<PAGE> 1
PROSPECTUS SUPPLEMENT
- -----------------------------
(TO PROSPECTUS DATED DECEMBER 28, 1999)
$400,000,000
ADVANTA REVOLVING HOME EQUITY LOAN TRUST 2000-A
ADVANTA REVOLVING HOME EQUITY LOAN ASSET BACKED NOTES,
SERIES 2000-A
[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 underlying 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>
$400,000,000 LIBOR + 0.25% August 25, 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 May 25, 2000.
The property of the trust consists of a pool of
adjustable rate revolving home equity credit line
loans. The trust will also hold cash for the
purchase of additional mortgage loans on or before
August 31, 2000.
The notes will have the benefit of a certificate
guaranty insurance policy from Ambac Assurance
Corporation which will guarantee minimum required
amounts due on the notes.
[AMBAC LOGO]
Delivery of the notes is expected to be made in
book-entry form through the facilities of DTC,
Clearstream and the Euroclear System on or about
April 27, 2000.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE SPONSOR
--------------- --------------------- -----------------------
<S> <C> <C> <C>
Per note 100% 0.25% 99.75%
Total.... $400,000,000 $1,000,000 $399,000,000
</TABLE>
Proceeds to the sponsor are before deducting expenses, which are estimated to be
approximately $700,000.
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.
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
APRIL 18, 2000
<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>
<CAPTION>
Page
----
<S> <C>
Summary .......................................................... S-3
Risk Factors ..................................................... S-7
Formation of the Trust ........................................... S-10
The Owner Trustee .......................................... S-10
The Indenture Trustee ...................................... S-10
The Master Servicer .............................................. S-10
The Sponsor and the Master Servicer ........................ S-11
Pending Legislative Proposals .............................. S-12
The HELOC Lending Program ........................................ S-13
Description of the Mortgage Loans ................................ S-16
Maturity and Prepayment Considerations ........................... S-24
The Notes .................................................. S-25
Effect of Overcollateralization Feature .................... S-25
The Pre-Funding Account .................................... S-26
Capitalized Interest Account ............................... S-26
Optional Redemption ........................................ S-26
Decrement Table ............................................ S-26
Description of the Notes ......................................... S-28
Optional Transfers of Mortgage Loans to the
Sponsor or the Related Originator .......................... S-28
Payments on Mortgage Loans; Deposits to
Principal and Interest Account ............................. S-29
Payments on the Notes ...................................... S-29
Overcollateralization Feature .............................. S-30
Interest Distributions ..................................... S-30
Calculation of the LIBOR Rate for the Notes ................ S-31
Payment of Principal ....................................... S-32
Rapid Amortization Events .................................. S-32
Events of Default Under the Indenture ...................... S-33
Remedies of Event of Default under the
Indenture .................................................. S-33
Flow of Funds .............................................. S-34
The Insurer and the Policy ....................................... S-35
The Insurer ................................................ S-35
The Policy ................................................. S-36
Draws Under the Policy ..................................... S-37
Provisions of the Agreements ..................................... S-37
Collection and Other Servicing Procedures
on Mortgage Loans .......................................... S-37
Transfer of the Mortgage Loan Files ........................ S-37
Hazard Insurance ........................................... S-38
Realization Upon Defaulted Mortgage Loans .................. S-38
Servicing Compensation and Payment
of Expenses ................................................ S-39
Reports .................................................... S-39
Evidence as to Compliance .................................. S-39
Matters Regarding the Master Servicer ...................... S-40
Amendments ................................................. S-40
The Indenture Trustee ...................................... S-40
Use of Proceeds .................................................. S-41
Material Federal Income Tax Consequences ......................... S-41
Characterization of the Notes as Indebtedness .............. S-42
Taxation of Interest Income of Noteholders ................. S-42
Possible Classification of the Trust as a
Partnership or Association Taxable as a
Corporation ............................................... S-44
Foreign Investors .......................................... S-45
Backup Withholding ......................................... S-46
Tax-Exempt Entities ........................................ S-46
State Taxes ...................................................... S-47
ERISA Considerations ............................................. S-47
Legal Investment Considerations .................................. S-48
Underwriting ..................................................... S-48
Legal Matters .................................................... S-49
Experts .......................................................... S-49
Ratings .......................................................... S-49
Glossary ......................................................... S-50
</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> <C> <C>
ISSUING TRUST: Advanta Revolving Home INSURER: Ambac Assurance Corporation
Equity Loan Trust 2000-A
NOTES: Advanta Revolving Home PAYMENT DATES: The 25th day of each month,
Equity Loan Asset Backed beginning in May 2000. If the
Notes, Series 2000-A 25th day is not a business day,
then the payment date will be
the next business day.
NON-OFFERED Trust Certificate CLOSING DATE: On or about April 27, 2000.
CERTIFICATES:
SPONSOR: Advanta Conduit CUT-OFF DATE: The close of business on
Receivables, Inc. March 31, 2000
MASTER SERVICER: Advanta Mortgage Corp. ORIGINATORS: Advanta Bank Corp., Advanta
USA Finance Corp. and Advanta
National Bank
INDENTURE TRUSTEE: Bankers Trust Company of OWNER TRUSTEE: Wilmington Trust Company
California, N.A.
</TABLE>
---------------
ASSETS OF THE TRUST
The trust's assets include:
- a pool of adjustable rate revolving home equity 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.
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
draws and any principal payments on the mortgage loans, the pool principal
balance may fluctuate and differ each day.
S-3
<PAGE> 4
THE MORTGAGE LOANS
The mortgage loans owned by the trust consist of adjustable rate revolving
home equity credit line loans.
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,
as long as the notes are maintained in book-entry form, 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,
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 during the interest accrual period at the note
interest rate 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 April 2003
payment date, you will be entitled to the lesser of:
(a) 94.80% 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 draws made to the borrowers under the credit line agreements
during that remittance period and minus any amounts applied to
reduce over-collateralization.
As long as a rapid amortization event has not occurred, beginning on the
payment date in May 2003, and for each subsequent payment date, you will be
entitled to the amount described in (a) above. In addition, on each payment date
you may receive extra payments used to reduce the principal balance of your note
to the extent excess funds are allocated to you.
We refer you to "Description of the Notes" in this prospectus supplement
for additional information.
S-4
<PAGE> 5
CREDIT ENHANCEMENT
Credit enhancement is intended to reduce the effect on holders of the
notes of shortfalls in payments received from borrowers and losses realized on
the mortgage loans. The credit enhancement for the notes will consist of the
certificate guaranty insurance policy and the overcollateralization features
described in this prospectus supplement.
1. Overcollateralization: Initially, the principal balance of the mortgage
loans will be greater than the principal balance of the notes. Because more
interest is usually required to be paid by the borrowers than is necessary to
pay the interest accrued on the notes and the expenses of the trust, there is
expected to be excess interest each month. A portion of this excess will be used
to make accelerated payments of principal on the notes, until the targeted
amount of overcollateralization has been reached, further increasing the credit
support for the notes by reducing the principal balance of the notes.
We refer you to "Description of the Notes--Overcollateralization Feature"
in this prospectus supplement for additional information.
2. 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;
- the amount by which the note balance exceeds the sum of the pool
principal balance and amounts on deposit in the pre-funding account;
and
- any principal amounts owed to noteholders on the final scheduled
payment date.
We refer you to "The Insurer and the Policy" in this prospectus supplement
for additional information.
PRE-FUNDING ACCOUNT
On the closing date, approximately $119,000,000 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;
- August 31, 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 is not
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 on any payment date after the principal balance of the mortgage loans
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 equal to 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.
S-5
<PAGE> 6
ERISA CONSIDERATIONS
Subject to the conditions and considerations discussed under "ERISA
Considerations" in this prospectus supplement, the notes may be purchased by
pension, profit-sharing or other employee benefit individual retirement accounts
and various types of Keogh plans, that are subject to the Employee Retirement
Income Security Act of 1974 and Section 4975 of the Internal Revenue Code. Each
such purchaser will be deemed to make certain representations.
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.
S-7
<PAGE> 8
DELINQUENT MORTGAGE LOANS ARE MORE LIKELY TO DEFAULT
On the closing date, 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.
MORTGAGE LOANS HAVE AN INTEREST ONLY FEATURE DURING THE DRAW PERIOD, WHICH MAY
REDUCE YOUR PRINCIPAL PAYMENTS AND INCREASE DEFAULTS AND DELINQUENCIES
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 since borrowers are required to only make interest payments. 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 during the amortization period 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 these 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 103% of their 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 sum of the rates at which the fees of the trust are calculated plus
0.50%. This means that the interest that is payable to the investors on the
notes may be limited to the interest the trust receives on the mortgage loans
minus the sum of the rates at which the fees of the trust are calculated plus
0.50%. If the weighted average interest rate of the mortgage loans was reduced
significantly, under a relatively high prepayment scenario, or if the interest
rate index for the mortgage loans decreased without a corresponding decrease
S-8
<PAGE> 9
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.
- 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 the 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.
LIMITED LIQUIDITY; LACK OF SMMEA ELIGIBILITY MAY REDUCE MARKETABILITY AND
LIQUIDITY FOR THE NOTES
The underwriters intend to make a secondary market in the offered notes,
but will have no obligation to do so. We cannot assure you that a secondary
market for any of the offered notes will develop, or if one does so develop,
that it will continue or provide sufficient liquidity of investment or that it
will remain for the term of the notes. The notes will not constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended. Accordingly, many institutions with legal authority to
invest in SMMEA securities will not be able to invest in the notes, thereby
limiting the market for the notes. In light of the foregoing, you should consult
your own counsel as to whether you have the legal authority to invest in
non-SMMEA securities such as the notes. See "Legal Investment Matters" in this
prospectus supplement and in the attached prospectus.
---------------
S-9
<PAGE> 10
You can find a glossary of defined terms used in this prospectus
supplement beginning on page S-50 of this prospectus supplement.
FORMATION OF THE TRUST
Advanta Revolving Home Equity Loan Trust 2000-A is a business trust formed
under the laws of the State of Delaware under a trust agreement between Advanta
Conduit Receivables, Inc., as sponsor, 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 revolving home
equity 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 April 18,
2000 included as Exhibit A to this prospectus supplement.
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, 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 1761 East
St. Andrew Place, Santa Ana, California 92705. 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.
S-10
<PAGE> 11
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 December 31, 1999, Advanta Corp. had assets in excess
of $3.6 billion and consolidated managed assets of approximately $12.0 billion.
See "The Sponsor" and "The Master Servicer" in the prospectus.
As of December 31, 1999, the master servicer and its subsidiaries were
servicing:
- approximately 143,000 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
- approximately 177,600 mortgage loans which are serviced for third
parties on a contract servicing basis representing an aggregate
outstanding principal balance of approximately $11.9 billion.
As of December 31, 1999, the sponsor or its affiliates have issued 41
series of closed-end mortgage asset-backed securities with an original principal
balance of approximately $12.9 billion, some of which are no longer outstanding,
and 6 series of revolving home equity loan asset-backed securities with an
original principal balance of approximately $860 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.
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. Fleet's allegations, which Advanta denies, center around Fleet's
assertions that Advanta has failed to complete certain post-
S-11
<PAGE> 12
closing adjustments to the value of the assets and liabilities that Advanta
contributed in 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. Formal discovery has
begun and is ongoing. 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 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 LEGISLATIVE PROPOSALS
Various legislative proposals and initiatives relating to the banking and
finance businesses have been or will be introduced in Congress. Recently, an
FDIC discussion draft proposal has been made public relating to capital
requirements of subprime lenders. Under the proposal, regulatory capital
required to be held for certain mortgage or other loans that are considered
subprime would be increased. Advanta is primarily in the lending and leasing
businesses. At this time, Advanta has not yet quantified the amount of Advanta's
mortgage business that could be categorized as "subprime" under the FDIC's
proposal. If a substantial portion of Advanta's loan and lease receivables were
to meet the FDIC's proposed definition of "subprime" and the draft proposal were
to be adopted, the increased regulatory capital requirements could have negative
impact on Advanta's financial results. This is one of several regulatory and
legislative initiatives focused on the subprime mortgage business that
potentially could impact the manner in which Advanta conducts its business and
its financial results.
Other federal legislative proposals and initiatives that could impact our
businesses include financial privacy initiatives that would restrict the
permissible use of customer-specific financial and other credit information, and
statutory changes to the Real Estate Settlement Procedures Act, the Truth in
Lending Act and the Home Ownership Equity Protection Act. Additionally, a number
of states are considering, and others likely will consider, legislative and
regulatory initiatives related to subprime mortgage lending and financial
privacy. It is impossible to determine whether any of these proposals or
initiatives will be adopted or occur and, if so, the magnitude of any impact
they will have on the manner in which Advanta conducts its business and its
financial results.
Accordingly, the sponsor, the master servicer and the originators have no
way to determine what, if any, impact such proposals and initiatives will have
on their origination and servicing procedures in the future.
S-12
<PAGE> 13
THE HELOC LENDING PROGRAM
UNDERWRITING PROCEDURES RELATING TO REVOLVING HOME EQUITY CREDIT LINE LOANS.
The following is a description of the underwriting procedures customarily
employed by the originators, Advanta National Bank, Advanta Bank Corp. and
Advanta Finance Corp., in their HELOC, or revolving home equity 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 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 each applicant in
order to evaluate such 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.
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 not more than 10% 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, including the interest payments based on the applicable credit
limit, due during the draw period, to the borrower's gross monthly income. The
underwriting guidelines state that the maximum monthly debt-to-income ratio is
55%, 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. and Advanta Bank Corp. generally require a full title
policy for each HELOC, and Advanta National Bank generally requires a full title
policy for HELOCs in
S-13
<PAGE> 14
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. The master servicer may cause the
borrower to obtain flood insurance, may obtain it on behalf of the borrower and
at the expense of the borrower or will maintain a master policy covering
properties located in designated flood zones.
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.
After foreclosure, 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.
The master servicer will charge off a mortgage loan with a CLTV of greater
than 100% (a "HLTV HELOC Mortgage Loan") in the trust the sooner of (i) when it
becomes 180 days delinquent or (ii) when the master servicer has determined that
it has recovered all amounts it expects to recover from the defaulted mortgage
loan. The master servicer will charge off any other mortgage loan in the trust
when it has determined that it has recovered all amounts it expects to recover
from the defaulted mortgage loan.
For the mortgage loans in the trust, 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. For the mortgage loans in the trust, the
master servicer may not change its policies if the change would adversely affect
the interest of the noteholders or the insurer. Any change
S-14
<PAGE> 15
must be consistent with accepted servicing practices, the terms of the mortgage
loans 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 four years ended December 31, 1999. The owned and
managed HELOC portfolio includes, but is not limited to, HELOCs originated on or
before December 31, 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
in the trust. 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 in the trust.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
MASTER SERVICER'S OWNED AND MANAGED HELOC PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDING Year Ending Year Ending YEAR ENDING
DECEMBER 31, 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 ........ 33,472 $ 840,879 12,314 $ 360,186 6,434 $ 157,087 2,252 $ 59,675
Delinquency
percentage
30-59 days ..... 1.83% 2.08% 1.89% 1.67% 2.66% 2.59% 1.29% 1.27%
60-89 days ..... 0.99% 1.08% 0.89% 0.90% 0.95% 0.75% 0.75% 0.99%
90-119 days .... 0.47% 0.46% 0.39% 0.29% 0.61% 0.33% 0.32% 0.26%
120-149 days ... 0.35% 0.38% 0.39% 0.46% 0.45% 0.31% 0.04% 0.12%
150-179 days ... 0.18% 0.20% 0.15% 0.14% 0.23% 0.23% 0.04% 0.03%
180 days or more 0.66% 0.80% 0.67% 0.62% 0.42% 0.56% 0.04% 0.03%
Total ............ 4.48% 5.00% 4.38% 4.08% 5.32% 4.77% 2.48% 2.70%
Foreclosure rate . 0.19% 0.28% 0.14% 0.31% -- -- -- --
REO properties ... 0.03% -- -- -- -- -- -- --
</TABLE>
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. REO, or real estate owned, properties are properties for which
the mortgages have been foreclosed or for which deeds in lieu of foreclosure
have been accepted and are being held by the master servicer pending
disposition. Percentages are calculated using the number of loans, not the
dollar amount.
S-15
<PAGE> 16
LOAN LOSS EXPERIENCE OF THE MASTER SERVICER'S
OWNED AND MANAGED HELOC PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDING Year Ending Year Ending Year Ending
DECEMBER 31, 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...... $ 589,131 $ 244,520 $ 109,407 $ 23,236
Net losses...................... $ 3,953 $ 519 $ 174 $ 45
Net losses as a percentage of
average amount outstanding...... 0.67 % 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 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 the experience on the HELOC mortgage loans in the trust. 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 the 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, the majority 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
Unless otherwise specified, 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 March 31, 2000.
The aggregate principal balance of the pool, or pool principal balance, as of
the statistical calculation date is $303,541,483.96. Prior to the closing date,
some of the mortgage loans may prepay in full, may be determined not to meet the
eligibility requirements and, as a result, may not be included in the pool of
initial mortgage loans, or additional loans may be added. Consequently, the
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 August 31, 2000, the
trust is expected to acquire subsequent mortgage loans with an aggregate
principal balance of approximately $119,000,000. The subsequent mortgage loans
will be selected using the same criteria used to select the initial mortgage
loans and are required to meet
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<PAGE> 17
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% to 11.500%,
- the weighted average periodic cap is 5.141%,
- the annual coupon rate caps range from 0% to 11.500%, and
- the weighted average annual coupon rate cap is 5.502%.
As of the statistical calculation date, the HLTV HELOC Mortgage Loans had
a weighted average FICO score of 657, and the non HLTV HELOC Mortgage Loans had
a weighted average FICO score of 615.
The mortgage loans may 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
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<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 (i) the appraised value of the mortgaged
property at the time of origination of the mortgage loan or (ii) 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.
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 % OF AGGREGATE
State MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ----- -------------- ----------- -----------------
<S> <C> <C> <C>
California ........... 1,090 $ 41,290,615.76 13.60%
New York ............. 621 20,339,255.95 6.70%
Florida .............. 629 18,723,634.02 6.17%
Michigan ............. 704 17,707,970.32 5.83%
Pennsylvania ......... 481 12,837,219.63 4.23%
New Jersey ........... 366 12,435,464.36 4.10%
Georgia .............. 419 12,130,301.13 4.00%
Ohio ................. 476 12,098,183.79 3.99%
Illinois ............. 423 11,908,392.30 3.92%
Maryland ............. 317 10,521,748.95 3.47%
Other ................ 4,488 133,548,697.75 43.99%
------ --------------- ------
TOTAL.... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Other includes any state that did not make the top ten distribution on a
percentage basis.
Geographic location is determined by the address of the mortgaged property
securing the mortgage loan. The mortgaged properties are located in 45 states
plus the District of Columbia.
PROPERTY TYPE
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
PROPERTY TYPES MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- -------------------------------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
Single Family/PUD........................... 9,285 $283,610,852.07 93.43%
Rowhouse/Townhouse/Condo.................... 424 11,732,583.72 3.87%
2 to 4 Units................................ 144 4,395,075.45 1.45%
Manufactured................................ 161 3,802,972.72 1.25%
------ --------------- ------
TOTAL.............................. 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
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<PAGE> 19
LIEN PRIORITY
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
LIEN PRIORITY MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- -------------------------------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
First Lien.................................. 331 $ 13,976,250.28 4.60%
Second Lien................................. 9,683 289,565,233.68 95.40%
------ --------------- -------
TOTAL..................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ---------------- -------------- ----------- -----------------
<S> <C> <C> <C>
Owner Occupied.............................. 9,977 $302,306,447.37 99.59%
Vacation Home............................... 14 491,070.40 0.16%
Non-Owner Occupied.......................... 23 743,966.19 0.25%
------ --------------- ------
TOTAL ....................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
RANGE OF PRINCIPAL BALANCES MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- --------------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
$ 0.00............................... 113 $ 0.00 0.00%
0.01 - 25,000.00................ 4,783 81,653,303.84 26.91%
25,000.01 - 50,000.00................ 3,805 134,618,208.66 44.36%
50,000.01 - 75,000.00................ 1,197 74,160,083.04 24.43%
75,000.01 - 100,000.00................ 78 6,829,060.40 2.25%
100,000.01 - 125,000.00................ 12 1,350,489.31 0.44%
125,000.01 - 150,000.00................ 9 1,254,817.62 0.41%
150,000.01 - 200,000.00................ 9 1,586,928.33 0.52%
200,000.01 - 250,000.00................ 4 890,830.52 0.29%
250,000.01 - 425,000.00................ 4 1,197,762.24 0.39%
------ --------------- ------
TOTAL ...................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Minimum: $ 0.00
Maximum: $400,000.00
Average Principal Balance: $ 30,311.71
S-19
<PAGE> 20
CREDIT LIMITS
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
RANGE OF CREDIT LIMITS MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ---------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
$ 5,000.00 - 25,000.00.......... 4,240 $ 70,787,045.32 23.32%
25,000.01 - 50,000.00.......... 4,148 135,162,429.72 44.53%
50,000.01 - 75,000.00.......... 1,480 82,994,257.18 27.34%
75,000.01 - 100,000.00.......... 96 7,660,721.97 2.52%
100,000.01 - 125,000.00.......... 14 1,367,454.53 0.45%
125,000.01 - 150,000.00.......... 13 1,507,576.53 0.50%
150,000.01 - 200,000.00.......... 12 1,745,745.14 0.58%
200,000.01 - 250,000.00.......... 5 1,073,309.02 0.35%
250,000.01 - 425,000.00.......... 6 1,242,944.55 0.41%
-------- --------------- ------
TOTAL .................. 10,014 $303,541,483.96 100.00%
======== =============== ======
</TABLE>
Minimum: $ 5,000.00
Maximum: $423,330.00
Average Credit Limit: $ 33,359.07
CURRENT CREDIT LIMIT UTILIZATION
<TABLE>
<CAPTION>
RANGE OF CURRENT CREDIT NUMBER OF % OF AGGREGATE
LIMIT UTILIZATION (%) MORTGAGE LOANS CREDIT LIMIT CREDIT LIMIT
- --------------------- -------------- ------------ ------------
<S> <C> <C> <C>
0.000.................................... 113 $ 2,706,175.00 0.81%
0.001 - 50.000........................ 488 17,776,240.00 5.32%
50.001 - 80.000........................ 947 35,200,996.00 10.54%
80.001 - 90.000........................ 463 17,386,014.00 5.20%
90.001 - 100.000........................ 7,950 259,427,914.00 77.66%
100.001 - 103.000........................ 53 1,560,381.00 0.47%
------ --------------- ------
TOTAL ............................ 10,014 $334,057,720.00 100.00%
====== =============== ======
</TABLE>
Minimum: 0.000%
Maximum: 101.367%
Weighted Average by Credit Limit: 95.248%
S-20
<PAGE> 21
MORTGAGE LOAN COUPON RATES
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
RANGE OF COUPON RATES (%) MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ------------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
8.001 - 9.000............... 46 $ 2,040,395.60 0.67%
9.001 - 10.000............... 126 6,115,004.15 2.01%
10.001 - 11.000............... 546 20,038,073.80 6.60%
11.001 - 12.000............... 847 26,934,795.61 8.87%
12.001 - 13.000............... 1,150 34,818,523.84 11.47%
13.001 - 14.000............... 2,538 77,685,526.65 25.60%
14.001 - 15.000............... 3,295 96,491,743.49 31.80%
15.001 - 16.000............... 1,087 30,070,635.15 9.91%
16.001 - 17.000............... 323 8,178,962.16 2.69%
17.001 - 18.000............... 53 1,107,678.51 0.36%
18.001 - 19.000............... 3 60,145.00 0.02%
------ --------------- ------
TOTAL .................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Minimum: 8.500%
Maximum: 18.500%
Weighted Average by Principal Balance: 13.613%
MAXIMUM MORTGAGE LOAN COUPON RATES
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
COUPON RATES (%) MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ---------------- -------------- ----------- -----------------
<S> <C> <C> <C>
9.000 - 10.000............... 2 $ 89,927.70 0.03%
15.001 - 16.000............... 36 1,284,750.06 0.42%
16.001 - 17.000............... 68 3,028,106.31 1.00%
17.001 - 18.000............... 332 12,925,622.26 4.26%
18.001 - 19.000............... 604 21,337,313.50 7.03%
19.001 - 20.000............... 785 24,358,169.84 8.02%
20.001 - 21.000............... 1,588 46,912,007.47 15.45%
21.001 - 22.000............... 3,847 122,378,557.79 40.32%
22.001 - 23.000............... 2,067 56,141,622.33 18.50%
23.001 - 24.000............... 685 15,085,406.70 4.97%
------ --------------- ------
TOTAL ................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Minimum: 9.399%
Maximum: 24.000%
Weighted Average by Principal Balance: 21.128%
S-21
<PAGE> 22
INTEREST RATE MARGIN
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
RANGE OF MARGINS (%) MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- -------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
0.000 - 1.000............... 108 $ 4,881,844.03 1.61%
1.001 - 1.500............... 113 5,582,364.34 1.84%
1.501 - 2.000............... 283 10,243,389.73 3.37%
2.001 - 2.500............... 368 13,108,428.55 4.32%
2.501 - 3.000............... 440 13,487,710.87 4.44%
3.001 - 3.500............... 420 12,827,544.69 4.23%
3.501 - 4.000............... 454 13,787,955.20 4.54%
4.001 - 4.500............... 982 27,903,681.05 9.19%
4.501 - 5.000............... 1,165 36,672,320.80 12.08%
5.001 - 5.500............... 1,614 49,009,620.09 16.15%
5.501 - 6.000............... 1,788 51,840,522.87 17.09%
6.001 - 6.500............... 908 27,106,792.85 8.93%
6.501 - 7.000............... 600 16,590,648.25 5.47%
7.001 - 7.500............... 453 12,637,680.48 4.16%
7.501 - 8.000............... 189 4,715,327.83 1.55%
8.001 - 8.500............... 103 2,494,979.63 0.82%
8.501 - 9.000............... 22 559,737.70 0.18%
9.001 - 10.000............... 4 90,935.00 0.03%
------ --------------- ------
TOTAL.................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Minimum: 0.000%
Maximum: 10.000%
Weighted Average by Principal Balance: 4.972%
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
RANGE OF COMBINED NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ------------------------ -------------- ----------- -----------------
<S> <C> <C> <C>
0.000 - 50.000............... 157 $ 4,628,182.13 1.52%
50.001 - 80.000............... 1,120 37,924,152.42 12.49%
80.001 - 90.000............... 1,750 50,511,473.57 16.64%
90.001 - 100.000............... 4,174 109,131,216.08 35.96%
100.001 - 125.000............... 2,813 101,346,459.76 33.39%
------ --------------- ------
TOTAL.................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Minimum: 6.00%
Maximum: 125.00%
Weighted Average by Principal Balance: 99.32%
S-22
<PAGE> 23
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
RANGE OF MONTHS
REMAINING TO SCHEDULED NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ----------------- -------------- ----------- -----------------
<S> <C> <C> <C>
less than 229...................... 2 $ 29,009.93 0.01%
259 - 264........................ 1 23,651.69 0.01%
265 - 270........................ 537 15,672,195.98 5.16%
271 - 276........................ 9,474 287,816,626.36 94.82%
------ --------------- ------
TOTAL ............. 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Minimum: 219 months
Maximum: 276 months
Weighted Average by Principal Balance: 274 months
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS ELAPSED SINCE NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
ORIGINATION MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ----------- -------------- ----------- -----------------
<S> <C> <C> <C>
0 - 6...................................... 9,812 $297,499,419.85 98.01%
7 - 12..................................... 200 6,013,054.18 1.98%
19 or more................................... 2 29,009.93 0.01%
------ --------------- ------
TOTAL ....................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
Minimum: 0 months
Maximum: 21 months
Weighted Average by Principal Balance: 2 months
DELINQUENCY STATUS
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS OUTSTANDING PRINCIPAL BALANCE
- ------------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
Current..................................... 9,736 $296,257,264.64 97.60%
1 - 29 days.............................. 220 5,741,997.80 1.89%
30 - 59 days............................... 58 1,542,221.52 0.51%
------ --------------- ------
TOTAL ....................... 10,014 $303,541,483.96 100.00%
====== =============== ======
</TABLE>
S-23
<PAGE> 24
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
During the pre-funding period, the trust may acquire approximately
$119,000,000 aggregate principal balance of mortgage loans with the prior
consent of the insurer. 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 combined loan-to-value ratio not higher than 125.00%;
- a maturity date not later than September 30, 2023; and
- a principal balance not greater than $400,000.
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; (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. The mortgage loans may be subject to termination fees in the amount of (i)
$500, (ii) the sum of six months of interest payments or (iii) some other amount
described in the credit line agreement. 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.
S-24
<PAGE> 25
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 likely, over time, represent a declining percentage of
the pool. This is because payments of principal are based on a fixed allocation
percentage of 94.8%, 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 Principal Balance may grow and Principal Collections which are paid
through to the noteholders will also, eventually, grow. Even if the Pool
Principal Balance backing the notes increases, we cannot issue more notes, so
the noteholders of the notes will receive principal at a faster rate. If the
Pool Principal 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
Principal 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 Overcollateralization Amount equals the
Specified Overcollateralization Amount, the 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. Excess Cashflow available for payment in 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 principal payments (including Accelerated
Principal Payments) are paid to the noteholders. If the actual rate of payments
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 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 Overcollateralization Amount equals the Specified
Overcollateralization Amount.
S-25
<PAGE> 26
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 $119,000,000 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;
- August 31, 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 be instructed by the
sponsor to make a cash deposit to the capitalized interest account from the net
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 Pool Principal
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 CleanUp 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, (ii) accrued and unpaid
interest at the Note Interest Rate through the day preceding the final payment
date and (iii) all amounts due and owing to the insurer. However, the consent of
the insurer is required for any redemption that would result in a draw on the
policy.
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 constant 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.
S-26
<PAGE> 27
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
MORTGAGE AMORTIZATION TERM TO INTEREST
PRE-FUNDING PRINCIPAL LOAN COUPON TERM MATURITY RATE
GROUP TYPE PERIOD BALANCE RATE (MONTHS) (MONTHS) MARGIN
----- ---- ------ ------- ---- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1 ARM HELOC 0 $303,541,483.96 13.613% 276 274 4.972%
2 ARM HELOC 2 $59,199,722.16 13.972% 276 276 4.972%
3 ARM HELOC 3 $59,199,722.16 13.972% 276 276 4.972%
---------------
$421,940,928.28
</TABLE>
- 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 term of the draw period specified in the credit
line agreement of each mortgage loan is 36 months
from the Closing Date and no extension of the draw
period is made,
- 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 April 27, 2000,
- the trust expenses are as defined in the underlying
documents,
- for each payment date the Note Interest Rate is
6.41%, and
- the prime rate remains constant at 9.00%.
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-27
<PAGE> 28
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL NOTE BALANCE
AMORTIZATION SCHEDULE TO CALL
CONSTANT 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
4/25/01.............................. 88 78 73 68 62 57 52
4/25/02.............................. 82 63 54 46 38 31 24
4/25/03.............................. 77 51 40 31 23 16 9
4/25/04.............................. 68 40 31 24 18 13 9
4/25/05.............................. 60 32 24 17 12 0 0
4/25/06.............................. 53 26 18 12 0 0 0
4/25/07.............................. 46 21 13 8 0 0 0
4/25/08.............................. 40 17 10 0 0 0 0
4/25/09.............................. 38 13 0 0 0 0 0
4/25/10.............................. 34 11 0 0 0 0 0
4/25/11.............................. 31 9 0 0 0 0 0
4/25/12.............................. 28 0 0 0 0 0 0
4/25/13.............................. 25 0 0 0 0 0 0
4/25/14.............................. 22 0 0 0 0 0 0
4/25/15.............................. 20 0 0 0 0 0 0
4/25/16.............................. 18 0 0 0 0 0 0
4/25/17.............................. 16 0 0 0 0 0 0
4/25/18.............................. 15 0 0 0 0 0 0
4/25/19.............................. 13 0 0 0 0 0 0
4/25/20.............................. 12 0 0 0 0 0 0
4/25/21.............................. 11 0 0 0 0 0 0
4/25/22.............................. 10 0 0 0 0 0 0
4/25/23.............................. 0 0 0 0 0 0 0
Weighted Average Life to Call (in years) 8.6 4.1 3.2 2.5 2.1 1.7 1.4
Weighted Average Life to Maturity (in years) 8.6 4.4 3.4 2.7 2.2 1.8 1.5
</TABLE>
All percentages in the above table are rounded to the nearest 1%. The
calculation of the Weighted Average Life to Call assumes that the Clean-Up Call
(aggregate balance of the mortgage loans is equal to or less than 10% of the
original principal balance of the Notes) is exercised on the Clean-Up Date. The
calculation of the Weighted Average Life to Maturity assumes that the notes pay
to maturity.
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 any 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
S-28
<PAGE> 29
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. Any recovery made with respect to HLTV HELOC Mortgage
Loans 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 principal recovery made with
respect to HLTV HELOC Mortgage Loans, 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, within two business days after
receipt, 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.
PAYMENTS ON THE NOTES
Beginning with the first payment date, which will occur on May 25,
2000, payments 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 as long as the notes are maintained in
book-entry form. If definitive notes are issued, the record date will be the
last day of the month 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 the
following Business Day. Payments will be made by check, wire transfer, or
otherwise upon (a) the request of an owner owning notes having denominations
aggregating at least $1,000,000 and (b) notice received by the indenture trustee
at least five Business Days prior to the record date. The final payment on 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 owners
of the final payment.
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OVERCOLLATERALIZATION FEATURE
The Overcollateralization Amount is equal to the amount by which the
Pool Principal Balance plus the amount on deposit in the pre-funding account
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 of 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, 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 May 25, 2000. 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 0.25% and (y) for any payment date
thereafter, the sum of LIBOR and 0.50%, and
- the Net Funds Cap Rate, which is 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 the Prepayment Interest Shortfalls and Relief
Act Shortfalls for the Remittance Period, net of the servicing
fee, the indenture trustee's fee, the owner trustee's fee and
the premium payable to the insurer under the policy divided by
(B) the Pool Principal Balance as of the opening of the
Remittance Period, less (y) .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
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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, calculated at the Formula Rate over the
amount calculated at the Net Funds Cap Rate, together with interest on such
excess 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.
For each payment date interest on the notes 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. As used in this context,
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 (1) which are engaged in transactions in Eurodollar deposits in the
international Eurocurrency market, (2) with an established place of business in
London, (3) which have been designated by the indenture trustee after
consultation with the master servicer and (4) 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 of the Reference Banks 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%; or
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
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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.
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 April 2003 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 earlier to occur of
(i) the end of the managed amortization period and (ii) the occurrence of a
Rapid Amortization Event. In the absence of a Rapid Amortization Event the rapid
amortization period will begin on the May 2003 payment date. 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 94.80%,
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 August
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:
- 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;
- 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
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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;
- the occurrence of events of bankruptcy, insolvency or
receivership relating to the originators or the sponsor;
- 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;
- 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;
- a draw under the certificate guaranty insurance policy; and
- 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:
- a default in the payment of any interest when the same becomes
due and payable, which default continues for a period of five
days;
- a default in the payment in full of the Note Balance on the
final scheduled payment date;
- 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
- 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 OF 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
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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
Upon receipt, the indenture trustee shall deposit into the note
account, without duplication, the Available Funds.
Available Funds are the sum of (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.
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,
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- 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,
- 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,
- 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 senior liens current unless the master
servicer has determined that the advance would not be
recoverable.
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 master servicer, the underwriter, the indenture trustee
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 Officer 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 structure
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 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, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999, 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, 2000; Securities and Exchange Commission
File No. 1-10777 - 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 financing
statements.
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The following table sets forth the capitalization of the certificate
insurer as of December 31, 1998 and December 31, 1999, respectively, in
conformity with generally accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Unearned premiums ................. $ 1,303 $ 1,442
Other liabilities ................. 548 524
------- -------
Total liabilities ................. $ 1,851 $ 1,966
======= =======
Stockholder' s equity
Common stock ...................... $ 82 $ 82
Additional paid-in capital ........ 541 752
Accumulated other comprehensive
income (loss) ..................... 138 (92)
Retained earnings ................. 1,405 1,674
------- -------
Total stockholders' equity ........ 2,166 2,416
------- -------
Total liabilities and stockholders'
equity ............................ $ 4,017 $ 4,382
======= =======
</TABLE>
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, 1999 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, 17th Floor, 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 in
this prospectus supplement "The Insurer and the Policy" 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 on which 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.
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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 CarryForward 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, noteholders 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.
DRAWS UNDER THE POLICY
On each determination date the indenture trustee is required to
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's fee, the owner trustee's fee, and the premium payable to the insurer.
For 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
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intervening assignments, if applicable, showing a complete chain of title, 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 or
retained by the recording office.
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
sent for recording, within 75 business days of the closing date, or, 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 terms of the credit line agreements generally require borrowers to
maintain hazard insurance. The master servicer is required to cause the borrower
to maintain or to maintain a specified level of hazard insurance on the
mortgaged properties relating to the mortgage loans. The master servicer may
satisfy its obligation to cause hazard policies to be maintained by causing the
borrower to obtain or obtaining on behalf of the borrower and at the expense of
the borrower a hazard insurance policy insuring against losses on the mortgaged
properties. The master servicer may satisfy its obligation to maintain hazard
insurance by maintaining a blanket hazard 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 deductible clause. All amounts collected by the master servicer
under any hazard insurance policy, net of any reimbursements for expenses to the
master servicer and amounts to be applied to the restoration or repair of the
mortgaged property, will be deposited in the principal and interest account.
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 lesser of (i) the Principal Balance of the mortgage loan or
(ii) the credit limit of the mortgage loan.
The terms of the credit line agreements generally require borrowers to
maintain flood insurance if the mortgaged property is located in a federally
designated flood area. The master servicer is required to cause the borrower to
maintain or to maintain a specified level of flood insurance on the mortgaged
properties relating to the mortgage loans. The master servicer may satisfy its
obligation to cause flood policies to be maintained by causing the borrower to
obtain or obtaining on behalf of the borrower and at the expense of the borrower
a hazard insurance policy insuring against losses on the mortgaged properties.
The master servicer may satisfy its obligation to maintain flood policies by
maintaining a master flood insurance policy insuring against losses on the
mortgaged properties located in federally designated flood zones. If the 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. All amounts collected by the
master servicer under any flood insurance policy, net of any reimbursements for
expenses and amounts to be applied to the restoration or repair of the mortgaged
property, will 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
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mortgagor; (ii) if a notice of default on a senior lien is received by the
master servicer; or (iii) if circumstances are discovered by the master servicer
which would indicate that a potential for loss exists. The master servicer may
terminate foreclosure proceedings 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, as part of its normal servicing procedures, may
sell defaulted mortgage loans to independent third parties. The proceeds of
those sales will become Liquidation Proceeds.
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 to pay for 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 Pool Principal Balance 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 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 master
servicer's right of reimbursement will be prior to the rights of the noteholders
to receive any Net Liquidation Proceeds.
REPORTS
Monthly reports concerning the performance of the mortgage loans, the
trust and payments on the notes will be made available to the noteholders. In
addition, within 60 days after the end of each calendar year, beginning with the
2001 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 the servicing
operation of the master servicer and that, on the basis of the examination, the
firm believes that the servicing was conducted in compliance with minimum
servicing standards as defined in the Uniform Single Attestation Program for
Mortgage Bankers except for (a) the exceptions that the firm believes to be
immaterial and (b) any other exceptions contained in the report.
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MATTERS REGARDING THE MASTER SERVICER
The master servicer may not resign from its obligations and duties
under the sale and servicing agreement, 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 and 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
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 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 thirty 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 three Business Days following notice that such 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 Santa Ana, California,
will act as the indenture trustee under the indenture.
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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. The trust, 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 trust at the request of 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 trust will be obligated to
appoint a successor indenture trustee, acceptable to the insurer, the sponsor
and the master servicer. 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, the sponsor and the master servicer.
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.
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.
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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, Wolf,
Block, Schorr and Solis-Cohen 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
originators intend 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.
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 of the code 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 of the
code, 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
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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 holder 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 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.
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A subsequent noteholder 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
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 holder 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 holder 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.
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
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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 holder of a note 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
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, so long as (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 and (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 or other similar
form (currently including Form W-8, which will be valid only for payments prior
to January 1, 2001), 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, addresses and other information. 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 the withholding tax is 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.
The IRS recently issued Withholding Regulations, generally effective
for payments made after December 31, 2000, which make certain modifications to
withholding, backup withholding, and information reporting rules. The
Withholding Regulations may require that a foreign beneficial owner (including,
in the case of a partnership, the partners thereof) obtain a United States
taxpayer identification number and make certain certifications on Form W-8BEN or
other similar forms if the foreign beneficial owner wishes to claim exemption
from, or a reduced rate of, withholding under an applicable income tax treaty.
Prospective investors are urged to consult their own tax advisors regarding the
Withholding Regulations.
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 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
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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 January 1, 2001. See "--Foreign
Investors" above and "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.
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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.
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 of the code 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.
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 regulation, 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 of 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.
S-47
<PAGE> 48
LEGAL INVESTMENT CONSIDERATIONS
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 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 "Investment Matters"
in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement between the sponsor and Bear, Stearns & Co. Inc., as underwriter and
as representative for Morgan Stanley & Co. Incorporated, Prudential Securities
Incorporated and Salomon Smith Barney Inc., as underwriters, 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>
Bear, Stearns & Co. Inc.................................. $100,000,000
Morgan Stanley & Co. Incorporated........................ $100,000,000
Prudential Securities Incorporated....................... $100,000,000
Salomon Smith Barney Inc................................. $100,000,000
------------
Total........................................... $400,000,000
</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 0.10%. 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.
S-48
<PAGE> 49
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 Wolf, Block, Schorr and Solis-Cohen LLP, New
York, New York. Brown & Wood LLP, New York, New York, will act as counsel for
the underwriters.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 1999 and 1998 and for each of the years in
the three-year period ended December 31, 1999 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 2000-A as
of April 18, 2000, 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 of 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-49
<PAGE> 50
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, the sum of (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) any investment earnings on amounts on
deposit in the pre-funding account, (vi) any amounts transferred from the
pre-funding account following the end of the pre-funding period and (viii) other
amounts remitted by the master servicer or any sub-servicer, minus the amount of
the Indenture Trustee's Fee then due, the Owner Trustee's Fee then due, and the
premium payable to the insurer on such payment date.
"BUSINESS DAY" means any day other than (i) a Saturday or Sunday or
(ii) a day on which any of the Insurer, the Master Servicer or the Sponsor is
closed or commercial banking institutions in the State of New York or Delaware
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 (i) 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) minus (ii) investment earnings on amounts on deposit
in the pre-funding account as of the preceding payment date.
"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" means the payment date on which Insured Amounts are
due.
"EXCESS CASHFLOW" means with respect to any payment date the excess of
Available Funds over the sum of (i) interest payable on the notes, (ii) fees
payable to the Indenture Trustee, the Owner Trustee, the Master Servicer and the
insurer, (iii) payments in respect of principal required to be made on the notes
and (iv) Reimbursement Amounts.
"FIXED ALLOCATION PERCENTAGE" means 94.80%.
"FORMULA RATE" means, (i) 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 plus
0.25% and (ii) for any payment date thereafter, the sum of LIBOR plus 0.50%.
"HELOCS" means revolving home equity credit line loans.
"HLTV HELOC MORTGAGE LOAN" means any mortgage loan with a Combined
Loan-to-Value Ratio of greater than 100%.
"INSURED AMOUNTS" means, with respect to any Payment Date, the
Deficiency Amount for such Payment Date.
S-50
<PAGE> 51
"INSURED PAYMENTS" means, for any payment date, the amount actually
paid by the insurer to the indenture trustee equal to (i) the Insured Amount for
that payment date plus (ii) Preference Amounts for any given Business Day.
"INTEREST ACCRUAL PERIOD" means for any payment date, 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, (ii) for non HLTV HELOC Mortgage Loans, the portion of Net
Liquidation Proceeds allocable to interest and (iii) for HLTV HELOC Mortgage
Loans the total amount of Net Liquidation Proceeds. Prepaid installments of
interest made by a borrower not intended as a prepayment will be deemed
collected in the Remittance Period to which they relate.
"INTEREST DISTRIBUTION AMOUNT" means, for any payment date, the
interest then due on the notes, which is equal to the product of (i) the Note
Interest Rate multiplied by the actual number of days in the Interest Accrual
Period divided by a year of 360 days and (ii) the Note Balance as of the day
immediately prior to such payment date.
"INTEREST SHORTFALL AMOUNT" means, for any payment date, the sum of (i)
the amount by which the Interest Distribution Amount exceeded the actual amount
distributed in respect of interest and (ii) any unreimbursed Interest Shortfall
Amounts from prior payment dates together with interest on such amounts 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 the second LIBOR Business Day prior to the Closing Date, in the case of the
first Interest Accrual Period.
"LIQUIDATED MORTGAGE LOAN" means a defaulted mortgage loan which (i) in
the case of a mortgage loan other than an HLTV HELOC Mortgage Loan, the master
servicer has determined that it has recovered all amounts it expects to recover
on the defaulted mortgage loan or (ii) in the case of an HLTV HELOC Mortgage
Loan, (A) is 180 days or more delinquent, or (B), the master servicer has
determined that it has recovered all amounts it expects to recover on the
defaulted mortgage loan, 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, sale to a third
party or otherwise.
"NET FUNDS CAP CARRY-FORWARD AMOUNT" means, on any payment date, the
sum of (i) the excess of the amount of interest due based on the Formula Rate,
over the interest due based on the Net Funds Cap Rate, (ii) any such amounts
described in clause (i) for prior payment dates and not previously paid,
together with interest on such excess 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 at the
applicable coupon rate during the related Remittance Period, minus the amount of
Prepayment Interest Shortfalls and minus the amount of Relief Act Shortfalls for
the related Remittance Period, net of the servicing fee, the indenture trustee's
fee, the owner trustee's fee and the premium payable to the insurer under the
policy, divided by (B) the Pool Principal Balance as of the opening of the
related Remittance Period, less (y) .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 (i) the
S-51
<PAGE> 52
Principal Balance of the mortgage loan and (ii) 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
(i) Principal Collections over (ii) 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 any Payment Date, the lesser of the
Formula Rate and the Net Funds Cap Rate.
"ORIGINAL NOTE BALANCE" means the Note Balance as of the closing date,
which equals $400,000,000.
"OVERCOLLATERALIZATION AMOUNT" means, the amount, if any, by which the
Pool Principal Balance plus the amount on deposit in the pre-funding account
exceeds the Note Balance.
"OVERCOLLATERALIZATION DEFICIT" means, for any payment date, the amount
by which the Note Balance, after giving effect to the payment of principal on
the notes on the payment date, exceeds the Pool Principal Balance plus the
amount on deposit in the pre-funding account as of such payment date.
"OVERCOLLATERALIZATION REDUCTION AMOUNT" means the dollar amount of any
decrease in the Specified Overcollateralization Amount made in accordance with
the indenture.
"POOL PRINCIPAL 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 noteholder 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.
"PRE-FUNDED AMOUNT" means the amount on deposit in the pre-funding
account, which shall initially be approximately $119,000,000.
"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 principal balance as of the
applicable 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 and allocated to principal under the terms of the credit line
agreements during the Remittance Period, plus the principal portion of Net
Liquidation Proceeds, except that for HLTV HELOC Mortgage Loans, all Net
Liquidation Proceeds shall be treated as interest collections.
"RAPID AMORTIZATION EVENT" means the events described under
"Description of the Notes--Rapid Amortization Events" in this prospectus
supplement.
S-52
<PAGE> 53
"REIMBURSEMENT AMOUNTS" means all amounts due and owing to the insurer,
including unreimbursed draws on the policy, together with interest on such
amount.
"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, for 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) 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 Note Balance.
"SCHEDULED PRINCIPAL DISTRIBUTION AMOUNT" means
(A) on any payment date during the managed amortization period, the
excess of (x) the lesser of (1) the Fixed Allocation Percentage of Principal
Collections 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 Fixed Allocation Percentage of Principal Collections over (y)
the Overcollateralization Reduction Amount, if any, for the payment date.
In no event will the amount described in clause (A) or (B) be less than
zero, or greater than the Note Balance.
"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 associated costs 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.
"SPECIFIED OVERCOLLATERALIZATION AMOUNT means a level of
overcollateralization specified by the insurer in the insurance agreement.
S-53
<PAGE> 54
EXHIBIT A
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................... A-2
Balance Sheet of the Trust as of April 18, 2000............................ A-3
Notes to Balance Sheet..................................................... A-4
</TABLE>
A-1
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanta Revolving Home Equity Loan Trust 2000-A:
We have audited the accompanying balance sheet of Advanta Revolving
Home Equity Loan Trust 2000-A, a Delaware business trust, as of April 18, 2000.
This financial statement is the responsibility of the trust. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Advanta Revolving Home Equity
Loan Trust 2000-A, as of April 18, 2000, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
April 18, 2000
A-2
<PAGE> 56
ADVANTA REVOLVING HOME EQUITY LOAN TRUST 2000-A
BALANCE SHEET
APRIL 18, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash................................................................. $0
Total assets................................................ $0
LIABILITIES AND CERTIFICATEHOLDER'S EQUITY
Liabilities.......................................................... $0
Certificateholder's equity........................................... $0
Total liabilities and certificateholder's equity............ $0
</TABLE>
The accompanying notes are an integral part of this statement.
A-3
<PAGE> 57
ADVANTA REVOLVING HOME EQUITY LOAN TRUST 2000-A
NOTES TO BALANCE SHEET
APRIL 18, 2000
1. Organization
Advanta Revolving Home Equity Loan Trust 2000-A, a Delaware statutory
business trust, was organized in the state of Delaware on April 18, 2000, with
Wilmington Trust Company, as its owner trustee.
The trust was organized to engage exclusively in the following business
and financial activities: to purchase or acquire from certain affiliates of
Advanta Conduit Receivables, Inc. certain property relating to certain
receivables consisting of adjustable rate home equity revolving credit line
loans, and to pledge such receivables to Bankers Trust Company of California,
N.A., as indenture trustee.
Prior to and including April 18, 2000, the Advanta Revolving Home
Equity Loan Trust 2000-A did not conduct any activities.
2. Registration Statement
At April 18, 2000, the Advanta Revolving Home Equity Loan Trust 2000-A
was in the process of preparing to issue $400 million of its Advanta Revolving
Home Equity Loan Asset Backed Notes, Series 2000-A.
Advanta Conduit Receivables, Inc. has agreed to indemnify the indenture
trustee and owner trustee and certain other persons involved in the sale of the
notes.
A-4
<PAGE> 58
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.
WE SUGGEST THAT YOU READ THE
SECTION ENTITLED "RISK FACTORS"
STARTING ON PAGE 8 OF THIS
PROSPECTUS AND CONSIDER THESE
FACTORS BEFORE MAKING A DECISION
TO INVEST IN THESE SECURITIES.
These securities are mortgage
loan asset-backed securities
which represent interests in or
obligations of the trust issuing
that series of securities and
are not interests in or
obligations of any other person
or entity.
Neither these securities nor the
mortgage loans will be insured
or guaranteed by any
governmental agency or
instrumentality.
Retain this prospectus for
future reference. This
prospectus may not be used to
consummate sales of securities
unless accompanied by the
prospectus supplement relating
to the offering of these
securities.
THE SECURITIES --
- will be issued from time to time in
series.
- will be issued by trusts established
by Advanta Conduit Receivables, Inc.
- will be backed by one or more pools
of mortgage loans held by the issuing
trust.
- will be rated in one of the four
highest rating categories by at least
one nationally recognized statistical
rating organization.
- may have the benefit of one or more
forms of credit enhancement, such as
insurance policies,
overcollateralization, subordination
or reserve funds.
THE ASSETS --
The assets of each trust will
primarily consist of a pool of
mortgage loans, funds on deposit in
one or more accounts and forms of
credit support described in this
prospectus and in the prospectus
supplement.
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 DECEMBER 28, 1999
<PAGE> 59
IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) this prospectus, which
provides general information, some of which may not apply to a particular series
of securities, and (2) the prospectus supplement, which describes the specific
terms of your series of securities.
This prospectus by itself does not contain complete information about
the offering of your securities; the balance of that information is contained in
the prospectus supplement. We suggest that you read both this prospectus and the
prospectus supplement in full. We cannot sell the securities to you unless you
have received both this prospectus and the prospectus supplement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Prospectus..................................... 4
Risk Factors.............................................. 8
The Trusts................................................ 13
The Mortgage Loans........................................ 13
Types of Mortgage Loans Which Will be
Held by the Trusts......................... 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.................................. 21
Yield Considerations................................ 22
Maturity And Prepayment Considerations.............. 22
Form of Securities.................................. 23
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
</TABLE>
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<TABLE>
<S> <C>
Rights of Redemption................................ 41
Environmental Legislation........................... 42
Enforceability of Mortgage Loans Provisions......... 42
California Deeds of Trust........................... 43
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...................................... 61
Certificates........................................ 61
Notes .............................................. 63
Consultation With Counsel........................... 63
Reports................................................... 63
Investment Matters........................................ 64
Use of Proceeds........................................... 64
Methods of Distribution................................... 64
Legal Matters............................................. 64
Financial Information..................................... 64
Additional Information.................................... 64
Annex I .................................................. A-1
</TABLE>
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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.
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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
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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:
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- - 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.
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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.
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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.
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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.
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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.
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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.
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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 affiliates of the sponsor from
banks, savings and loan associations, mortgage bankers, mortgage brokers and
other mortgage loan originators or
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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:
(i) U.S. treasury securities of a specified constant maturity,
(ii) weekly auction average investment yield of U.S. treasury bills
of specified maturities,
(iii) prime,
(iv) the cost of funds of member institutions for the Federal Home
Loan Bank of San Francisco, or
(v) 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.
- - 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, 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 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;
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- - 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;
- - 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 allow the mortgagors to convert the
adjustable rates to a fixed rate at some point during the life of the
mortgage loan or fixed rate mortgage loans, which allow the mortgagors
to convert the fixed rates to an adjustable rate at some point during
the life of the mortgage loan.
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;
- - the average outstanding principal balance;
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- - 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 limitation, unsatisfactory payment histories or
debt-to-income ratios, or a record of derogatory credit items such as
outstanding judgments or prior bankruptcies.
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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.
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.
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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 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
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
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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.
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.
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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;
- - a description of other material assets in the trust, including any
reserve fund;
- - the final scheduled distribution date of each class of securities;
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- - 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.
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
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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.
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
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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.
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
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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 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
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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.
- - 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.
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- - 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 interest collected and in some cases
accrued, 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 collected and in some cases 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.
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
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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;
- - 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
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- - 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.
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.
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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.
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
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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. The payments required to be made under the terms of the letter of
credit shall be deposited in the distribution account.
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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.
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
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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".
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.
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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 addition the master servicer may sell delinquent
mortgage loans to third parties, if they believe that this method of disposition
will generate maximum recoveries. 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."
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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,
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and the parent of Advanta Mortgage Corp. Midatlantic, Advanta Mortgage Corp.
Midatlantic II, Advanta Mortgage 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.
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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
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- - 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.
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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.
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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
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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
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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
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would defeat the title of any purchaser subsequent to foreclosure or sale under
a deed of trust. Consequently, the practical effect of the redemption right is
to force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, 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.
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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
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into default, there may be delays in payment and losses on the securities. Any
interest shortfalls, deferrals or 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
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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.
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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
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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."
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,
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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."
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
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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.
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
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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 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
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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.
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,
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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.
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
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whom the special attributes are important may wish to consult their own tax
advisors regarding investment in partnership interests.
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
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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 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
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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).
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
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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 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
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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 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.
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Market Discount
A beneficial owner that purchases a security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of the security, or, in the case of a security with original issue
discount, its adjusted issue price, will be required to allocate each principal
distribution first to accrued market discount on the security, and recognize
ordinary income to the extent the distribution does not exceed the aggregate
amount of accrued market discount on the security not previously included in
income. 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.
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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
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 has 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, although
taxpayers may begin compliance with the withholding regulations immediately.
Prospective investors are urged to consult their own tax advisors regarding the
withholding regulations.
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.
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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.
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.
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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 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
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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;
- - 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.
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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 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.
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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.
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
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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.
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ANNEX I
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the securities will be available only
in book-entry form. Investors in the securities may hold the securities through
any of DTC, Cedelbank or Euroclear. The securities will be 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.
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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.
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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 steps described
below to obtain an exemption or reduced tax rate, as defined below,
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, although
taxpayers may begin compliance with the withholding regulations immediately.
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 as well as
the application of the withholding regulations. Prospective investors are urged
to consult their own tax advisors for specific advice regarding their holding
and disposing of the securities.
- - Exemption for Non-U.S. Persons. Under the existing rules, beneficial
owners of global securities that are non-U.S. persons, as defined below
can obtain a complete exemption from the withholding tax by filing a
signed Form W-8, Certificate of Foreign Status. Under the withholding
regulations, a non-U.S. person may claim beneficial owner status by
filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner
for United States Tax Withholding. The old Form W-8 is valid until the
earlier of (i) three years beginning on the date that the form is
signed, or (ii) December 31, 2000. The new Form W-8BEN is valid for a
period of three years beginning on the date that the form is signed. If
the information shown on Form W-8 changes, a new Form W-8 or Form
W-8BEN must be filed within 30 days of the change.
- - Exemption for Non-U.S. Persons with effectively connected income. Under
the existing rules, 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. Under the withholding regulations, a non-U.S. person may
claim an exemption from U.S. withholding on income effectively
connected with the conduct of a trade or business in the United States
by filing Form W-8ECI, Certificate of Foreign
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Person's Claim for Exemption From Withholding on Income Effectively
Connected With the Conduct of a Trade or Business in the United States.
The old Form 4224 is valid until the earlier of (i) one year beginning
on the date that the form is signed, or (ii) December 31, 2000. The new
Form W-8ECI is valid for a period of three years beginning on the date
that the form is signed.
- - Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. Under the existing rules, 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.
Under the withholding regulations, a non-U.S. person may claim treaty
benefits by filing Form W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. The old Form 1001
is valid until the earlier of (i) three years beginning on the date
that the form is signed, or (ii) December 31, 2000. The new Form W-8BEN
is valid for a period of three years beginning on the date that the
form is signed.
- - 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. Under the existing rules,
the Owner of a global security or 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. The withholding
regulations revise the procedures that withholding agents and payees must follow
to comply with, or to establish an exemption from, withholding for payments made
after December 31, 2000. Each foreign holder of securities should consult its
own tax advisor regarding compliance with these procedures under the withholding
regulations.
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
person 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.
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- --------------------------------------------------------------------------------
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$400,000,000
ADVANTA REVOLVING HOME EQUITY LOAN TRUST 2000-A
ADVANTA REVOLVING HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 2000-A
[ADVANTA LOGO]
ADVANTA CONDUIT RECEIVABLES, INC.
SPONSOR
[ADVANTA LOGO]
ADVANTA MORTGAGE CORP. USA
MASTER SERVICER
-----------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
April 18, 2000
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.
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