidencing interests in the other investment pools must have
been purchased by investors other than plans for at least one year prior
to the plan's acquisition of certificates.
Moreover, these underwriter exemptions provide relief from some of the
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
if, among other requirements:
- - in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in
which plans have invested is acquired by persons independent of the
restricted group and at least fifty percent of the aggregate interest in
the trust is acquired by persons independent of the restricted group;
- - the fiduciary, or its affiliate, is an obligor under five percent or less
of the fair market value of the obligations contained in the trust;
- - the plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding
at the time of the acquisition;
- - immediately after the acquisition, no more than twenty-five percent of
the assets of the plan 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.
These underwriter exemptions do not apply to plans sponsored by the
restricted group, which means the sponsor, the underwriters, the trustee, the
master servicer, any other servicer, any credit enhancement provider, any
obligor under mortgage loans included in the trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
trust, or any affiliate of these parties.
In addition to these underwriter exemptions, the Department of Labor has
issued an exemption for some transactions involving the sale or exchange of
residential mortgage pool pass-through certificates by plans and for
transactions in connection with the servicing and operation of the mortgage
pool.
NOTES
The underwriter exemptions will not be available for securities which are
notes. However, under the plan assets regulation, if the notes are treated as
indebtedness without substantial equity features, the trust's assets would not
be deemed assets of a plan. If the notes are treated as having substantial
equity features, the purchase, holding and resale of the notes could result in a
transaction that is prohibited under ERISA or the code. Even if the notes were
treated as debt for purposes of the plan assets regulation, the acquisition or
holding of the notes by or on behalf
62
<PAGE> 113
of a plan could give rise to a prohibited transaction if the acquisition or
holding were deemed to be a loan to a party in interest of the plan. Exemptions
from the prohibited transaction rules could be applicable to the purchase and
holding of notes by a plan, depending on the type and circumstances of the plan
fiduciary making the decision to acquire 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 these exemptions or by another Department of Labor exemption.
CONSULTATION WITH COUNSEL
The prospectus supplement for each series of securities will provide
further information which plans may wish to consider before purchasing the
securities. A plan fiduciary considering the purchase of securities may wish to
consult its tax and legal advisors regarding whether the assets of the trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, we suggest that each plan fiduciary determine for itself
whether under the general fiduciary standards of investment prudence and
diversification, an investment in the securities is appropriate for the plan,
taking into account the overall investment policy of the plan and the
composition of the plan's investment portfolio.
REPORTS
Each trust will be required to file reports with the Commission under the
requirements of the Securities Exchange Act. The sponsor intends to cause each
trust to suspend filing the reports if and when the reports are no longer
required under the Securities Exchange Act.
In connection with each distribution made to the holders of a series, the
trustee will furnish the securityholders with statements which will describe the
amount of the distribution, its allocation to principal and to interest, and
information regarding the performance of the mortgage loans. The master servicer
will furnish the trustee periodic compliance statements and, an annual statement
from a firm of independent public accountants concerning the accountants' the
examination of documents and records relating to the servicing of the mortgage
loans in the trust. Copies of the monthly and annual statements will be sent to
securityholders if requested and addressed to Advanta Conduit Receivables, Inc.,
10790 Rancho Bernardo Road, San Diego, California 92127, (858)676-3099.
INVESTMENT MATTERS
The prospectus supplement will state whether a series of Securities will
constitute mortgage related securities for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, commonly referred to as SMMEA. Investors whose
investment authority is subject to legal restrictions may wish to consult with
their own legal advisors to determine whether and to what extent the securities
constitute legal investments for them.
63
<PAGE> 114
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
securities will be used by the sponsor to finance the purchase of mortgage
loans, or to repay short-term financings utilized to fund the purchase of the
mortgage loans general corporate purposes. The sponsor expects that it will sell
securities similar to these securities from time to time. The timing and amount
of any additional sales will be dependent upon a number of factors, including
the volume of mortgage loans originated and purchased by the sponsor, prevailing
interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The prospectus supplement relating to each series of securities will set
forth the specific terms of the offering of the series of securities, the names
of the underwriters, the proceeds to the sponsor or its affiliates from the sale
and, if applicable, the initial public offering prices, the discounts and
commissions to the underwriters and any discounts and concessions allowed or
reallowed to dealers.
LEGAL MATTERS
Legal matters in connection with the securities will be passed upon for
the sponsor by Dewey Ballantine LLP, New York, New York, by the general counsel
of the sponsor or other counsel identified in the prospectus supplement.
FINANCIAL INFORMATION
The sponsor has determined that its financial statements are not material
to this offering. Any prospective investor who desires to review financial
information of the sponsor may request a copy of the Sponsor's most recent
financial statements from the sponsor.
A new trust will be formed to own the trust property for that trust, and
to issue each series of securities. Each trust will have no assets or
obligations prior to the issuance of the securities and will not engage in any
activities other than those described in this prospectus and in the prospectus
supplement. Accordingly, no financial statements of a trust will be included in
this prospectus or in any prospectus supplement, unless the trust is a business
trust.
A prospectus supplement and a Current Report on Form 8-K, which will be
incorporated by reference to the registration statement, will contain any
required financial statements of the credit enhancement provider.
ADDITIONAL INFORMATION
This prospectus, together with the prospectus supplement for each series
of securities, contains a summary of the material terms of the applicable
exhibits to the registration statement and the agreements under which the
securities will be issued. Copies of the exhibits are on file at the offices of
the Securities and Exchange Commission in Washington, D.C., and may be obtained
at rates prescribed by the Commission upon request to the Commission or may be
inspected, without charge, at the Commission's offices.
64
<PAGE> 115
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 tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors 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.
A-1
<PAGE> 116
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 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.
A-2
<PAGE> 117
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;
- - 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, as defined below, 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.
A-3
<PAGE> 118
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.
A U.S. person is:
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision thereof,
(3) an estate that is subject to U.S. federal income tax
regardless of the source of its income or
(4) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United
States fiduciary has the authority to control all substantial decisions
of the trust.
A non-U.S. person is any person who is not a U.S. person.
This summary does not deal with all aspects of U.S. federal income
tax withholding that may be relevant to foreign holders of the
securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the
securities.
A-4
<PAGE> 119
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$275,000,000
Advanta Revolving Home Equity Loan Trust 1999-B
Advanta Revolving Home Equity Loan
Asset Backed Notes, Series 1999-B
[Advanta Logo]
Advanta Conduit Receivables, Inc.
Sponsor
[Advanta Logo]
Advanta Mortgage Corp. USA
Master Servicer
---------------------------------
Prospectus Supplement
---------------------------------
MORGAN STANLEY DEAN WITTER
BANC OF AMERICA SECURITIES LLC
September 21, 1999
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes offered hereby in any state where the offer
is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus
when acting as underwriters of these notes and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the notes, whether
or not participating in this offering, may be required to deliver a prospectus
supplement and prospectus until ninety days after the date of this prospectus
supplement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
