<PAGE>
As filed with the Securities and Exchange Commission on July 1, 1999
Registration No. 333-78725
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON FORM S-3
UNDER THE SECURITIES ACT OF 1933
-----------
NELLIE MAE EDUCATION LOAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3423352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1240 Pawtucket Avenue
Rumford, Rhode Island 02916
(401) 438-4500
(Address, including ZIP code, and telephone
number, including area code, of registrant's principal
executive offices)
Ann M. O'Rourke
Secretary
Nellie Mae Education Loan Corporation
1240 Pawtucket Avenue
Rumford, Rhode Island 02916
(401) 438-4500
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
-----------
Copy to:
Daniel M. Rossner
Brown & Wood LLP
One World Trade Center
New York, NY 10048-0057
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective as determined
by market conditions.
-----------
If the only securities being registered on this Form are being offered
under dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis under Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
under Rule 462(b) under the Securities Act, please check the following box and
list the Securities Act Registration Statement Number of the earlier effective
Registration Statement for the same offering. / /
If this Form is a post-effective amendment filed under Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If delivery of the prospectus is expected to be made under Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Each Class of to Be Offering Price Offering Price Registration
Securities to Be Registered Registered Per Unit(1) (1) Fee(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Notes and Certificates... $1,000,000 100% $1,000,000 $278
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The registration fee of $278, calculated in accordance with Rule 457(o)
under the Securities Act of 1933, was paid by the Registrant at the
time of the initial filing of this Registration Statement.
-----------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting under said Section 8(a), may
determine.
<PAGE>
The information in this prospectus supplement and the accompanying prospectus
are not complete and may be changed. We may not sell these securities until
the registration statement filed with the Securities and Exchange Commission
is effective. This prospectus supplement and the accompanying prospectus are
not an offer to sell these securities and they are not soliciting an offer to
buy these securities in any state where the offer or sale of them is not
permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 1, 1999
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY __, 1999
Nellie Mae Student Loan Trust 1999-A
Issuer
Nellie Mae Education Loan Corporation
Seller and Master Servicer
$________ Floating Rate Asset-Backed Notes
$________ Floating Rate Asset-Backed Certificates
The Securities
The trust will issue:
<TABLE>
<CAPTION>
Class A-1 Notes Class A-2 Notes Certificates Total
<S> <C> <C> <C> <C>
Principal Amount $_____________ $_____________ $___________ $__________
Class Note Rate or Certificate Rate Three-Month Three-Month LIBOR Three-Month LIBOR
LIBOR plus [ ]%, plus [ ]%, plus [ ]%, subject
subject to an subject to an to an interest
interest rate cap interest rate cap rate cap
Interest Payable Quarterly Quarterly Quarterly
Available Principal Payable Quarterly Quarterly Quarterly
First Payment Date [__________] [___________] [___________]
Note Final Maturity Date or
Certificate Final Distribution
Date _______ ___,20__ _______ __, 20__ _______ __, 20__
Price to Public ___________% ____________% ____________% $__________
Underwriting Discount ___________% ____________% ____________% $__________
</TABLE>
<PAGE>
Trust Assets
The assets of the Trust will include:
- student loans, legal title to which will be held by an eligible lender
trustee on behalf of the trust ; and
- moneys and other investment securities on deposit in the funds and
accounts under the indenture, including the reserve account.
<PAGE>
Undercollateralization
As of ________ __, 1999, the principal amount of the notes and the certificate
balance of the certificates together exceed the principal amount of the student
loans in the trust, plus accrued interest, by approximately
$__________.
The securities will represent obligations of, or interests in, the
trust only and will not represent interests in or obligations of
the seller, the master servicer, the administrator or any of their
affiliates. The securities are not insured or guaranteed by any
entity.
This prospectus supplement may be used to offer and sell the
securities only if accompanied by the prospectus.
Consider carefully the risk factors beginning on page S-11 of
this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
[Names of Underwriters]
Prospectus Supplement dated July 1, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
Information about the securities is contained in two separate
documents that are progressively more detailed:
- the accompanying prospectus, which provides general information,
some of which may not apply to your securities, and
- this prospectus supplement, which describes the specific terms of
your securities.
If the description of the terms of the securities varies between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
You should rely only on information contained in this prospectus
supplement, the accompanying prospectus or any other document to which we have
referred you. We have not authorized anyone to provide you with any other
information. This prospectus supplement may only be used where it is legal to
sell these securities.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents and the table of contents
included in the accompanying prospectus indicate where those captions are
located.
[We have filed with the SEC preliminary information that the
underwriters prepared for prospective investors regarding the trust's assets and
the securities. The information contained in this document supersedes all the
information contained in that filing.]
Until 90 days after the date of this prospectus supplement, all dealers
that effect transactions in the securities, whether or not participating in this
offering, may be required to deliver a prospectus and prospectus supplement.
This requirement is in addition to the dealer's obligation to deliver a
prospectus and prospectus supplement when acting as underwriters with respect to
their unsold allotments or subscriptions.
The securities will not be offered in any state where offering them is
not permitted.
Certain persons participating in the offering of the securities may
engage in transactions that stabilize, maintain or otherwise affect the prices
of the securities. Those transactions could cause the prices of the securities
to be higher than they might otherwise be. See "Underwriting" beginning on page
S-62 of this prospectus supplement.
----------
S-2
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C>
Important Notice About Information Presented in This
Prospectus Supplement and the Accompanying Prospectus...........................S-2
Summary..........................................................................S-4
Risk Factors....................................................................S-11
Formation of the Trust..........................................................S-24
The Trust Loan Pool............................................................S-27
Description of the Securities...................................................S-47
Description of the Transfer and Servicing Agreements............................S-58
Federal Family Education Loan Program...........................................S-71
Federal Income Tax Consequences.................................................S-72
ERISA Considerations............................................................S-72
Underwriting....................................................................S-73
Legal Matters...................................................................S-74
Reports to Securityholders......................................................S-74
Glossary of Principal Terms.....................................................S-76
Annex I Global Clearance, Settlement and Tax
Documentation Procedures.......................................................S-96
</TABLE>
S-3
<PAGE>
SUMMARY
This summary highlights selected information contained in this
prospectus supplement. However, it does not provide all the information that you
need to consider in making your investment decision. Please read this entire
prospectus supplement and the accompanying prospectus carefully for important
additional information about the securities.
PRINCIPAL PARTIES
The Seller
Nellie Mae Education Loan Corporation, a Delaware corporation, will:
- organize the trust and
- sell the pool of student loans to the trust.
The Trust
Nellie Mae Student Loan Trust 1999-A, a Delaware business trust.
The Master Servicer
Nellie Mae Education Loan Corporation will be responsible, as master
servicer under a master servicing agreement, for servicing the student loans
owned by the trust. The master servicer will arrange for one or more other
institutions to subservice the loans on a daily basis. Initially, the
subservicers will be AFSA Data Corporation and USA Group Loan Services, Inc.
The Administrator
Nellie Mae Education Loan Corporation, as administrator, will provide
management and administrative services to the trust under an administration
agreement between Nellie Mae Education Loan Corporation and the trust.
The Trustees
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago, a national banking association, is
the eligible lender trustee and will hold the trust's beneficial ownership of
the student loans in the trust.
INDENTURE TRUSTEE
State Street Bank and Trust Company, a Massachusetts banking
corporation, is the indenture trustee.
S-4
<PAGE>
SIGNIFICANT DATES
Closing Date
We expect to issue the securities on ___________, 1999.
Quarterly Payment Dates
We will make payments on the securities on the [ ]th day of each [ ],
[ ], [ ] and [ ]. If the [ ]th is not a business day, we will make payments
on the securities on the next business day. The first quarterly payment date
is [ ], 1999.
Cutoff Date
[ ], 1999. The trust will receive payments made on the related student
loans on and after this date.
DESCRIPTION OF THE SECURITIES
General
We are offering the following floating rate asset-backed securities
under this prospectus supplement and the accompanying prospectus:
- Class A-1 Notes in the aggregate principal amount of $__________,
- Class A-2 Notes in the aggregate principal amount of
$___________, and
- Certificates in the aggregate principal amount of
$______________.
We will issue the securities in book-entry form in multiples of
$1,000. Any securities that you purchase will be held through The Depository
Trust Company in the United States, and Cedelbank or the Euroclear System in
Europe.
Interest Payments
The note rate for each class of notes and the certificate rate for the
certificates is specified on the cover page of this prospectus supplement.
However, the actual interest rate on each class of notes and the actual interest
return rate on the certificates for each quarterly interest period are subject
to an interest rate cap that is equal to the adjusted student loan rate. The
adjusted student loan rate for each quarter will equal the percentage equivalent
of a fraction:
- whose numerator is the expected interest collections on the trust
loans for the related collection period minus the servicing fee
and the administration fee for that period; and
- whose denominator is the sum of the principal amount of the notes
and the certificate balance of the certificates as of the last
day of that period.
S-5
<PAGE>
Interest on the notes and the certificates will be calculated on the
basis of the actual number of days elapsed in the related quarterly interest
period and a 360-day year.
If the interest rate cap is in effect during a particular quarterly
interest period, you will not receive interest on your securities at the
applicable class note rate or certificate rate specified on the cover page of
this prospectus supplement. Nevertheless, the difference between the amount of
interest that would have been payable at the applicable class note rate or
certificate rate and the amount of interest that we actually pay you as a result
of the application of the interest rate cap may be paid to you on a future
quarterly payment date. The ratings of the securities do not address how likely
it is that you will receive this difference.
Principal Payments
Until the securities have been paid in full, we will pay principal on
the securities on each quarterly payment date in an amount generally equal to
the principal collections on the related student loans for the preceding
quarterly period. Principal payments on the notes will be made sequentially;
that is, no principal will be paid on the Class A-2 Notes until the Class A-1
Notes have been paid in full, and no principal will be paid on the certificates
until the Class A-1 Notes and the Class A-2 Notes have been paid in full.
There is one exception to the sequential payment of principal on
the notes. Following a default under the indenture and the acceleration of
the notes, we will pay principal to each class of notes on a pro rata basis
until the notes have been paid in full.
Priority of Payments
On each quarterly payment date, the indenture trustee will pay the
following amounts to the extent that funds are available:
- to the master servicer and administrator, certain fees;
- to the noteholders, pro rata, interest;
- to the certificateholders, interest;
- to the noteholders, principal;
- to the certificateholders, following payment in full of the
notes, principal; and
- to the reserve account, remaining funds.
Final Maturity and Distribution Dates
On the final maturity and distribution dates listed on the cover page
of this prospectus supplement, we will pay any unpaid principal that remains
outstanding on each class of the notes and on the certificates.
S-6
<PAGE>
Auction Sale
Any student loans remaining in the trust at the end of the collection
period immediately preceding the _____ ___ quarterly payment date will be
offered for sale. We will use the proceeds of any sale to redeem the notes and
repurchase the certificate balance of the certificates. The auction price must
at least equal the sum of the aggregate unpaid principal amount of the notes and
the aggregate certificate balance of the certificates, plus, in each case,
accrued and unpaid interest.
Optional Redemption
On any quarterly payment date on which the sum of:
- the unpaid principal amount of the notes and
- the certificate balance of the certificates
IS NO MORE THAN 10% of the sum of:
- the initial unpaid principal amount of the notes and
- the initial certificate balance of the certificates,
Nellie Mae Funding, LLC, a subsidiary of the seller, or its assignee will have
the option to purchase all the student loans in the trust. Any notes and
certificates that remain outstanding on the date on which Nellie Mae Funding,
LLC or its assignee exercises this option will be prepaid in full on that date.
The redemption price for any class of notes will equal the aggregate unpaid
principal amount of that class, plus accrued and unpaid interest, and the
redemption price for the certificates will equal the aggregate certificate
balance, plus accrued and unpaid interest. However, it is possible that the
redemption price will not include payment of any interest that you may not have
received due to the effect of the interest rate cap.
TRUST PROPERTY
General
The primary property of the trust will be:
- the student loans transferred to the trust;
- all amounts collected on the student loans on or after the cutoff
date; and
- moneys and other investment securities on deposit in the funds
and accounts under the indenture, including the reserve account.
The Initial Trust Loans
The initial student loans expected to be transferred to the trust by
the seller will consist of guaranteed education loans to students and parents of
students made under the Federal Family Education Loan Program. All the loans are
reinsured by the Department of Education. On the closing date, the initial trust
loans had the characteristics listed below as of _________, 1999. Although the
initial trust loans that are actually transferred to the trust by the seller on
the closing date may differ from those that are
S-7
<PAGE>
expected to be transferred to the trust as of the date of this prospectus
supplement, that difference is limited to no more than 5% of the initial pool
balance.
<TABLE>
<S> <C>
- Aggregate principal amount: $______
- Aggregate principal amount as a percentage of the initial
principal amount to the notes and initial certificate balance of
the certificates: _____%
- Weighted average interest rate: _____%
- Weighted average original term to maturity: __ months
- Weighted average remaining term to maturity: __ months
- Stafford Loans (% by principal balance): ____%
- SLS Loans (% by principal balance): ____%
- PLUS Loans (% by principal balance): ____%
- Consolidation Loans (% by principal balance): ____%
- Guaranteed by California Student Aid Commission (% by principal
balance): ____%
- Guaranteed by American Student Assistance (% by principal
balance): ____%
- Guaranteed by New Hampshire Higher Education Assistance Fund
(% by principal balance): ____%
- Guaranteed by New York State Higher Education Services
Corporation (% by principal balance): ____%
- Guaranteed by Pennsylvania Higher Education Assistance Agency
(% by principal balance): ____%
- Guaranteed by United Student Aid Funds, Inc. (% by principal
balance): ____%
- Guaranteed by other guarantors (% by principal balance): ____%
</TABLE>
Additional Trust Loans
From time to time after the closing date, the trust may acquire serial
loans made to borrowers whose existing student loans are already owned by the
trust. The aggregate principal balance of serial loans that the trust may
acquire after the closing date will not exceed 5%
S-8
<PAGE>
of the initial pool balance. In addition, in lieu of using cash to repurchase
from the trust student loans with respect to which there has been a material
breach of the representations and warranties contained in the loan sale
agreement, the seller may transfer to the trust qualified substitute student
loans.
CREDIT ENHANCEMENT
"Credit enhancement" refers to features of a securities offering
designed to reduce delays in payments and losses. The credit enhancement for
the notes will consist of:
- the reserve account and
- the subordination of the certificates.
The credit enhancement for the certificates will consist of the reserve account.
The Reserve Account
The trust will establish a reserve account with the indenture trustee.
The reserve account will be funded as follows:
- On the closing date, the trust will make an initial deposit of
$__________ into the reserve account.
- On each quarterly payment date, any funds remaining after all
required payments have been made will be deposited into the
reserve account.
Funds on deposit in the reserve account on each quarterly payment date
will be available to cover shortfalls in interest and principal payments on the
notes and the certificates to the extent described in this prospectus
supplement. Amounts in the reserve account on any quarterly payment date in
excess of the specified minimum reserve account balance, after all required
payments have been made, will be released to Nellie Mae Funding, LLC or its
assignee.
Subordination of the Certificates
The subordination of the certificates to the notes as described in this
prospectus supplement will provide additional credit enhancement for the notes.
Because no principal will be paid on the certificates until the notes have been
paid in full, any losses on the student loans not covered by amounts available
in the reserve account will be allocated to the certificates before being
allocated to the notes.
FEDERAL INCOME TAX CONSIDERATIONS
Although there is no specific authority with respect to the
characterization for federal income tax purposes of securities having the same
terms as the notes, in the opinion of Brown & Wood LLP, special federal tax
counsel for the trust, the notes will be characterized as debt for federal
income tax purposes.
In the opinion of special federal tax counsel for the trust, for
federal income tax purposes the trust will not be characterized as an
association, or publicly traded partnership, taxable as a corporation. The
certificateholders and the seller, as owner of
S-9
<PAGE>
all amounts not otherwise required to be distributed to the noteholders or the
certificateholders or to pay expenses of the trust, will agree to treat the
trust as a partnership in which they are partners. Alternative characterizations
of the trust are possible, but they would not result in materially adverse
federal income tax consequences to the certificateholders. However, there are no
cases or rulings on similar transactions involving a trust that issues debt and
equity interests with terms similar to those of the notes and the certificates.
Other federal income tax considerations with respect to the securities
and the trust are discussed under "Federal Income Tax Consequences" in this
prospectus supplement and in the accompanying prospectus.
ERISA CONSIDERATIONS
The Notes
Subject to the considerations discussed under "ERISA Considerations" on
page S-62 of this prospectus supplement, the notes may be purchased by employee
benefit plans.
The Certificates
The certificates may not be acquired by, on behalf of, or using the
assets of any plan that is subject to Title I of ERISA or Section 4975 of the
Internal Revenue Code. Each certificateholder, by accepting a certificate, will
be deemed to have made the representations discussed under "ERISA
Considerations" on page S-62 of this prospectus supplement.
RATINGS
It is a condition to the issuance and sale of the notes that at least
two nationally recognized rating agencies rate the notes in their highest
investment rating categories.
It is a condition to the issuance and sale of the certificates that at
least two nationally recognized rating agencies rate the Certificates in one of
their three highest investment rating categories.
S-10
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase any of the securities.
The securities are not a suitable
investment for all investors The securities are not a suitable investment
if you require a regular or predictable
schedule of payments or payment on any
specific date. Because the securities are
complex instruments, you should only
consider investing in them if you have
sufficient expertise, either alone or with
your financial, tax and legal advisors, to
analyze the prepayment, reinvestment,
S-default and market risk, the tax
consequences of this investment, and the
interaction of these factors.
Your ability to resell the
securities may be limited The securities will be a new issue without
any established trading market. We do not
currently intend to list them on any
national securities exchange or on the
Nasdaq Stock Market. The underwriters may
assist in resales of the securities but are
not required to do so. A secondary market
for the securities may not develop. If a
secondary market does develop, it might not
continue or it might not be sufficiently
active or liquid for you to resell any of
your securities. [Names of Underwriters]
have advised us that they intend to attempt
to make a secondary market in the
securities; however, they are not obligated
to do so.
The trust has limited assets from
which to make payments on the
securities The trust does not have, nor is it permitted
or expected to have, any significant assets
or sources of funds other than the student
loans, the related guarantee agreements and
the reserve account. The notes represent
obligations of, and the certificates
represent ownership interests in, the trust
alone and will not be insured or guaranteed
by any entity. Consequently, you must rely
on payments on the student loans from
borrowers, guarantors or both, and amounts
on deposit in the reserve account, to repay
your securities. Only a limited amount of
money will be deposited in the reserve
account and that amount will be reduced,
subject to a specified minimum, as the
aggregate principal amount of the notes and
the aggregate certificate balance of the
certificates are
S-11
<PAGE>
reduced. If the reserve account is
exhausted, the trust will depend solely on
payments on the student loans to make
payments on the notes and the certificates
and you could suffer a loss if those
payments are inadequate. You will have no
claim to any amounts that the trust properly
distributes to the seller, the master
servicer or any of their affiliates from
time to time.
Losses may occur if the principal
amount of the notes and the
certificate balance of the
certificates exceed the pool
balance of the student loans As of the closing date, the sum of the
aggregate principal amount of the notes and
the certificate balance of the certificates
will be equal to approximately ___% of the
outstanding principal balance of the student
loans as of the cutoff date.
If the sum of the aggregate principal amount
of the notes and the aggregate certificate
balance of the certificates exceeds the
outstanding principal balance of the student
loans in the trust, you may experience
losses to the extent that excess interest
collections do not make up this difference.
Any of the following will increase the
likelihood of this sort of loss:
- a high rate of prepayments or
S-12
<PAGE>
- a widening of the spread between
the three-month T-bill rate and
three-month LIBOR.
In addition, you may experience losses if an
event of default should occur under the
indenture and the indenture trustee were
required to sell the student loans at a time
when the sum of the principal amount of the
notes and the certificate balance of the
certificates exceeded the outstanding
balance of the student loans. However,
because the notes must be redeemed in full
before any principal is paid on the
certificates, losses to investors in the
notes in this case would be limited to the
amount not absorbed by investors in the
certificates.
Addition of student loans may
change the characteristics of
the trust loans after the
closing date From time to time after the closing date,
the seller may elect to transfer to the
trust serial loans made to borrowers whose
existing student loans are already owned by
the trust. In addition, in lieu of using
cash to repurchase from the trust student
loans with respect to which there has been a
material breach of the representations and
warranties contained in the loan sale
agreement, the seller may transfer qualified
substitute student loans to the trust. As a
result, the characteristics of the pool of
trust loans may vary from the information
presented in this prospectus supplement. The
composition of the student loans and their
borrowers, the related guarantors, the
distribution by loan type, school type, the
distribution by interest rate, the
distribution by principal balance and the
distribution by remaining term to scheduled
maturity all may vary. You should consider
the effect of these potential variances when
making your investment decision concerning
the securities.
Because the timing of principal
payments is uncertain, the return
on your investment will change over
time The pre-tax return on your investment will
change from time to time .
S-13
<PAGE>
- The Rate of Principal is Uncertain.
The amount of principal payments
that you receive on your securities
and the time when you receive them
depend on how borrowers pay the
principal of their student loans.
Principal payments on the
securities derive from regularly
scheduled payments on the student
loans or from unscheduled payments
resulting from prepayments,
defaults or consolidations of the
student loans. We cannot predict
the timing of unscheduled payments.
In addition, principal payments on
the trust loans may be used to
purchase serial loans from the
seller rather than to make
principal payments on the
securities.
- Prior to the Parity Date, Excess
Interest Pays Down Principal. Prior
to the date on which the sum of the
aggregate principal amount of the
notes, plus the aggregate
certificate balance of the
certificates first equals the sum
of the outstanding balance of the
student loans in the trust plus
the amount of the reserve account,
any excess spread on the loans
will be used to make principal
payments on the securities.
You will bear the risk that the timing and
amount of principal payments on your
securities will prevent you from attaining
your desired yield.
You may be unable to reinvest
principal payments at the yield you
earn on the securities Asset-backed securities usually produce
increased principal payments to investors
when market interest rates fall below the
interest rates on the collateral (student
loans in this case) and result in decreased
principal payments when market interest
rates rise above the interest rates on the
collateral. As a result, you are likely to
receive more money to reinvest at a time
when other investments generally are
S-14
<PAGE>
producing lower yields than the yield on the
securities. Similarly, you are likely to
receive less money to reinvest when other
investments generally are producing higher
yields than the yield on the securities.
If the securities are repaid early
due to an auction sale or the
exercise of the purchase option,
you will bear the reinvestment risk The securities may be repaid before you
expect them to be if:
- the indenture trustee successfully
conducts an auction sale or
- Nellie Mae Funding, LLC or its
assignee exercises its option to
purchase all the assets of the
trust.
As a result, you will bear the risk that you
cannot reinvest the money you receive in
repayment of the securities at a yield that
is at least equal to the yield on the
securities.
Changes in legislation may
adversely affect student loans and
federal guarantors The Higher Education Act or other relevant
federal or state laws, rules and regulations
may be amended or modified in the future in
a manner that could adversely affect the
federal student loan programs described in
this prospectus supplement and the
accompanying prospectus, as well as the
student loans made under these programs and
the financial condition of the federal
guarantors. Among other things, the level of
guarantee payments may be adjusted from time
to time. We cannot predict whether any
changes will be adopted or, if adopted, what
impact those changes would have on the trust
or the securities.
The federal direct student loan
program could result in reduced
revenues for the master servicer,
the subservicers and the guarantors The Federal Direct Student Loan Program,
established under the Higher Education Act,
could result in reductions in the volume of
loans made under the Federal Family
Education Loan Program. If so, the seller,
the administrator, the master
S-15
<PAGE>
servicer and the subservicers may experience
increased costs due to reduced economies of
scale. These cost increases could reduce the
ability of the master servicer or the
subservicers to satisfy their obligations to
service the student loans. This increased
competition from the Federal Direct Student
Loan Program could also reduce revenues of
the guarantors that would otherwise be
available to pay claims on defaulted student
loans. The level of demand currently
existing in the secondary market for loans
made under the Federal Family Education Loan
Program could be reduced, resulting in fewer
potential buyers of the student loans and
lower prices available in the secondary
market for those loans. The Department of
Education also has implemented a direct
consolidation loan program, which may reduce
the volume of loans outstanding under the
Federal Family Education Loan Program and
also result in prepayments of student loans
held by the trust.
Generally, the Class A-1 Notes will
be most immediately affected by a
high prepayment rate; the
certificates will be at greatest
risk in event of default Since we generally will not pay any
principal to the holders of the Class A-2
Notes or the certificates until the
principal balance of the Class A-1 Notes has
been reduced to zero, the Class A-1
Noteholders would be most immediately
affected by a high rate of principal
prepayments . In contrast, as a result of
the sequential payment of principal, it is
likely that at any time the Class A-2 Notes
will have a greater percent of their initial
principal balance outstanding than the Class
A-1 and therefore, following a default under
the indenture, more losses will be allocated
to the Class A-2 Notes than to the Class A-1
Notes as relative percentage of their
respective initial principal amounts. In any
event, all losses will be allocated first to
the certificates before any losses are
allocated to the notes.
You may not receive interest at the
specified rate due to the effect of
the interest rate cap As specified on the cover of this prospectus
supplement, the interest rate for each class
of the notes and the certificate rate for
the certificates will be based on the level
of three-month LIBOR. However, in each
quarterly interest period , the interest
rate on each class of the notes and on the
certificates will subject to an interest
rate cap that is equal to the adjusted trust
loan rate for that period.
S-16
<PAGE>
The interest rate cap may be triggered as a
result of the following:
- The trust loans generally bear
interest based on the three-month
T-Bill rate, while the class note
rate for each class of notes and
the certificate rate for the
certificates is based on
three-month LIBOR. If the spread
between these two indices widens,
the interest rate cap may be
triggered.
- The principal balance of the trust
loans initially will be less than
the sum of the aggregate principal
amount of the notes and the
aggregate certificate balance of
the certificates. Consequently, the
aggregate principal balances of the
trust loans on which interest will
be collected will be less than the
principal amount of the securities.
Any interest not paid on your securities due
to the effect of the interest rate cap may
be paid later on a subordinated basis.
However, the existence of the interest rate
cap may reduce the market value and
liquidity of your securities.
Indenture trustee may have
difficulty liquidating student
loans Generally, during an event of default, the
indenture trustee is authorized to sell the
trust loans. It is possible, however, that
the indenture trustee may not find a
purchaser for them. In addition, the market
value of the trust loans might not equal the
principal amount of the notes and the
certificate balance of the certificates,
plus accrued interest. In either event, you
may suffer a loss.
Insufficient funds for principal
distributions is not an event of
default under the indenture The principal amount required to be paid on
the securities on any payment date generally
is limited to amounts available for payment.
Therefore, our failure to pay principal may
not result in an event of default under the
indenture until the final maturity date of
each class the notes shown on the cover of
this prospectus supplement.
S-17
<PAGE>
Trust loans are only insured
to 98% The trust loans are generally 98% insured by
a guarantor. As a result, in the event of a
trust loan default, the trust will
experience a loss on that loan generally in
the amount of 2% of its outstanding
principal and accrued interest. We will
assign a defaulted trust loan to the
applicable federal guarantor in exchange for
a guarantee payment on the 98% guaranteed
portion. We may not have any right to pursue
the borrower for the remaining 2%
unguaranteed portion. If the credit
enhancement described in this prospectus
supplement is insufficient to cover the
unguaranteed portion, you may suffer a loss.
Your investment also depends
on the financial condition of
the guarantors All the trust loans are unsecured. As a
result, the only security for payment of the
trust loans are the guarantees provided
under the guarantee agreements between the
eligible lender trustee and the guarantors.
All of the student loans that will be
conveyed to the trust on the closing date
are guaranteed by guarantors as set forth in
"The Trust Loan Pool - Guarantee of Trust
Loans" in this prospectus supplement. The
financial condition of a guarantor may be
adversely affected by a number of factors
including:
- the amount of claims made against
that guarantor as result of
borrower defaults;
- the amount of claims reimbursed to
that guarantor from the Department
of Education, which range from 75%
to 100% depending on the date the
student loan was made and the
performance of the guarantor; and
- changes in legislation that may
reduce expenditures from the
Department of Education that
support federal guarantors or that
may require federal guarantors to
pay more of their reserves to the
Department .
If the financial status of the guarantors
deteriorates, they may fail to make
guarantee payments to the eligible lender
trustee. In that event, you may suffer
delays in the payment of principal and
interest on the securities.
S-18
<PAGE>
Lag in guarantee payments
could delay interest and
principal payments on the
securities Generally, a lender may not submit a default
claim to a guarantor until the related
student loan has been delinquent for at
least 270 days. If interest on the
performing trust loans and available amounts
in the reserve account are insufficient to
cover collection shortfalls on the
delinquent loans, the delay in receiving
guarantee payments could result in a delay
in principal and interest payments on the
securities.
Bankruptcy of the seller could
adversely affect payments on
the securities The transactions in this prospectus
supplement have been structured to assure
that the transfer of the trust loans from
the seller to the trust will be treated as a
sale of the trust loans to the trust, not as
a pledge of the trust loans to secure a
borrowing by the seller. In the event of the
bankruptcy of the seller, however, there can
be no assurance that the sale of trust loans
to the trust will not be recharacterized as
a pledge of the trust loans to secure a
borrowing of the seller. Such a
recharacterization could result in delays
and reductions in the amount of collections
on the trust loans.
The seller will acquire the trust loans from
one or more of its affiliates or from third
parties. The seller views each of these
transfers as a "true sale" and not a secured
borrowing by any of its affiliates or a
third party. In addition, the seller will
represent that each trust loan, on the date
on which it is transferred to the eligible
lender trustee on behalf of the trust, is
free and clear of all security interests,
charges and encumbrances. However, if a
court were to disagree and treat those
transfers as secured borrowings, other
persons might be deemed to have an interest
in the trust loans superior to that of the
trust and the eligible lender trustee. Any
superior interest could result in delays and
reductions in the amount of collections on
the trust loans.
Failure to comply with student
loan origination and servicing
procedures could adversely
affect payments on the
securities The Higher Education Act requires loan
holders and servicers to follow specified
procedures, including certain due diligence
procedures, to ensure that
S-19
<PAGE>
student loans are properly originated and
serviced. Failure to follow these procedures
may result in:
- the Department of Education's
refusal to make reinsurance
payments to the guarantors or to
make interest subsidy payments and
special allowance payments to the
eligible lender trustee for the
trust loans; and
- the guarantors' inability or
refusal to make guarantee payments
on the trust loans.
The loss of any of these payments could
adversely affect payment of principal and
interest on the securities.
Offsets by guarantors or the
Department of Education could
reduce the amount of available
funds The eligible lender trustee may use the same
Department of Education lender
identification number for student loans in
the trust which it has used for other
student loans held by the eligible lender
trustee on behalf of other entities
established by the seller or its affiliates
under other indentures. If it does so, the
billings submitted to the Department and the
claims submitted to the guarantors will be
consolidated with the billings and claims
for payments for student loans under other
indentures using the same lender
identification number. Payments on those
billings by the Department as well as claim
payments by the applicable guarantors would
be made to the eligible lender trustee, or
to the master servicer on behalf of the
eligible lender trustee, in lump sum form.
Those payments would be allocated by the
eligible lender trustee among the various
indentures that reference the same lender
identification number.
If the Department or a guarantor determines
that the eligible lender trustee owes it a
liability on any Federal Family Education
Loan Program Loan for which the eligible
lender trustee is or was legal titleholder,
including loans held under the indenture for
your securities or other indentures, the
Department or the applicable guarantor might
seek to collect that liability by offsetting
it against payments due to the eligible
lender trustee under the terms of the trust.
Any offsetting or shortfall of payments due
to the eligible lender trustee could
adversely affect the amount of available
funds for any
S-20
<PAGE>
collection period and thus our ability to
pay you principal and interest on the
securities.
The indenture for your securities and other
indentures of the seller and its affiliates
entered into after [ ], 1999 will contain
provisions for cross-indemnification
concerning those payments and offsets. Even
with cross-indemnification provisions,
however, there can be no assurance that the
amount of funds available to the trust with
respect to indemnification would be adequate
to compensate the trust and investors in the
securities for any previous reduction in the
available funds.
Inability of the seller or master
servicer to meet its repurchase
obligations may adversely affect
the securities Under certain circumstances, the eligible
lender trustee on behalf of the trust has
the right to cause the seller or master
servicer to repurchase trust loans in the
event of a breach of its representations,
warranties or covenants regarding them.
There can be no assurance, however, that the
seller or the master servicer will have the
financial resources to do so.
Computer problems related to the
year 2000 may adversely affect
payments on the securities The year 2000 problem arises from the use by
software developers of two digits rather
than four to denote years in software
programs, computer hardware operating
systems and microprocessor-based embedded
controls in automated equipment. As a
result, information systems that operate
date sensitive software or automated
equipment that contains date sensitive
microprocessors may interpret "00" to
signify 1900 rather than 2000, thereby
impairing the ability of the information
systems or automated equipment to calculate,
sequence or recognize dates correctly. This
could result in serious malfunctions or even
complete failures of affected systems,
including an inability to process
transactions, issue securities or checks, or
engage in normal business activities.
The master servicer is responsible for
collecting and posting payments to borrowers
accounts. Failure by the master servicer or
its subservicers to resolve year
S-21
<PAGE>
2000 issues could adversely affect payments
on the securities or the servicing of the
trust loans. All of the master servicer's
internal systems were tested for year 2000
compliance.
The master servicer relies heavily on
several third-party service providers for
key business processes, such as origination,
servicing and guarantee of student loans.
Consequently, the master servicer has
executed an aggressive strategy to assess
and monitor vendors to ensure, to the extent
within its control, that its business
processes are not jeopardized. To date, year
2000 risks associated with third-party
vendors and business partners have been
categorized and prioritized. The master
servicer will continue to monitor the
progress of its business partners' year 2000
preparation and to work cooperatively with
them to address any concerns.
The master servicer, on behalf of the trust,
will submit claims to the various guarantors
for payment on defaulted trust loans. If any
guarantor that guarantees a significant
portion of the trust loans is unable to
process guarantee payments timely because of
its failure to remediate year 2000 issues,
the liquidity of the trust could be affected
adversely, possibly to a material extent.
Year 2000 issues could cause DTC's computer
applications and systems as they relate to
book-entry deliveries, processing payments
and settlement of trades, to malfunction.
This could result in a temporary illiquidity
in the trading of the securities. Although
DTC has advised NMELC that it has developed
and is implementing a technical assessment
and remediation plan (which includes a
testing phase) to deal with the year 2000
issues , there can be no assurance that DTC
will be successful in its remediation
efforts.
S-22
<PAGE>
If the trust, the seller, the administrator,
the master servicer, any subservicers, the
guarantors, the indenture trustee, the owner
trustee , the eligible lender trustee or DTC
are unable to modify their computer and
electronic systems and applications to
resolve any year 2000 issues, or if any of
these parties are adversely affected by the
inability or failure of a third party on
which they rely to resolve any year 2000
issues, the receipt of collections on the
student loans may be delayed. As a
consequence, you may experience a delay in
payment on your securities and/or suffer a
loss.
Year 2000 computer problems related
to the Department of Education may
adversely affect the securities as
a result of adverse effects on
guarantors and guarantee payments The Department of Education has undertaken a
year 2000 compliance project to address year
2000 issues. Information regarding the
Department of Education's year 2000 efforts
can be obtained at the Department of
Education's site on the World Wide Web at
http://www.ed.gov. Any failure by the
Department of Education to resolve any year
2000 issues or any adverse effect on the
Department of Education caused by a party on
which the Department of Education relies as
a result of year 2000 issues may have a
material adverse effect on the Federal
Family Education Loan Program, the
guarantors and guarantee payments on the
trust loans.
Withdrawal or downgrading of
initial ratings will affect prices
of the securities A security rating is not a recommendation to
buy, sell or hold securities. Similar
ratings on different types of securities do
not necessarily mean the same thing. You
should analyze the significance of each
rating independently from any other rating.
Any rating agency may change its rating of
the securities after they are issued if it
believes that circumstances have changed.
Any subsequent change in rating is likely to
affect the price that a subsequent purchaser
will be willing to pay for the securities.
In addition, the ratings do not address the
likelihood of the ultimate payment to you of
any interest not paid as a result of the
interest rate cap having been triggered.
S-23
<PAGE>
FORMATION OF THE TRUST
THE TRUST
Nellie Mae Student Loan Trust 1999-A will be a business trust formed
under the laws of the State of Delaware and in accordance with the trust
agreement for the transactions described in this prospectus supplement and in
the accompanying prospectus. The trust will perform only the following
activities:
- It will acquire, hold and manage:
- the student loans (the "Initial Trust Loans") to be
sold to the trust on ________ __, 1999 (the "Closing
Date") with effect from _________ ___, 1999 (the
"Cutoff Date");
- any Serial Loans that the seller may transfer to the
trust after the Closing Date;
- any Qualified Substitute Student Loans that the
seller may transfer to the trust after the Closing
Date in lieu of the seller's repurchasing for cash
loans with respect to which there has been a material
breach of the representations and warranties
contained in the loan sale agreement (the Qualified
Substitute Student Loans and the Serial Loans, the
"Additional Loans" and, together with the Initial
Trust Loans, the "Trust Loans");
- moneys and other investment securities of the trust
on deposit in accounts under the related indenture,
including the reserve account; and
- the proceeds of the Trust Loans and other trust
assets.
- It will issue the Class A-1 Floating Rate Asset-Backed Notes
(the "Class A-1 Notes") and the Class A-2 Floating Rate
Asset-Backed Notes (the "Class A-2 Notes" and, together with
the Class A-1 Notes, the "Notes") and the Floating Rate
Asset-Backed Certificates (the "Certificates" and, together
with the Notes, the "Securities").
- It will make payments on the Notes and the Certificates.
- It will engage in other activities that are necessary,
suitable or convenient to accomplish these and or other
related activities.
On behalf of the trust, The First National Bank of Chicago, as eligible
lender trustee, will use the proceeds from the sale of the Securities for the
following purposes:
- to purchase the Initial Trust Loans from Nellie Mae Education
Loan Corporation, the seller under the loan sale agreement;
- to make the initial deposit into the reserve account on the
Closing Date of cash or eligible investments equal to
$__________ (the "Reserve Account Initial Deposit"); and
S-24
<PAGE>
- to fund the costs of issuing the Securities.
After completing the above transactions, the property of the trust will consist
of:
- a pool of guaranteed education loans to students and parents
of students ("FFELP Loans") made under the Federal Family
Education Loan Program (the "FFELP"), legal title to which
loans is held by the eligible lender trustee on behalf of the
trust;
- all funds collected on the Trust Loans on or after the Cutoff
Date; and
- all monies and investments on deposit in the collection
account and the reserve account.
The Notes will be secured by the assets of the trust and the
Certificates will represent undivided ownership interests in the trust. The
indenture trustee will maintain the collection account and the reserve
account in its name for the benefit of the Noteholders and the
Certificateholders. To facilitate servicing and to minimize administrative
burden and expense, the eligible lender trustee will appoint the master
servicer as custodian of the promissory notes representing the Trust Loans.
Serial Loans will be added to the trust to the extent that the seller
exercises its option to sell Serial Loans to
the eligible lender trustee, acting on behalf of the trust, up to an
amount equal to 5% of the initial pool balance. Serial Loans and Qualified
Substitute
Student Loans may not be added to the trust unless the procedures in
the loan sale agreement are complied with.
S-25
<PAGE>
The trust's principal offices are in Chicago, Illinois, in care of The
First National Bank of Chicago, as eligible lender trustee, at the address
listed below.
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago will act as the eligible
lender trustee for the trust under the trust agreement to be dated as of [ ],
1999 among the seller, Nellie Mae Funding, LLC ("NMF"), a Delaware limited
liability company which is a subsidiary of the seller, and the eligible
lender trustee. The trust agreement may be amended from time to time. The
First National Bank of Chicago is a national banking association whose
principal offices are located at One First National Plaza, Suite 0216,
Chicago, Illinois 60670. Its New York offices are located at 14 Wall Street,
New York, New York 10005.
On behalf of the trust, the eligible lender trustee will acquire
legal title to all the Trust Loans conveyed from time to time under the loan
sale agreement, and enter into a guarantee agreement with each of the
guarantors of the related Trust Loans. The eligible lender trustee qualifies
as an eligible lender and owner of the Trust Loans for all purposes under the
Higher Education Act of 1965, as amended, and the guarantee agreements. Its
failure to qualify as an eligible lender would result in the loss of
guarantee payments from any guarantor and any federal assistance with respect
the Trust Loans it purchases on behalf of the trust. SEE "The Student Loan
Pools" in the accompanying prospectus. The eligible lender trustee's
liability in connection with the issuance and sale of the Securities is
limited solely to its express obligations as set forth in the trust
agreement, the loan sale agreement and the master servicing agreement. SEE
"Description of the Securities" and "Description of the Transfer and
Servicing Agreements" in this prospectus supplement and in the accompanying
prospectus.
The seller and its affiliates may maintain normal commercial banking
relations with the eligible lender trustee.
THE MASTER SERVICER AND THE SUBSERVICERS
S-26
<PAGE>
Nellie Mae Education Loan Corporation, as master servicer, will
arrange for the servicing of the Trust Loans under the master servicing
agreement. The master servicer has initially arranged for AFSA Data
Corporation and USA Group Loan Services, Inc. to subservice the Trust Loans
on a daily basis. Nevertheless, the master servicer will remain fully
responsible for the servicing of the Trust Loans.
AFSA Data Corporation ("AFSA") acts as a loan servicing agent for
NMELC. AFSA is a for-profit corporation and a wholly-owned subsidiary of
Fleet Holding Corporation, a subsidiary of Fleet National Bank, which in turn
is a wholly-owned subsidiary of Fleet Financial Group of Boston,
Massachusetts, a diversified financial services company. As of December 31,
1998, AFSA provided loan servicing for approximately $52 billion in student
loans. AFSA has its principal offices in Long Beach, California, and a
regional processing center in Utica, New York, which services the guaranteed
student loan and parental loan programs, and a regional processing center in
Lombard, Illinois, which services campus based programs. AFSA's principal
office is located at 2277 E. 220th Street, Long Beach, California 90810-1690;
telephone (313) 513-2700.
USA Group Loan Services, Inc. ("Loan Services"), formerly known as
Education Loan Servicing Center, Inc., is a private, nonprofit, non-stock
membership corporation which was organized in 1982 under and pursuant to the
provisions of the General Corporation Law of the State of Delaware. Loan
Services is an affiliate of USA Group, Inc., a nonprofit corporation which is
also affiliated with United Student Aid Funds, Inc., one of the guarantors of
the Trust Loans. As of September 30, 1998, Loan Services provided loan
servicing for in excess of 3,500,000 student and parent loans with
outstanding balances of over $13.4 billion for approximately 150 different
lenders and secondary market corporations. Loan Services' principal office is
located at 30 South Meridian, Indianapolis, Indiana 46204-3503; telephone
(800) 428-9250.
THE TRUST LOAN POOL
The pool of Trust Loans will include the Initial Trust Loans
purchased by the eligible lender trustee on behalf of the trust as of the
Cutoff Date and any Additional Trust Loans acquired by the eligible lender
trustee on behalf of the trust after the Closing Date.
From time to time after the Closing Date, the seller will have the
option to direct the eligible lender trustee to purchase Serial Loans from
the seller on behalf of the trust. A "Serial Loan" is a student loan made to
a borrower who is also a borrower under at least one outstanding Trust Loan.
The seller generally anticipates that it will cause the eligible lender
trustee to purchase Serial Loans, but the seller is not obligated to do so.
If the seller decides to sell a Serial Loan to the trust, it is expected that
the sale would occur shortly after the Serial Loan was acquired by the
seller. The maximum aggregate amount of Serial Loans that the seller may sell
to the trust is limited to 5% of the initial pool balance.
On behalf of the trust, the eligible lender trustee will purchase
Serial Loans by using collections of principal on the outstanding Trust Loans
that would have otherwise been part of Available Funds.
S-27
<PAGE>
In addition, on the quarterly payment date immediately after the end of each
Collection Period during which it has acquired any Serial Loans, the trust will
use any amounts then in the reserve account in excess of the Specified Reserve
Account Balance to pay any Purchase Premium Amounts for the Serial Loans
purchased during that Collection Period.
In selecting the Trust Loans, the seller has not used any procedures
that it believes to be adverse to the Securityholders nor will it do so in the
future. Nevertheless, you should note that the criteria that are described under
"Description of the Transfer and Servicing Agreements--Additional Fundings" in
this prospectus supplement or that are contained in the loan sale agreement are
the only required characteristics of the Additional Trust Loans. Therefore,
following the transfer of to the eligible lender trustee on behalf of the trust
of Serial Loans as well as the replacement of Trust Loans with Qualified
Substitute Student Loans, the aggregate characteristics of the entire pool of
Trust Loans, including the composition of the loans and their borrowers, the
guarantors, the distribution by loan type, the distribution by interest rate,
the distribution by principal balance, the distribution by school type and the
distribution by remaining term to scheduled maturity that are described in the
following tables, may vary from those of the Initial Trust Loans as of the
Cutoff Date. In addition, the distribution by weighted average interest rate
applicable to the Trust Loans on any date following the Cutoff Date may vary
from that set forth in the following tables as a result of variations in the
effective rates of interest applicable to the Trust Loans. Moreover, the
S-28
<PAGE>
information described below regarding the original term to maturity and
remaining term of maturity of the Initial Trust Loans as of the Cutoff Date
may vary significantly from the actual term to maturity of any Trust Loan
whose borrower is granted a deferral or forbearance period. We are unable to
predict the extent of that variance.
The tables below set forth certain characteristics of the Initial
Trust Loans as of the Cutoff Date. Although the Initial Trust Loans that the
seller actually transfers to the trust on the Closing Date may differ from
those that are expected to be transferred to the trust as of the date of this
prospectus supplement, that difference is limited to no more than 5% of the
initial pool balance.
In the tables below, the aggregate outstanding principal balance of
the Initial Trust Loans as of the Cutoff Date includes net principal balances
due from borrowers, plus accrued interest in an amount estimated to be
$_________ as of the Cutoff Date that we expect to be capitalized when
repayment begins. Due to rounding, the percentages set forth in the tables
below may not always add to 100%.
Composition of the Initial Trust Loans
as of the Cutoff Date
<TABLE>
<S> <C>
Aggregate outstanding principal balance $ _______
Number of borrowers _______
Average outstanding principal balance per borrower $ _______
Number of loans _______
Average outstanding principal balance per loan $ _______
Weighted average original term to maturity _______ months
Weighted average remaining term to maturity _______ months
Weighted average annual interest rate _______ %
</TABLE>
In the preceding table, the weighted average annual interest rate
was calculated using the interest rates of the Initial Trust Loans in effect
as of the Cutoff Date . However, because some of the Initial Trust Loans bear
interest at a variable annual rate, there can be no assurance that the
foregoing percentage will remain applicable to the Initial Trust Loans at any
time after the Cutoff Date.
In addition, the weighted average original term to maturity was
determined from the date of origination of each Initial Trust Loan and the
weighted average remaining term to maturity was determined from the Cutoff
Date, in each case to the stated maturity date of the related loan. In making
these calculations, we assumed that repayment of each loan would begin
promptly after the expiration of the typical grace period following the
related student's
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<PAGE>
expected graduation date . We also assumed that no deferrals or forebearances
under the FFELP would be granted in the future.
Distribution of the Initial Trust Loans
by Loan Type as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial Trust
Number Aggregate Outstanding Loans by Outstanding
Loan Type of Loans Principal Balance Principal Balance
- ---------- -------- --------------------- --------------------
<S> <C> <C> <C>
Stafford Loans
Unsubsidized Stafford Loans
SLS Loans
PLUS Loans
Consolidation Loans
------------- --------------------- --------------------
Total
</TABLE>
S-30
<PAGE>
Distribution of the Initial Trust Loans
by Borrower Interest Rates as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial Trust
Range of Interest Number Aggregate Outstanding Loans by Outstanding
Rates of Loans Principal Balance Principal Balance
- ------------------ -------- --------------------- --------------------------
<S> <C> <C> <C>
7.00% to 7.49%
7.50% to 7.99%
8.00% to 8.49%
8.50% to 8.99%
9.00% to 9.49%
9.50% and above
Total
</TABLE>
In the preceding table, the ranges of interest rates were
calculated using the interest rates of the Initial Trust Loans in effect as
of the Cutoff Date. However, because some of the Initial Trust Loans bear
interest at a variable annual rate, there can be no assurance that the ranges
shown above will remain applicable to the Initial Trust Loans at any time
after the Cutoff Date.
S-31
<PAGE>
Distribution of the Initial Trust Loans
by Outstanding Principal Balance as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial Trust
Range of Outstanding Number Aggregate Outstanding Loans by Outstanding
Principal Balance of Loans Principal Balance Principal Balance
- -------------------- -------- --------------------- --------------------------
<S> <C> <C> <C>
Less than $2,000
$ 2,000 to $ 3,999
$ 4,000 to $ 5,999
$ 6,000 to $ 7,999
$ 8,000 to $ 9,999
$10,000 to $11,999
$12,000 to $13,999
$14,000 to $15,999
$16,000 to $17,999
$18,000 to $19,999
$20,000 to $21,999
$22,000 to $23,999
$24,000 to $25,999
$26,000 to $27,999
$28,000 and above
Total
</TABLE>
S-32
<PAGE>
Distribution of the Initial Trust Loans
by School Type as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial Trust
Number Aggregate Outstanding Loans by Outstanding
School Type of Loans Principal Balance Principal Balance
------------------------ -------------- --------------------- -------------------------
<S> <C> <C> <C>
4-Year Public
4-Year Private
2-Year Public
2-Year Private
Proprietary/Vocational
Other/Unknown
Total
</TABLE>
S-33
<PAGE>
Distribution of the Initial Trust Loans
by Remaining Term to Scheduled Maturity
as of the Cutoff Date
<TABLE>
<CAPTION>
Range of Remaining Term to Aggregate Percent of Initial
Scheduled Outstanding Trust Loans
Maturity Number Principal by Outstanding
(in months) of Loans Balance Principal Balance
- --------------------------------- --------------- ------------- ------------------
<S> <C> <C> <C>
Less than 24
24 to 35
36 to 47
48 to 59
60 to 71
72 to 83
84 to 95
96 to 107
108 to 119
120 to 131
132 to 143
144 to 155
156 to 167
168 to 179
180 to 191
192 and above
Total
</TABLE>
In the preceding table, the ranges of remaining term to scheduled
maturity was determined from the Cutoff Date to the stated maturity date of the
related Initial Trust Loans. We assumed that repayment of each loan would begin
promptly after the expiration of the typical grace period following the related
student's expected graduation date and that no deferrals or forbearances under
the FFELP would be granted in the future.
S-34
<PAGE>
Distribution of the Initial Trust Loans
by Borrower Payment Status as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate Percent of Initial Trust
Number Outstanding Loans by Outstanding
Borrower Payment Status of Loans Principal Balance Principal Balance
- -------------------------- ----------------- ---------------------- -------------------------
<S> <C> <C> <C>
In-School
Grace
Deferral
Forbearance
Repayment
Total
</TABLE>
In the preceding table, the heading "Borrower Payment Status" refers
to the status of the borrower of each Initial Trust Loan as of the Cutoff Date.
A borrower still may be attending school ("In-School"), may be in a grace period
prior to beginning repayment ("Grace"), may be repaying the loan ("Repayment")
or may have temporarily ceased repaying the loan through a deferral ("Deferral")
or a forbearance ("Forbearance") period. See "Federal Family Education Loan
Program" below and in the accompanying prospectus. For purposes of the preceding
table, the term "In-School" excludes, and the term "Deferral" includes, all SLS
Loans or PLUS Loans made to borrowers who are still attending school.
S-35
<PAGE>
Geographic Distribution of the
Initial Trust Loans as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate Percent of Initial Trust
Number Outstanding Loans by Outstanding
Location of Loans Principal Balance Principal Balance
- ------------ -------------- ------------------------ -------------------------
<S> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Military
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
</TABLE>
S-36
<PAGE>
<TABLE>
<CAPTION>
Aggregate Percent of Initial Trust
Number Outstanding Loans by Outstanding
Location of Loans Principal Balance Principal Balance
- ------------ -------------- ----------------- -------------------------
<S> <C> <C> <C>
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Other
Total
</TABLE>
In the preceding table, the description of a borrower's location is
based on that borrower's permanent billing address as shown in the master
servicer's records as of the Cutoff Date.
S-37
<PAGE>
Distribution of Initial Trust Loans by Date of Disbursement
<TABLE>
<CAPTION>
Aggregate Percent of Initial
Outstanding Trust Loans
Number Principal by Outstanding
Date of Disbursement of Loans Balance Principal Balance
- ------------------------ ----------- ------------------ -------------------
<S> <C> <C> <C>
Before October 1, 1993
From October 1, 1993 through
September 30, 1998
From October 1, 1998 on
Total
</TABLE>
Initial Trust Loans disbursed before October 1, 1993 are 100%
guaranteed by the Initial Guarantors and reinsured against default by the
Department of Education up to a maximum of 100% of the Guarantee Payments.
Initial Trust Loans disbursed from October 1, 1993 through September 30, 1998
are 98% guaranteed by the Initial Guarantors and reinsured against default by
the Department of Education up to a maximum of 98% of the guarantee payments.
Initial Trust Loans disbursed on or after October 1, 1998 are 98% guaranteed by
the Initial Guarantors and reinsured against default by the Department up to a
maximum of 95% of the guarantee payments.
S-38
<PAGE>
Distribution of Initial Trust Loans by
Number of Days of Delinquency as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial Trust
Loans
Number Aggregate Outstanding by Outstanding
Days Delinquent of Loans Principal Balance Principal Balance
- --------------- ----------------- ---------------------- --------------------------
<S> <C> <C> <C>
0 - 30
31 - 60
61 - 90
91 - 120
Total
</TABLE>
The outstanding principal balance of each Trust Loan will be amortized
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the loan's
outstanding principal balance multiplied by the applicable interest rate and
further multiplied by the period elapsed (as a fraction of a calendar year)
since the preceding payment of interest was made. Payments received on each
Trust Loan are applied first to late charges and then to interest accrued to the
date of payment. The remainder is then applied to reduce the unpaid principal
balance. Accordingly, if a borrower pays a regular installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a monthly installment after its scheduled due
date, the portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the portion of the payment applied to reduce
the unpaid principal balance will be correspondingly less. In either case,
subject to any applicable deferral or forbearance periods, the borrower is
obligated to pay regular monthly installments until the final scheduled payment
date for that Trust Loan, at which time the amount of the final installment is
increased or decreased as necessary to repay the principal balance of the loan
outstanding at that time.
S-39
<PAGE>
Guarantee of Trust Loans
By the Closing Date, the eligible lender trustee will have entered
into guarantee agreements with the state or non-profit guarantors listed on
the chart appearing on page S-39 of this prospectus supplement (the "Initial
Guarantors"). Under the guarantee agreements, each Initial Guarantor has
agreed to serve as guarantor for certain "Initial Trust Loans."
The trust may acquire Additional Loans guaranteed by a state or
non-profit guarantor other than the Initial Guarantors (each, an "Additional
Guarantor" and, together with the Initial Guarantors, the "guarantors") provided
that, at the time the trust acquires the Additional Loan, the related Additional
Guarantor is a state or non-profit guarantor and has entered into a guarantee
agreement with the eligible lender trustee. No more than 20% of the Trust Loans
by principal balance may have guarantees from Additional Guarantors and no more
than 5% of the Trust Loans by principal balance may have guarantees from any one
Additional Guarantor.
Under its guarantee agreement, each guarantor guarantees to pay 100% of
the principal and accrued interest for each Trust Loan covered by its guarantee,
including any interest that may be capitalized from time to time, in the event
any one of the following events has occurred:
- the borrower under the loan fails to make monthly principal or
interest payments when due and the failure continues for a
statutorily determined period of time (at least 180 days for
student loans for which the first day of delinquency occurs
before October 7, 1998 or 270 days for student loans for which
the first day of delinquency occurs on or after October 7,
1998), EXCEPT that the guarantee against the borrower's
failure to make payments will cover only 98% of unpaid
principal and accrued and unpaid interest for Trust Loans
first disbursed on or after October 1, 1993;
- a petition in bankruptcy under any chapter of the Federal
Bankruptcy Code is filed by or against the borrower;
- the borrower dies;
- the borrower becomes totally and permanently disabled to work
and earn money or attend school, as certified by a qualified
physician;
- the borrower's program of study cannot be completed because
the borrower's school closes;
- the loan application is discovered to have been falsely
certified by the borrower's school; or
- a determination is made, based solely on the borrower's
actions in obtaining the loan, that the borrower was
ineligible for the loan.
When one of these conditions is satisfied, the Higher Education Act
requires the guarantor generally to pay the claim within 90 days after the
lender submits it. The
S-40
<PAGE>
obligations of a guarantor under its guarantee agreement are obligations solely
of that guarantor and are not supported by the full faith and credit of the
federal government or any state government. However, the Act provides that if
the Secretary of Education determines that a guarantor is unable to meet its
insurance obligations, the Secretary will assume responsibility for all
functions of that guarantor under the guarantor's loan insurance program. The
Secretary is authorized, among other things, to take those actions that are
necessary to ensure that:
- student loans continue to be available to residents of the
state or states in which the guarantor did business;
- all guarantees issued by the guarantor before the Secretary
assumed its functions are fully honored; and
- the student loans guaranteed by the guarantor are properly
serviced.
For a further discussion of the Secretary's authority in the event that a
guarantor is unable to meet its insurance obligations, SEE "Guarantors Under the
FFELP - Department of Education Oversight" in the accompanying prospectus.
Each guarantor's obligations on any Trust Loan that it guarantees are
conditioned upon the satisfaction of all the conditions set forth in the
applicable guarantee agreement. These conditions generally include, but are not
limited to, the following:
- the Trust Loan was originated and serviced in accordance with
the Higher Education Act and other applicable requirements;
- the guarantee fee payable on the Trust Loan is timely paid to
the guarantor;
- all required pre-claim delinquency status notifications and
the claim for the guarantee payments on the Trust Loan are
timely submitted; and
- the promissory note evidencing the Trust Loan is transferred
and endorsed to the guarantor when a claim for guarantee
payments on the loan is made.
Failure to comply with any of the applicable conditions, including those listed
above, may result in:
- the guarantor's refusal to honor its guarantee agreement with
respect to the Trust Loan;
- the guarantor's denial of coverage on certain accrued interest
amounts on the loan; or
- the loss of certain interest subsidy payments and special
allowance payments with respect to the loan.
Under the master servicing agreement, the master servicer's failure to
comply with any applicable conditions would constitute a breach of its covenants
and would obligate the master servicer to repurchase the affected Trust Loans.
SEE "Risk Factors--Inability of the Seller or Master Servicer to Meet Its
Purchase Obligations May Adversely Affect the Notes" in this prospectus
supplement and "Description of the Transfer and Servicing Agreements--Master
Servicer Covenants" in the accompanying prospectus.
S-41
<PAGE>
Under the loan sale agreement, the seller's material breach of its
representations and warranties would obligate the seller to repurchase (or
provide a substitute for) the affected Trust Loans and reimburse the trust for
any non-guaranteed interest amounts or lost interest subsidy payments or special
allowance payments that result from the breach. SEE "Description of the Transfer
and Servicing Agreements--Sale of Student Loans; Representations and Warranties"
in the accompanying prospectus.
The following table provides information with respect to the portion of
the Initial Trust Loans guaranteed by each Initial Guarantor.
S-42
<PAGE>
Distribution of Initial Trust Loans by Initial Guarantor as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial Trust
Aggregate Outstanding Loans by Outstanding
Number Principal Balance of Principal Balance
Name of Guarantor of Loans Guaranteed Initial Trust Loans Guaranteed
<S> <C> <C> <C>
</TABLE>
S-43
<PAGE>
In the preceding table, the aggregate outstanding principal balance of
the Initial Trust Loans as of the Cutoff Date includes net principal balances
due from borrowers, plus accrued interest in an amount estimated to be
$__________ as of the Cutoff Date that we expect to be capitalized when
repayment begins.
Set forth below is current and historical information for each Initial
Guarantor which guarantees Initial Student Loans comprising at least 5% of the
initial Pool Balance (each, a "Significant Guarantor") concerning all the
student loans that it guarantees, including those not owned by the trust. The
information provided has been obtained from the Significant Guarantors
themselves or Department of Education Data Books, so neither the seller nor the
underwriters are able to make any representation regarding its accuracy or
completeness.
GUARANTEE VOLUME. The following table sets forth the approximate
aggregate principal balance of federally reinsured student loans, including PLUS
Loans but excluding Consolidation Loans, that first became guaranteed by the
Significant Guarantors in each of the last five federal fiscal years:
<TABLE>
<CAPTION>
Stafford, SLS and PLUS Loans Guaranteed
by Federal Fiscal Year
(dollars in millions)
Name of Guarantor
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
California Student Aid
Commission .................. $1,913 $1,601 $1,410 $1,563 $1,949
American Student Assistance ... $1,099 $ 906 $ 707 $ 668 $ 656
New Hampshire Higher Education
Assistance Fund ............. $ 117 $ 134 $ 134 $ 157 $ 154
New York State Higher Education
Services Corporation ........ $1,667 $1,554 $1,404 $1,532 $1,568
Pennsylvania Higher Education
Assistance Agency ........... $1,747 $1,809 $1,777 $1,828 $1,787
United Student Aid Funds, Inc. $4,725 $5,041 $5,293 $6,161 $6,181
</TABLE>
RECOVERY RATES. The recovery rate provides a measure of the
effectiveness of a guarantor's collection efforts against defaulting borrowers
after the guarantee claims have been satisfied. It is determined by dividing the
cumulative amount recovered from borrowers by a guarantor by the cumulative
amount of default claims paid by that guarantor . The table below sets forth the
recovery rates for each Significant Guarantor as of the end of each of the last
five federal fiscal years:
S-44
<PAGE>
<TABLE>
<CAPTION>
Recovery Rate
By Federal Fiscal Year
Name of Guarantor
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
California Student Aid
Commission .................. 33.6% 35.6% 37.6% 36.4% 42.0%
American Student Assistance ... 39.0% 38.3% 41.3% 42.7% 49.0%
New Hampshire Higher Education
Assistance Fund ............. 43.8% 44.3% 46.1% 36.0% 52.9%
New York State Higher Education
Services Corporation ........ 41.9% 43.9% 46.2% 49.4% 53.0%
Pennsylvania Higher Education
Assistance Agency ........... 52.9% 53.3% 55.0% 54.8% 59.2%
United Student Aid Funds, Inc. 29.3% 34.9% 39.2% 40.9% 44.3%
</TABLE>
CLAIMS RATE. Each Significant Guarantor's claims rate measures the
amount of federal reinsurance claims paid to it by the Department of Education
during a fiscal year as a percentage of the original principal amount of
guaranteed loans that were in repayment at the end of the prior federal fiscal
year. No assurance can be made that any guarantor will receive full
reimbursement for reinsurance claims (or the full 98% maximum reimbursement for
loans first disbursed on or after October 1, 1993 but before October 1, 1998, or
the full 95% maximum reimbursement for loans first disbursed on or after October
1, 1998). This reimbursement is subject to reduction when the annual default
claims rate of a guarantor for a federal fiscal year exceeds 5%. SEE "Guarantors
Under the FFELP--Federal Reimbursement Agreements" and "--Effect of Annual
Claims Rate on Reimbursement of Guarantors" in the accompanying prospectus. The
following table sets forth the claims rate of each Significant Guarantor for
each of the last five federal fiscal years:
S-45
<PAGE>
<TABLE>
<CAPTION>
Claims Rate
by Federal Fiscal Year
Name of Guarantor
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
California Student Aid
Commission .................. 4.1% 3.4% 4.5% 4.5% 3.1%
American Student Assistance ... 3.0% 3.5% 3.1% 3.4% 2.8%
New Hampshire Higher Education
Assistance Fund ............. 2.6% 2.2% 2.4% 2.8% 2.2%
New York State Higher Education
Services Corporation ........ 2.8% 3.2% 2.9% 2.5% 2.7%
Pennsylvania Higher Education
Assistance Agency ........... 2.2% 2.0% 1.6% 1.9% 2.0%
United Student Aid Funds, Inc. 5.0% 4.7% 4.7% 4.7% 4.0%
</TABLE>
Unless otherwise indicated, all the above information relating to a
particular guarantor has been obtained from that guarantor, is not guaranteed as
to accuracy or completeness by the seller or the underwriters and is not to be
construed as a representation by the seller or the underwriters. The guarantee
volumes, recovery rates and claims rates of the other Initial Guarantors and of
any Additional Guarantors may vary from those of the Significant Guarantors. No
assurances can be given as to what the volumes or rates of the other Initial
Guarantors and of any Additional Guarantors will be or as to whether the Initial
Guarantors or the Additional Guarantors will be able to meet their insurance
obligations. The Department of Education Data Books contain information
concerning all state and non-profit guarantors and therefore may be consulted
for additional information concerning the Initial Guarantors and for information
concerning state or non-profit guarantors that could become Additional
Guarantors.
Incentive Programs
The seller currently offers the following incentive programs to
eligible student loan borrowers, including borrowers under the Trust Loans.
- Borrowers who make their student loan payments electronically
through automatic monthly deductions from a savings or
checking account may be eligible to receive a 0.25% interest
rate reduction.
- Borrowers who make their first 36 consecutive student loan
payments on time may be eligible to receive a one percent
reduction in their interest rate for the remaining term of
their loan.
- Borrowers who make their first 48 consecutive loan payments on
time may be eligible either:
S-46
<PAGE>
- to have their final six scheduled loan payments paid by the
master servicer or
- to have their interest rate reduced by two percent for the
remaining term of their loan.
All of the above incentive programs are not applicable to each Trust Loan.
Moreover, these incentive programs may be modified by the master servicer at any
time and, with the exception of the 0.25% interest rate reduction, will be
applicable to Trust Loans only if and to the extent that the trust receives
payment from the seller in an amount sufficient to offset the effective yield
reductions. To the extent that the seller makes the above benefits available to
borrowers under Trust Loans, those borrowers may participate in the programs
described above. Neither the seller nor the trust is able to predict the extent
to which borrowers will be eligible.
DESCRIPTION OF THE SECURITIES
General
The trust will issue the Class A-1 Notes and the Class A-2 Notes under
the terms of an indenture to be dated as of [ ], 1999 (as amended and
supplemented from time to time, the "indenture"), between the trust and State
Street Bank and Trust Company, a Massachusetts banking corporation, as indenture
trustee. The trust also will issue the Certificates under the trust agreement.
The indenture and the trust agreement will be substantially in the forms filed
as an exhibit to the Registration Statement of which this prospectus supplement
forms a part. The following sections summarize important terms of the
Securities, the indenture and the trust agreement. This summary is not complete
and is qualified in its entirety by reference to the actual provisions of the
Notes, the Certificates, the indenture and the trust agreement. It is intended
to supplement and, to the extent of any inconsistency, replace the description
of the general terms and provisions of the Notes, the Certificates, the
indenture and the trust agreement set forth in the accompanying prospectus.
Payments of Interest
WHEN INTEREST IS PAID. We will pay interest on the Notes, and interest
return on the Certificates, quarterly on or about ____25, ____25, ____25, and
____25 of each year or, if that day is not a business day, on the next
succeeding business day, beginning on [ ], 1999 (each, a "quarterly payment
date"). We will make payments to holders of record of the Securities on the
related record date. The "record date" with respect to any quarterly payment
date is the [ ]th day of the month in which that quarterly payment date occurs,
whether or not that day is a business day.
WHEN INTEREST IS ACCRUED. Interest will accrue on the principal balance
of the Class A-1 Notes and the principal balance of the Class A-2 Notes at an
annual rate equal to the Class A-1 Note Rate and the Class A-2 Note Rate,
respectively. Interest return will accrue on the certificate balance of the
Certificates at an annual rate equal to the Certificate Rate. Interest on the
outstanding principal amount of each class of Notes, and interest return on the
certificate balance of the Certificates, will accrue during each quarterly
interest period. "Quarterly interest period" means the period from and including
the Closing Date, in the case of the first quarterly payment date, or from and
including the most recent quarterly payment date on which interest has been
paid, to but excluding the current quarterly payment date. Interest accrued as
of any quarterly payment date but not paid on that date will be due on the next
quarterly payment date, together with an amount equal to interest on the unpaid
amount at the applicable annual rate described below.
S-47
<PAGE>
HOW CLASS NOTE RATES AND CERTIFICATE RATES ARE CALCULATED.
The "Class A-1 Note Rate", the "Class A-2 Note Rate" and the "Certificate
Rate" for each quarterly interest period will equal the LESSER of:
- the Class A-1 Note LIBOR Rate, the Class A-2 Note LIBOR Rate
or the Certificate LIBOR Rate, as applicable,
AND
- the Adjusted Student Loan Rate for that quarterly interest
period.
The "Class A-1 Note LIBOR Rate", the "Class A-2 Note LIBOR Rate" and the
"Certificate LIBOR Rate" shall be equal to Three-Month LIBOR for the related
LIBOR Reset Period plus 0.__%, 0.__% and 0.__%, respectively. Interest on the
Notes and interest return on the Certificates will be calculated on the basis of
the actual number of days elapsed in each quarterly interest period divided by
360.
The "Adjusted Student Loan Rate" for any quarterly interest period will
equal the PRODUCT of:
- the quotient obtained by dividing:
- 365 (or 366 in the case of a leap year) by
- the actual number of days elapsed in that quarterly
period;
MULTIPLIED by
- the percentage equivalent of a fraction
- whose numerator is equal to the sum of the Expected
Interest Collections less the sum of the servicing
fee and the administration fee for that quarterly
interest period; and
- whose denominator is the sum of the aggregate
principal amount of the Notes and the certificate
balance of the Certificates as of the last day of
that quarterly interest period.
"Expected Interest Collections" means, with respect to any quarterly interest
period, the SUM of:
- the amount of interest accrued whether or not actually paid,
net of any amounts required by the Higher Education Act to be
paid to the Department of Education or to borrowers with
respect to the Trust Loans for the Collection Period preceding
the applicable
S-48
<PAGE>
quarterly payment date (the "Student Loan Rate Accrual
Period"), as described under "Federal Family Education Loan
Program" in the accompanying prospectus;
- interest subsidy payments and special allowance payments
estimated to have accrued for that Student Loan Rate Accrual
Period whether or not actually received, taking into account
any expected deduction of amounts required to be paid to the
Department with respect to the Trust Loans
- for that Student Loan Rate Accrual Period to the extent not
included in the preceding clause;
AND
- Investment Earnings, as that term is defined on page 46 of the
accompanying prospectus, for that Student Loan Rate Accrual
Period.
"Collection Period" means each period of three calendar months from and
including the date next following the end of the preceding Collection Period or,
with respect to the first Collection Period, the period beginning on the Cutoff
Date and ending on [ ], 1999.
HOW INTEREST PAYMENTS ARE FUNDED. We will fund payments of interest on
the Notes and interest return on the Certificates generally from the Available
Funds on deposit in the collection account and from amounts on deposit in the
reserve account that remain after we have paid the servicing fee and all overdue
servicing fees and the administration fee and all overdue administration fees
for that quarterly payment date. SEE "Description of the Transfer and Servicing
Agreements--Distributions" beginning on page S-55 and "--Credit Enhancement"
beginning on page S-58 of this prospectus supplement.
NOTEHOLDERS' INTEREST BASIS CARRYOVER AND CERTIFICATEHOLDERS' RETURN
CARRYOVER. Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover and Certificateholders' Return Carryover
may be incurred on any quarterly payment date.
The "Class A-1 Noteholders' Interest Basis Carryover" means the sum of:
- if the Class A-1 Note Rate for any quarterly payment date is
based on the Adjusted Student Loan Rate, the EXCESS of
- the amount of interest on the Class A-1 Notes that
would have accrued in respect of the related
quarterly interest period had interest been
calculated based on the Class A-1 Note LIBOR Rate,
OVER
- the amount of interest on the Class A-1 Notes
actually accrued in respect of that quarterly
interest period based on the Adjusted Student Loan
Rate;
AND
S-49
<PAGE>
- the unpaid portion of any excess amount under the previous
clause from prior quarterly payment dates and interest accrued
on that amount at the Class A-1 Note LIBOR Rate.
The "Class A-2 Noteholders' Interest Basis Carryover" means the sum of:
- if the Class A-2 Note Rate for any quarterly payment date is
based on the Adjusted Student Loan Rate, the EXCESS of:
- the amount of interest on the Class A-2 Notes that
would have accrued in respect of the related
quarterly interest period had interest been
calculated based on the Class A-2 Note LIBOR Rate,
OVER
- the amount of interest on the Class A-2 Notes
actually accrued in respect of that quarterly
interest period based on the Adjusted Student Loan
Rate;
AND
- the unpaid portion of any excess amount under the previous
clause from prior quarterly payment dates and interest accrued
on that amount at the Class A-2 Note LIBOR Rate.
The "Certificateholders' Return Carryover" means the sum of:
- if the Certificate Rate for any quarterly payment date is
based on the Adjusted Student Loan Rate, the EXCESS of:
- the amount of interest return on the Certificates
that would have accrued in respect of the related
quarterly interest period had interest been
calculated based on the Certificate LIBOR Rate,
OVER
- the amount of interest return actually accrued on the
Certificates in respect of that quarterly interest
period based on the Adjusted Trust Loan Rate;
- AND
- the unpaid portion of any excess amount under the previous
clause from prior quarterly payment dates and interest accrued
on that amount at the Certificate Rate calculated based on the
Certificate LIBOR Rate.
HOW CARRYOVER IS PAID. Any Class A-1 Noteholders' Interest Basis
Carryover, Class A-2 Noteholders' Interest Basis Carryover and
Certificateholders' Return Carryover incurred prior to the Parity Date will not
be payable until on or after the Parity Date. The "Parity Date" is the first
quarterly payment date on which the sum of:
- the aggregate principal amount of the Notes,
AND
- the aggregate certificate balance of the Certificates,
S-50
<PAGE>
in each case after all distributions on that date are made, is
no longer in excess the sum of:
- the Pool Balance as of the last day of the related Collection
Period and
- the amount on deposit in the reserve account.
On each quarterly payment date from and after the Parity Date, any
Class A-1 Noteholders' Interest Basis Carryover, Class A-2 Noteholders' Interest
Basis Carryover and Certificateholders' Return Carryover incurred and unpaid to
and including that quarterly payment date will be payable on that quarterly
payment date but only out of any Reserve Account Excess that remains after the
following payments have first been made:
- any Purchase Premium Amounts due the seller for Serial Loans
purchased by the trust before the end of the related
Collection Period;
- on the Parity Date, any amount necessary to reduce to zero the
remaining amount by which the sum of the aggregate principal
amount of the Notes and the aggregate certificate balance of
the Certificates exceeds the Pool Balance; and
- in the case of the Certificateholders' Return Carryover,
payment of the Class A-1 Noteholders' Interest Basis Carryover
and the Class A-2 Noteholders' Interest Basis Carryover.
The "Pool Balance" at any time equals the aggregate principal balance
of the Trust Loans at the end of the preceding Collection Period, including
accrued interest through the end of that Collection Period to the extent that
interest will be capitalized when repayment begins, after taking into account
each of the following, without duplication:
- all payments received by the trust during that Collection
Period from borrowers, the guarantors and the Department of
Education;
- all Purchase Amounts received by the trust for that Collection
Period from the seller or the master servicer;
- all Additional Fundings made with respect to that Collection
Period; and
- all losses realized on Trust Loans liquidated during that
Collection Period.
"Purchase Amount" with respect to a Trust Loan means the unpaid balance
owed by the applicable borrower plus accrued interest to the date of purchase.
Payments of Principal
WHEN PRINCIPAL IS PAID. Principal payments will be made to the
Securityholders, sequentially, in the order of priority set forth in the first
paragraph under "--PRIORITY OF PRINCIPAL PAYMENTs" on page S-48 of this
prospectus supplement, on each quarterly payment date in an amount generally
S-51
<PAGE>
equal to the Principal Distribution Amount for that quarterly payment date,
until the sum of the aggregate principal amount of the Notes and the aggregate
certificate balance of the Certificates is reduced to zero.
HOW PRINCIPAL PAYMENTS ARE FUNDED. Payments of the Principal
Distribution Amount generally will be made from the Available Funds remaining
after distribution of:
- the servicing fee and all overdue servicing fees;
- the administration fee and all overdue administration fees;
- the Noteholders' Interest Distribution Amount; and
- the Certificateholders' Return Distribution Amount;
In addition, if the Available Funds are insufficient, amounts on deposit in the
reserve account will be used to pay the Principal Distribution Amount. SEE
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement" in this prospectus supplement. If the Available Funds and
the amounts on deposit in the reserve account are insufficient to pay the
Noteholders' Principal Distribution Amount or, after the Notes have been paid in
full, the Certificateholders' Balance Distribution Amount, for any quarterly
payment date, the shortfall will be added to the principal payable to the
Noteholders or the Certificateholders, as the case may be, on subsequent
quarterly payment dates.
In addition, on each quarterly payment date, for so long as the sum of
the aggregate principal amount of the Notes and the aggregate certificate
balance of the Certificates outstanding on that date is greater than the Pool
Balance as of the close of business on the last day of the related Collection
Period, any Reserve Account Excess for that quarterly payment date will be
applied to pay the principal of the Securities in the order of priority set
forth in the following paragraph. However, any amount to be applied to principal
will first be reduced by paying to the seller the unpaid Purchase Premium
Amounts for any Serial Loans that the trust purchased before the end of that
Collection Period. Any amounts available to be distributed as set forth in the
two preceding sentences will not be part of the Principal Distribution Amount
for that quarterly payment date. We cannot give you any assurance that there
will ever be a Reserve Account Excess or that it will be available to be paid as
principal on the Securities. SEE "Description of the Transfer and Servicing
Agreements--Credit Enhancement--RESERVE ACCOUNt" beginning on page S-58 of this
prospectus supplement.
PRIORITY OF PRINCIPAL PAYMENTS. On each quarterly payment date on
which principal payments are made to the holders of the Notes whether in respect
of the Noteholders' Principal Distribution Amount, Reserve Account Excess or
amounts in respect of a mandatory redemption as described below, or otherwise,
all payments of principal will be applied to pay principal as follows:
- FIRST, to the Class A-1 Noteholders until the aggregate
principal amount of the Class A-1 Notes has been reduced to
zero; and
- SECOND, to Class A-2 Noteholders until the aggregate principal
amount of the Class A-2 Notes has been reduced to zero.
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In addition, on each quarterly payment date on which principal payments are made
on the Securities whether in respect of the Principal Distribution Amount,
Reserve Account Excess, mandatory redemption amounts or otherwise, all payments
of principal will be applied to pay principal of the Securities as follows:
- FIRST, to the Noteholders until the aggregate principal amount
of the Notes has been paid in full; and
- SECOND, to the Certificateholders until the certificate
balance of the Certificates has been reduced to zero.
There is one exception to the sequential payment of principal on the
Notes described above. Following a default under the indenture and the
acceleration of the Notes, we will pay principal on each Class of Notes on a pro
rata basis until the Notes have been paid in full.
NOTE FINAL MATURITY DATES AND CERTIFICATE FINAL DISTRIBUTION DATE. Any
outstanding principal amount of the Class A-1 Notes will be payable in full on
the ______ quarterly payment date. Any outstanding principal amount of the Class
A-2 Notes will be payable in full on the ____ quarterly payment date. Any
remaining certificate balance of the Certificates will be paid on the ____
quarterly payment date. However, the actual final payment on either class of the
Notes or on the Certificates could occur on dates other than those listed in
this paragraph as a result of a variety of factors including those described
under "Risk Factors--Because the Timing of Principal Payments Is Uncertain, the
Return on Your Investment Will Change over Time" and "--If the Notes Are Repaid
Early Due to an Auction Sale or the Exercise of the Purchase Option, You Will
Bear the Reinvestment Risk".
Calculation of Three-Month LIBOR
For purposes of calculating the Class A-1 Note LIBOR Rate, the Class
A-2 Note LIBOR Rate and the Certificate LIBOR Rate for each Quarterly interest
period, the trust agreement requires the indenture trustee to determine
Three-Month LIBOR on the second business day before the LIBOR Reset Period
within which that quarterly interest period begins or, in the case of the
initial LIBOR Reset Period, on the second business day before the Closing Date
(each, a "LIBOR Determination Date"). For purposes of calculating Three-Month
LIBOR, a business day is any day on which banks in The City of New York and the
City of London are open for international business. Interest due for any
quarterly interest period will be determined based on the actual number of days
in that quarterly interest period over a 360-day year.
"Three-Month LIBOR" means, for any LIBOR Reset Period, the London
interbank offered rate for deposits in U.S. dollars having a maturity of three
months commencing on the related LIBOR
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Determination Date (the "Index Maturity") as it appears on Telerate Page 3750 as
of 11:00 a.m., London time, on that LIBOR Determination Date. If the rate does
not appear on Telerate Page 3750, the rate for that day will be determined on
the basis of the rates at which deposits in U.S. dollars, having the Index
Maturity and in a principal amount of at least U.S. $1,000,000, are offered at
approximately 11:00 a.m., London time, on that LIBOR Determination Date, to
prime banks in the London interbank market by the Reference Banks. The indenture
trustee will request the principal London office of each Reference Bank to
provide a quotation of its rate. If at least two quotations are provided, the
rate for that day will be the arithmetic mean of the quotations. If at least two
quotations are not provided, the rate for that day will be the arithmetic mean
of the rates quoted at approximately 11:00 a.m., New York time, on that LIBOR
Determination Date by major banks in The City of New York that have been
selected by the indenture trustee for loans in U.S. dollars to leading European
banks having the Index Maturity and in a principal amount of at least U.S.
$1,000,000. However, if the banks selected by the indenture trustee are not
quoting rates, Three-Month LIBOR as in effect for the previous LIBOR Reset
Period will be used.
"LIBOR Reset Period" means the three-month period beginning on the [
]th day (or, if that day is not a business day, on the next succeeding business
day) of each [ ], [ ], [ ] and [ ] and ending on the day immediately preceding
the following LIBOR Reset Period. However, the initial LIBOR Reset Period will
begin on the Closing Date.
"Telerate Page 3750" means the display page so designated on the Bridge
Telerate, Inc. service (or such other page as may replace that page for the
purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the indenture trustee.
Book-Entry Registration
The Depository Trust Company is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the UCC and a
"clearing agency" registered under the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in their
accounts, thereby eliminating the need for physical movement of certificates.
Participants include the underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Securities may do so only through Participants and Indirect
Participants. In addition, Securityholders will receive all distributions of
principal and interest on their Securities through DTC and its Participants.
Under a book-entry format, Securityholders will receive payments after the
related Quarterly payment date because, while payments are required to be
forwarded to Cede & Co., as nominee for DTC, on that date, DTC will forward the
payments to its Participants which will then be required to forward them to
Indirect Participants or Securityholders. It is anticipated that the only
"Securityholder" will be Cede & Co., as nominee for DTC, and that
Securityholders will not be recognized by the indenture trustee or owner trustee
as a Securityholder under the indenture or trust agreement. Securityholders will
be permitted to exercise their rights indirectly through DTC and its
Participants which in turn will exercise their rights through DTC.
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Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to the Securities are likewise required to make
book-entry transfers and receive and transmit payments on behalf of their
respective Securityholders.
Because DTC can only act on behalf of Participants that in turn act on
behalf of Indirect Participants and certain banks, a Securityholder may be
unable to pledge the Securities to persons or entities that do not participate
in the DTC system or otherwise to take actions in respect of the Securities due
to the lack of a physical certificate for the Securities.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 36 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for participants of Euroclear ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 34
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator") under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and
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<PAGE>
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Securityholder under the indenture on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
the relevant rules and procedures and subject to the relevant Depositary's
ability to effect those actions on its behalf through DTC.
Securityholders may hold their Securities through DTC (in the United
States) or CEDEL or Euroclear (in Europe) if they are participants of those
systems, or indirectly through organizations which are participants in those
systems.
The Securities initially will be registered in the name of Cede & Co.,
the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries (collectively,
the "Depositaries").which in turn will hold those positions in customers'
securities accounts in the Depositaries' names on the books of DTC.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of Securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. The credits or any transactions in the
securities settled during that processing will be reported to the relevant
Euroclear or CEDEL Participants on that business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
or Euroclear Participant to a Participant will be received with value on the DTC
settlement date but will be available in the relevant CEDEL or Euroclear cash
account only as of the business day following settlement in DTC. For information
with respect to tax documentation procedures for the Securities, SEE "Federal
Income Tax Consequences--Trusts for Which a Partnership Election Is Made--Tax
Consequences to Holders of the Debt Securities--FOREIGN DEBT SECURITY HOLDERS"
and "--Tax Consequences to Holders of the Equity Securities--FOREIGN EQUITY
SECURITY HOLDERS" in the accompanying prospectus.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC's rules on behalf of the relevant European international
clearing system by its Depositary. However, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in that system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions to the Depositaries.
S-56
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DTC has advised the administrator that it will take any action
permitted to be taken by a Securityholder under the indenture or the trust
agreement only at the direction of one or more Participants to whose accounts
with DTC the Securities are credited.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Securities among
participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform those procedures, which may be discontinued at
any time.
DTC management is aware that some computer processing applications,
systems and the like for processing dates ("Systems") that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter Year 2000 problems. DTC has informed its Participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("DTC Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from which DTC licenses software and
hardware, and third party vendors on which DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from which DTC
acquires services to:
- impress upon them the importance of such services being Year
2000 compliant; and
- determine the extent of their efforts for Year 2000
remediation (and, as appropriate, testing) of their services.
In addition, DTC is in the process of developing such
contingency plans as it deems appropriate.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
There will be no responsibility or obligation on the part of any trust,
the seller, the master servicer, the administrator, the eligible lender trustee,
the indenture trustee or the underwriters to any Participants, Cedel
Participants or Euroclear Participants or the persons for whom they act as
nominees with respect to:
- the accuracy of any records maintained by DTC, Cedel or
Euroclear or any Participant,
- the payment by DTC, Cedel or Euroclear or any Participant of
any amount due to any beneficial owner in respect of the
principal amount or interest on the Securities,
- the delivery by any Participant, Cedel Participant or
Euroclear Participant of any notice to any beneficial owner
which is required or permitted under the terms of the
indenture or the trust agreement to be given to
Securityholders, or
- any other action taken by DTC as the Securityholder.
S-57
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
AGREEMENTS COVERED
In the sections below certain terms of the following documents
(collectively, the "Transfer and Servicing Agreements") have been summarized:
- - the loan sale agreement to be dated as of [ ], 1999 (as amended
and supplemented from time to time, the "loan sale agreement"),
among the seller, the trust and the eligible lender trustee,
- - the master servicing agreement to be dated as of [ ], 1999 (as
amended and supplemented from time to time, the "master servicing
agreement") among the trust, the eligible lender trustee and
Nellie Mae Education Loan Corporation in its capacity as master
servicer,
- - the administration agreement to be dated as of [ ], 1999 (as
amended and supplemented from time to time, the "administration
agreement") among the trust, the indenture trustee and Nellie Mae
Education Loan Corporation in its capacity as administrator, and
- - the trust agreement .
The eligible lender trustee will purchase the Initial Trust Loans on behalf of
the trust pursuant to the loan sale agreement. The master servicer will be
responsible for servicing the Trust Loans under the master servicing agreement.
The administrator will undertake certain administrative duties and functions
with respect to the trust and the Trust Loans pursuant to the administration
agreement. The trust will be created under the trust agreement. Forms of the
Transfer and Servicing Agreements have been filed with the SEC as exhibits to
the Registration Statement. A copy of the Transfer and Servicing Agreements will
be filed with the SEC after the Securities are issued.
This summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Transfer
and Servicing Agreements. The following summary supplements the description of
the general terms and provisions of the Transfer and Servicing Agreements set
forth in the accompanying prospectus. To the extent the two are inconsistent,
this summary replaces the information in the accompanying prospectus.
SALE OF TRUST LOANS; REPRESENTATIONS AND WARRANTIES
Under the heading "Description of the Transfer and Servicing
Agreements" in the accompanying prospectus, you will find information about:
- - the sale on the Closing Date, of the Initial Trust Loans to the
eligible lender trustee on behalf of the trust as provided in the
loan sale agreement; and
- - the representations and warranties made by the seller in
connection with its transfer of the Additional Trust Loans to the
eligible lender trustee on behalf of the trust.
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ADDITIONAL FUNDINGS
Following the Closing Date, the seller shall have the option to cause
the eligible lender trustee to purchase Serial Loans. A "Serial Loan" is a
student loan made to a borrower who is already a borrower under at least one
Trust Loan. Serial Loans will be made or acquired by The First National Bank of
Chicago or another eligible lender on behalf of the seller at the seller's
discretion and in accordance with its usual business practices. The seller
generally anticipates that it will cause the eligible lender trustee to purchase
Serial Loans for the trust after the Closing Date, but the seller has no
obligation to do so. The amount of Serial Loans that the seller may sell to the
trust is limited to 5% of the initial Pool Balance.
Each purchase of a Serial Loan will be funded by a transfer to the
seller of an amount equal to the SUM of:
- - the principal balance owed by the related borrower plus accrued
interest (the "Purchase Collateral Balance");
AND
- - an additional amount not to exceed __% of the principal balance
owed by that borrower (the "Purchase Premium Amount" and, together
with the Purchase Collateral Balance, the "Serial Loan Purchase
Amount").
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The Purchase Collateral Balance for each Serial Loan will be funded by
amounts representing collections of principal on the outstanding Trust Loans
which otherwise would have been part of the Available Funds as described on page
S-56 of this prospectus supplement. The Purchase Premium Amount for each Serial
Loan purchased in a Collection Period will be funded on the next quarterly
payment date from any Reserve Account Excess on that quarterly payment date as
described under "--Credit Enhancement--RESERVE ACCOUnt" beginning on page S-58
of this prospectus supplement.
The trust is prohibited from purchasing any Serial Loans after the
Closing Date in any of the following circumstances:
- - if an Event of Default occurs under the indenture,
- - if a Master Servicer Default occurs under the master servicing
agreement,
- - if an Administrator Default occurs under the administration agreement,
or
- - if certain events of insolvency occur with respect to the seller.
The eligible lender trustee will purchase each Serial Loan on behalf of
the trust under a transfer agreement (each, a "Transfer Agreement") among the
seller, the trust and the eligible lender trustee. The seller will designate
each date (a "Transfer Date") on which the trust will purchase Serial Loans
under one or more Transfer Agreements. On each Transfer Date, the seller will
assign to the eligible
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lender trustee on behalf of the trust, without recourse except as otherwise set
forth in the Transfer Agreements, the seller's entire interest in the Serial
Loans being transferred on that date, in exchange for the related Serial Loan
Purchase Amount . However, payment of that portion of the Serial Loan Purchase
Amount consisting of the Purchase Premium Amount will be deferred until the next
quarterly payment date on which amounts in excess of the Specified Reserve
Account balance are available in the reserve account.
During certain qualifying periods as described under "Federal Family
Education Loan Program" in this prospectus supplement and in the accompanying
prospectus, borrowers under certain student loans are not required to pay
interest currently; instead, the interest is added to the outstanding principal
balance of their loans at the end of the qualifying period. When current
collections of interest on the
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Trust Loans are inadequate, any shortfalls in interest payments to the
Securityholders will be funded with amounts that would otherwise have been
distributable as part of the Principal Distribution Amount for the related
quarterly payment date. See "--Distributions" below.
ACCOUNTS
In addition to the collection account referred to in the accompanying
prospectus under "Description of the Transfer and Servicing
Agreements--Accounts," the administrator will establish and maintain a reserve
account in the name of the indenture trustee on behalf of the Noteholders and
the Certificateholders.
SERVICING FEE; ADMINISTRATION FEE
The master servicer will be entitled to receive from the trust monthly
in arrears, on each monthly payment date that is not a quarterly payment date
and on each quarterly payment date, a servicing fee equal to one-twelfth of the
product of ___% times the Pool Balance as of the close of business on the first
day of the preceding calendar month. "Monthly payment date" means the 25th day
of each month, or if any such date is not a business day, the next succeeding
business day, beginning in [ ] 1999.
The servicing fee, together with any portion of the servicing fee that
remains unpaid from prior monthly payment dates, will be payable on each monthly
payment date and will be paid solely out of:
- - the Monthly Available Funds in the case of each monthly payment date
that is not a quarterly payment date, and
- - out of the Available Funds in the case of each quarterly payment date,
as well as amounts on deposit in the reserve account on that date.
As compensation for performing its obligations under the administration
agreement and as reimbursement for its related expenses, the administrator will
be entitled to receive monthly in arrears, on each monthly payment date that is
not a quarterly payment date and on each quarterly payment date, an
administration fee equal to $________.
DISTRIBUTIONS
DEPOSITS TO THE COLLECTION ACCOUNT. On or about the third business day
before each monthly payment date (the "Determination Date"), the administrator
will provide the indenture trustee with certain information about the preceding
monthly collection period or, in the case of a monthly payment date that is also
a quarterly payment date, the preceding Collection Period, including the amount
of the Monthly Available Funds or the Available Funds, as the case may be,
received on the Trust Loans, and the aggregate Purchase Amounts relating to the
Trust Loans repurchased by the seller or purchased by the master servicer.
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"Monthly collection period" means, with respect to any monthly payment
date that is not a quarterly payment date, the calendar month immediately
preceding the month in which that monthly payment date occurs.
"Monthly Available Funds" means, with respect to each monthly payment
date that is not a quarterly payment date, the sum of the following amounts with
respect to the related monthly collection period:
- - all collections received by the master servicer on the Trust Loans
during that monthly collection period and remitted to the
indenture trustee, including any guarantee payments received on
the Trust Loans;
- - interest subsidy payments and special allowance payments on the
Trust Loans received by the eligible lender trustee during that
monthly collection period;
- - all proceeds received from the liquidation of defaulted Trust
Loans ("Liquidated Student Loans") which became Liquidated Student
Loans during that monthly collection period in accordance with the
master servicer's customary servicing procedures, net of expenses
incurred by the master servicer in connection with the liquidation
and any amounts required by law to be remitted to the borrowers on
the Liquidated Student Loans (such net proceeds, "Liquidation
Proceeds");
- - all amounts in respect of Liquidated Student Loans written off in
prior monthly collection periods that were received by the master
servicer during that monthly collection period and remitted to the
indenture trustee;
- - the aggregate amount received by the indenture trustee on the
Trust Loans repurchased by the seller or purchased by the master
servicer under an obligation which arose during that monthly
collection period;
- - Investment Earnings , as that term is defined on page 46 of the
accompanying prospectus, for that monthly payment date; and
- - with respect to each monthly payment date other than a quarterly
payment date and other than a monthly payment date immediately
following a quarterly payment date, the Monthly Available Funds
remaining on deposit in the collection account from the monthly
collection period relating to the preceding monthly payment date
after giving effect to application of the Monthly Available Funds
on that preceding monthly payment date.
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However, if on any monthly payment date there would not be sufficient
funds, after application of the Monthly Available Funds and amounts available in
the reserve account, to pay any of the items specified in clauses FIRST and
SECOND, respectively, under the first paragraph of "----DISTRIBUTIONS FROM THE
COLLECTION ACCOUNT" on page S-57, then the Monthly Available Funds for that
monthly payment date will include, in addition to the Monthly Available Funds,
amounts on deposit in the collection account on the Determination Date relating
to that monthly payment date which would have constituted part of the Monthly
Available Funds for the monthly payment date succeeding that monthly payment
date up to the amount necessary to pay those items. The Monthly Available Funds
for that succeeding monthly payment date will be adjusted accordingly. However,
the Monthly Available Funds will exclude:
- - all payments and proceeds, including Liquidation Proceeds, of any
Trust Loans if their Purchase Amounts were included in the Monthly
Available Funds for a prior monthly collection period ; and
- - any collections in respect of principal on the Trust Loans applied
during the related monthly collection period by the eligible
lender trustee to purchase Serial Loans as described under
"--Additional Fundings" on page S-54 of this prospectus
supplement.
"Available Funds" means, with respect to any quarterly payment date and
the related Collection Period, the sum of the amounts specified in the first six
bullet points under the definition of Monthly Available Funds beginning on page
S-55 of this prospectus supplement for each of the three monthly collection
periods included in that Collection Period. However, if with respect to any
quarterly payment date there would not be sufficient funds, after application of
the Available Funds and amounts available in the reserve account, to pay any of
the items specified in clauses FIRST through SIXTH, under the second paragraph
of "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" on page S-57 of this prospectus
supplement, then the Available Funds for that quarterly payment date will
include, in addition to the Available Funds, amounts on deposit in the
collection account on the Determination Date relating to that quarterly payment
date which would have constituted part of the Available Funds for the quarterly
payment date succeeding that quarterly payment date up to the amount necessary
to pay those items. The Available Funds for the succeeding quarterly payment
date will be adjusted accordingly. In any event, Available Funds will exclude:
- - all payments and proceeds, including Liquidation Proceeds, of any
Trust Loans if their Purchase Amounts were included in the
Available Funds for a prior Collection Period;
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- - any collections in respect of principal on the Trust Loans applied
during the related Collection Period by the eligible lender
trustee to purchase Serial Loans ; and
- - the servicing fee, all overdue servicing fees, the administration
fee and all overdue administration fees paid on each monthly
payment date that is not a quarterly payment date during the
related Collection Period.
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT. On each monthly payment date
that is not a quarterly payment date, the administrator will instruct the
indenture trustee to make the following distributions to the extent of the
Monthly Available Funds in the collection account for that monthly payment date,
in the following order of priority:
- - FIRST, to the master servicer, the servicing fee for that monthly
payment date and all prior unpaid servicing fees; and
- - SECOND, to the administrator, the administration fee for that
monthly payment date and all prior unpaid administration fees.
On each quarterly payment date, the administrator will instruct the
indenture trustee to make the following deposits and distributions to the extent
of the Available Funds in the collection account for that quarterly payment
date, in the following order of priority:
- - FIRST, to the master servicer, the servicing fee for that
quarterly payment date and all prior unpaid servicing fees;
- - SECOND, to the administrator, the administration fee for that
quarterly payment date and all prior unpaid administration fees;
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- - THIRD, to the Class A-1 Noteholders, the Class A-1 Noteholders'
Interest Distribution Amount and to the Class A-2 Noteholders, the
Class A-2 Noteholders' Interest Distribution Amount for that
quarterly payment date, pro rata, based on the ratio of each of
those amounts to the total of those amounts;
- - FOURTH, to the Certificateholders, the Certificateholders' Return
Distribution Amount for that Quarterly payment date;
- - FIFTH, to the Noteholders, the Noteholders' Principal Distribution
Amount for that quarterly payment date (to be allocated among the
Noteholders as described under "Description of the
Securities--Payments of Principal--PRIORITY OF PRINCIPAL PAYMENTS"
beginning on page S-47 of this prospectus supplement);
- - SIXTH, after the Notes have been paid in full, to the
Certificateholders, the Certificateholders' Balance Distribution
Amount for that quarterly payment date; and
- - SEVENTH, to the reserve account, any remaining amounts after
application of clauses FIRSt through SIXTh.
SEE the "Glossary of Principal Terms"" for definitions of a number of
the capitalized terms used in the preceding sections but not elsewhere defined.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Under the Transfer and Servicing Agreements, the
reserve account will be created with an initial deposit by the trust on the
Closing Date of cash or eligible investments in an amount equal to the Reserve
Account Initial Deposit. The Available Funds remaining on each quarterly payment
date after payment of the servicing fee and all overdue servicing fees, the
administration fee and all overdue administration fees, the Noteholders'
Interest Distribution
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Amount, the Certificateholders' Return Distribution Amount, the Noteholders'
Principal Distribution Amount and the Certificateholders' Balance Distribution
Amount for that date will be deposited in the reserve account on that quarterly
payment date. SEE "--Distributions--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT"
above. As described below, subject to certain limitations, any amount on deposit
in the reserve account that exceeds the specified reserve account balance will
be released to NMF or its assignee.
"Specified Reserve Account Balance" with respect to any quarterly
payment date generally will be the GREATER of:
- - ___% of the sum of the aggregate principal amount of the Notes and
the certificate balance of the Certificates outstanding on such
date after taking into account the effect of distributions on that
quarterly payment date,
AND
- - $--------.
However, the Specified Reserve Account Balance shall in no event exceed the sum
of the aggregate principal amount of the Notes and the aggregate certificate
balance of the Certificates outstanding on that date.
If the amount on deposit in the reserve account on any quarterly
payment date, after giving effect to all distributions required to be made from
the Available Funds on that date, is greater than the Specified Reserve Account
Balance for that date, the administrator will instruct the indenture trustee to
apply the amount of that excess (the "Reserve Account Excess") in the priority
indicated:
- - FIRST, to the seller, any unpaid Purchase Premium Amounts for any
Serial Loans purchased by the trust
before the end of the related Collection Period;
- - SECOND, if such quarterly payment date is on or before the Parity
Date, to the Noteholders, an amount equal to the LESSER of:
- - the remaining amount of that excess
- AND
- - the sum of the aggregate unpaid principal amount of the Notes and
the aggregate certificate balance of the Certificates, after
giving effect to all other principal payments on the Notes for
that quarterly payment date;
this amount to be allocated between the Class A-1 Noteholders and
the Class A-2 Noteholders as described under "Description of the
Securities--Payments of Principal" --PRIORITY OF PRINCIPAL
PAYMENTS" beginning on page S-47 of this prospectus supplement;
- - THIRD, to the Class A-1 Noteholders and the Class A-2 Noteholders,
pro rata, the aggregate unpaid amount of any Class A-1
Noteholders' Interest Basis Carryover and Class A-2 Noteholders'
Interest Basis Carryover based on the ratio of each of those
amounts to the total of those amounts;
- - FOURTH, to the Certificateholders, the aggregate unpaid amount of
any Certificateholders' Return
Carryover; and
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- - FIFTH, to NMF or its assignee, any excess remaining after
application of subclauses FIRST through FOURTH above, and, once
that excess has been paid to NMF or its assignee, the
Securityholders will not have any rights in or claims to it.
Subject to the limitation described in the preceding paragraph, amounts
held from time to time in the reserve account will continue to be held for the
benefit of the trust. Funds will be withdrawn from the reserve account as
follows:
- - on each monthly payment date that is not a quarterly payment date,
to the extent that the amount of the Monthly Available Funds on
that monthly payment date is insufficient to pay the servicing fee
and all overdue servicing fees and the administration fee and all
overdue administration fees; and
- - on any quarterly payment date, to the extent that the amount of
the Available Funds on that quarterly payment date is insufficient
to pay any of the items specified in clauses FIRST through SIXTH
of the second paragraph under "--Distributions--DISTRIBUTIONS FROM
THE COLLECTION ACCOUnt" beginning on page S-57 of this prospectus
supplement.
(i) Funds withdrawn from the reserve account will be paid to the
persons and in the order of priority specified for distribution from the
collection account on that date. As a result of the subordination of the
Certificates to the Notes described elsewhere in this prospectus supplement, any
amounts that the Certificateholders would otherwise receive from the reserve
account in respect of the Certificateholders' Return Distribution Amount on any
quarterly payment date will be paid to the Noteholders until the Noteholders'
Interest Distribution Amount for that quarterly payment date has been paid in
full. In addition, by virtue of the subordination, Certificateholders will not
receive any amounts from the reserve account in respect of the
Certificateholders' Balance Distribution Amount until the Notes have been paid
in full. See "--SUBORDINATION" below.
The reserve account is intended to enhance the likelihood of timely
payment of principal and interest due to the Noteholders and the
Certificateholders and to decrease the likelihood that the Noteholders or the
Certificateholders will experience losses. In certain circumstances, however,
the reserve account could be depleted. If the amount required to be withdrawn
from the reserve account to cover shortfalls in the amount of the Available
Funds or the Monthly Available Funds exceeds the amount in the reserve account,
the Noteholders or the Certificateholders could incur losses or a temporary
shortfall in the amount of principal and interest distributed to them. Such a
temporary shortfall could, in turn, increase the average life of the Notes or
the Certificates, as the case may be. Amounts on deposit in the reserve account
will not be available until the Parity Date to cover any aggregate unpaid Class
A-1 Noteholders' Interest Basis Carryover, Class A-2 Noteholders' Interest Basis
Carryover or Certificateholders' Return Carryover. After the Parity Date, only
amounts on deposit in the reserve account that are in excess of the Specified
Reserve Account Balance, after paying any unpaid Purchase Premium Amounts for
any Serial Loans purchased by the trust before the end of the related Collection
Period, will be available for payment of the amounts listed in the preceding
sentence.
SUBORDINATION. The Class A-1 Noteholders and the Class A-2 Noteholders
will have equal priority to the payment of interest. However, on any quarterly
payment date on which principal is due to be paid on the Notes, the Class A-2
Noteholders will receive no payments of principal until the Class A-1
Noteholders have received payments of principal so that the aggregate principal
amount of the Class A-1 Notes is reduced to zero. Nevertheless, from and after
any acceleration of the Notes following an "Event of Default" as defined in the
accompanying prospectus, principal will be allocated on a pro rata basis between
the Class A-1 Notes and the Class A-2 Notes, based on the ratio of the aggregate
principal amount of each of those classes to the aggregate principal amount of
the Notes, until the aggregate principal amount of the Notes has been reduced to
zero. In
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addition, the rights of the Certificateholders to receive payments of interest
return on any quarterly payment date out of the Available Funds or the reserve
account are subordinated to the rights of the Noteholders to receive payments of
interest on that date. Similarly, the rights of the Certificateholders to
receive payments of principal out of the Available Funds or the reserve account
on any quarterly payment date are subordinated to the rights of the Noteholders
to receive payments of principal on that date. The Certificateholders will not
be entitled to any payments of principal out of the Available Funds or the
reserve account until the Notes have been paid in full.
TERMINATION
Certain information regarding termination of the trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
accompanying prospectus.
Any Trust Loans remaining in the trust at the end of the Collection
Period immediately preceding the _________ quarterly payment date will be
offered for sale by the indenture trustee. The seller, its affiliates and
unrelated third parties may offer bids to purchase the Trust Loans on that
quarterly payment date. If at least two bids (one of which from a bidder other
than the seller and its affiliates) are received, the indenture trustee will
accept the highest bid equal to or in excess of the GREATER of:
- - the aggregate Purchase Amounts of the Trust Loans as of the end of the
Collection Period immediately preceding that quarterly payment date,
AND
- - an amount that would be sufficient to:
- - reduce the sum of the outstanding principal amount of the Notes and the
certificate balance of the Certificates to zero on that quarterly
payment date, and
- - pay to the Securityholders, the Securityholders' Interest Distribution
Amount payable on that quarterly payment date
(such greater amount, the "Minimum Purchase Price"). If at least two bids are
not received or the highest bid is not equal to or in excess of the Minimum
Purchase Price, the indenture trustee will not consummate the sale. The proceeds
of the sale will be used to redeem any Notes and repurchase any Certificates
outstanding on that quarterly payment date. If the sale is not consummated in
accordance with the foregoing, the indenture trustee may, but shall not be under
any obligation to, solicit bids to purchase the Trust Loans on future quarterly
payment dates upon terms similar to those described above. No assurance can be
given as to whether the indenture trustee will be successful in soliciting
acceptable bids to purchase the Trust Loans on any date.
OPTIONAL REDEMPTION
As of the end of any Collection Period immediately preceding a
quarterly payment date on which the then outstanding Pool Balance is 10% or less
of the sum of the aggregate initial principal amount of the Notes and the
aggregate initial certificate balance of the Certificates, NMF or an assignee of
NMF may at its option purchase from the eligible lender trustee all remaining
Trust Loans at a price equal to the greater of the aggregate Purchase Amounts as
of the end of that Collection Period and the Minimum Purchase Price. That amount
will be used to retire the Notes and repurchase the Certificates concurrently
with the sale of the Trust Loans. Upon termination of the trust, all right,
title and interest in the Trust Loans and other funds of the trust, after giving
effect to any final distributions to the Securityholders, will be conveyed and
transferred to NMF or its assignee.
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FEDERAL FAMILY EDUCATION LOAN PROGRAM
A description of the Federal Family Education Loan Program is provided
in the accompanying prospectus under "Federal Family Education Loan Program".
The information provided below sets forth recent developments and additional
information with respect the Federal Family Education Loan Program.
RECENT DEVELOPMENTS--PRESIDENT CLINTON'S PROPOSED FY 2000 BUDGET. In
his proposed budget for fiscal year 2000, President Clinton has proposed
billions of dollars in funding cuts to FFELP. In addition, President Clinton has
again proposed a number of changes to the Higher Education Act that would affect
lenders and state and non-profit guarantors. These proposals would, among other
things:
- - deny lenders interest that accrues on Student Loans for which
payments are more than 180 days delinquent, representing as much
as a six month penalty for lenders on some loan defaults;
- - reduce the share of default collections (from 24% to 18.5%) that
state and non-profit guarantors are allowed to retain; and
- - recall an additional $1.6 billion in reserves held by state and
non-profit guarantors.
The President's proposed changes, if enacted, would increase the risk
that resources available to the guarantors to meet their guarantee obligations
will be significantly reduced.
OTHER RECENT DEVELOPMENTS. In June, 1999, the Department of Education
issued a draft notice of proposed rulemaking, in which the Department proposes
to amend the regulations governing the Federal Direct Student Loan Program to
reduce the origination fee previously required to be charged to borrowers. If
this proposal is implemented and origination fees are reduced to an extent that
makes the overall cost of borrowing under the Federal Direct Student Loan
Program more attractive to borrowers, the volume of loans originated under the
FFELP could be reduced. SEE "Risk Factors--The Federal Direct Student Loan
Program Could Result in Reduced Revenues for the Master Servicer, the
Subservicers and the Guarantors" in this prospectus supplement.
FEDERAL INCOME TAX CONSEQUENCES
Brown & Wood LLP (the "Special Federal Tax Counsel") is of the opinion
that the Notes will properly be characterized as indebtedness for federal income
tax purposes. That opinion is not binding on the Internal Revenue Service,
however, and thus no assurance can be given that such characterization will
prevail.
The Notes provide for stated interest at a floating rate based upon
Three-Month LIBOR, but are subject to certain restrictions on the maximum level
of the floating rate. Under Treasury regulations governing "original issue
discount" ("OID"), stated interest payable at a variable rate is not taxed as
OID or contingent interest if the variable rate is a qualified floating rate.
The tax treatment of interest that is not based on a qualified floating rate is
not certain and the regulations do not address the tax treatment of debt
instruments bearing contingent interest except in circumstances not relevant to
this discussion. While the tax treatment of interest on the Notes, including, in
particular, interest equal to the Class A-1 Noteholders' Interest Basis
Carryover and the Class A-2 Noteholders' Interest Basis Carryover amounts, is
not entirely clear under the regulations, the trust intends to treat the stated
interest as a "qualified floating rate" for OID purposes and thus such interest
should not be taxable to the Noteholders as OID or as contingent interest.
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<PAGE>
Prospective purchasers of the Securities should read "U.S. Federal
Income Tax Consequences" in the accompanying prospectus for a discussion of the
application of material federal income tax laws to the trust, the Notes and the
Certificates.
ERISA CONSIDERATIONS
Subject to the applicable provisions of ERISA and the Internal Revenue
Code, the Notes may be purchased by an employee benefit plan or an individual
retirement account or other arrangement described in Section 3(3) of ERISA or
Section 4975(e)(1) of the Code (a "Plan"). Fiduciaries of a Plan subject to
ERISA must first determine that the Plan's acquisition of a Note is consistent
with their fiduciary duties under ERISA, including the requirements of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan. Plan
fiduciaries must also determine that the acquisition will not result in a
nonexempt prohibited transaction as defined in Section 406 of ERISA or Section
4975 of the Code. Employee benefit plans which are governmental plans (as
defined in Section 3(32) of ERISA) or certain church plans (as defined in
Section 3(33) of ERISA) are not subject to the fiduciary responsibility or
prohibited transaction provisions of ERISA or the Code. However, any such plan
which is qualified under Section 401(a) of the Code and exempt from tax under
Section 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
The Certificates may not be acquired by, on behalf of, or using the
assets of any Plan that is subject to Title I of ERISA or Section 4975 of the
Code. Each Certificateholder, by accepting a Certificate, will be deemed to have
represented that it is not a Plan within the meaning of Title I of ERISA or
Section 4975 of the Code and is not acquiring the Certificate on behalf of, or
with the assets of, a Plan.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Securities (the "Underwriting Agreement"), the seller
has agreed to cause the trust to sell to each of the underwriters named below
(collectively, the "underwriters") for which [ ] is acting as representative,
and each of the underwriters has severally agreed to purchase, the principal
amount of Securities set forth opposite its name below.
<TABLE>
<CAPTION>
Principal Amount
Underwriter Class A-1 Notes Class A-2 Notes Certificates
- ----------- --------------- --------------- ------------
<S> <C> <C> <C>
</TABLE>
The seller has been advised by the underwriters that they propose to
offer the Notes to the public initially at the public offering prices set forth
on the cover page of this prospectus supplement, and to certain dealers at those
prices less a concession of 0.___% per Class A-1 Note, 0.___% per Class A-2 Note
and 0.____% per Certificate. In addition, the underwriters and those dealers may
allow a discount of 0.___% per Class A-1 Note, 0.___% per Class A-2 Note and
0.____% per Certificate on sales to certain other dealers. After the initial
public offering of the Securities, the public offering prices and the
concessions and discounts to dealers may be changed by the underwriters.
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<PAGE>
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the underwriters' representative is permitted to engage in certain transactions
that stabilize the prices of the classes of Notes and the Certificates. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the prices of the classes of Notes and the Certificates.
If the underwriters create a short position in any class of the Notes
or in the Certificates in connection with the offering (I.E., if they sell more
Notes or Certificates than are set forth on the cover page of this Prospectus
Supplement), the representative may reduce that short position by purchasing
Notes or Certificates in the open market.
The underwriters' representative may also impose a penalty bid on
certain underwriters and selling group members. This means that if the
representative purchases Securities in the open market to reduce the
underwriters' short position or to stabilize the price of any class of the
Securities, it may reclaim the amount of the selling concession from the
underwriters and selling group members which sold those Securities as part of
the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the seller 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 prices of the Securities. In
addition, neither the seller nor any of the underwriters makes any
representation that the underwriters' representative will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
The Underwriting Agreement provides that the seller will indemnify the
underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the underwriters may be required to
make.
The trust may, from time to time, invest the funds in the collection
account and the reserve account in eligible investments acquired from the
underwriters.
LEGAL MATTERS
Ann M. O'Rourke, General Counsel of Nellie Mae Corporation, will pass
upon certain legal matters relating to the seller, the master servicer and the
administrator.
Brown & Wood LLP will pass upon federal income tax matters on behalf
of the trust and upon certain legal matters relating to the Securities for the
underwriters. From time to time, Brown & Wood LLP has provided and expects to
continue to provide legal services to Nellie Mae Corporation and its affiliates.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Securities are issued, quarterly and annual
unaudited reports containing information concerning the Trust Loans will be
prepared by the administrator and sent on behalf of the trust only to Cede &
Co., as nominee of DTC and registered holder of the Securities, and will not be
sent to the beneficial owners of the Securities. Beneficial owners of Securities
will, however, be able to obtain the reports by requesting them from the
indenture trustee or, if the Notes are no longer outstanding, from the eligible
lender trustee. The reports will contain the information described under
"Description of the Transfer and Servicing Agreements--
S-72
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Statements to the Indenture Trustee and the Trust" in the accompanying
prospectus. However, the reports will not constitute financial statements
prepared in accordance with generally accepted accounting principles. See
"Certain Information Regarding the Securities--Book-Entry Registration" and
"Reports to Securityholders" in the accompanying prospectus.
The trust will file with the SEC all periodic reports that are required
under the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the SEC. These materials may be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington D.C. 20549 or at its regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of these materials can also be
obtained from the SEC's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. You may obtain information about the
operation of the Public Reference Section by calling the SEC at 1-800-SEC-0330.
Certain information about the trust is also available on the SEC's website at
http://www.sec.gov.
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<PAGE>
GLOSSARY OF PRINCIPAL TERMS
The terms listed below are used in this prospectus supplement primarily in
connection with the "Description of the Transfer and Servicing
Agreements--Distributions" beginning on page S-55 of this prospectus supplement.
"Certificateholders' Balance Distribution Amount" means, with respect to each
quarterly payment date on and after which the Notes have been paid in full, the
sum of:
- - the Principal Distribution Amount for that quarterly payment date or,
in the case of the quarterly payment date on which the Notes are paid
in full, any remaining Principal Distribution Amount not otherwise
distributed to the Noteholders on that quarterly payment date;
AND
- - the Certificateholders' Balance Shortfall as of the close of the
preceding quarterly payment date.
However, the Certificateholders' Balance Distribution Amount will in no
event exceed the certificate balance of the Certificates outstanding on
that date. In addition, on the Certificate Final Distribution Date, the
principal required to be distributed to the Certificateholders will
include the amount required to reduce the certificate balance of the
Certificates to zero.
"Certificateholders' Balance Shortfall" means, as of the close of any quarterly
payment date on or after which the Notes have been paid in full, the EXCESS of:
- - the Certificateholders' Balance Distribution Amount on that quarterly
payment date,
OVER
- - the amount of principal actually distributed to the Certificateholders
on that quarterly payment date.
"Certificateholders' Distribution Amount" means, with respect to any quarterly
payment date, the Certificateholders' Return Distribution Amount for that
quarterly payment date plus, with respect to any quarterly payment date on and
after which the Notes have been paid in full, the Certificateholders' Balance
Distribution Amount for that quarterly payment date.
"Certificateholders' Return Distribution Amount" means, with respect to any
quarterly payment date, the SUM of:
- - the amount of interest return accrued at the Certificate Rate for the
related quarterly interest period on the certificate balance
outstanding on the immediately preceding quarterly payment date (after
giving effect to all principal distributions to the Certificateholders
on that quarterly payment date) or, in the case of the first quarterly
payment date, on the Closing Date;
AND
- - the Certificateholders' Return Shortfall for that quarterly payment
date.
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However, the Certificateholders' Return Distribution Amount will not
include any Certificateholders' Return Carryover.
"Certificateholders' Return Shortfall" means, with respect to any
quarterly payment date, the EXCESS of:
- - the Certificateholders' Return Distribution Amount on the preceding
quarterly payment date,
OVER
- - the amount of interest return actually distributed to the
Certificateholders on that preceding quarterly payment date;
PLUS interest on the amount of such excess, to the extent permitted by
law, at the interest return rate borne by the Certificates from that
preceding quarterly payment date to the current quarterly payment date.
"Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any quarterly payment date, the EXCESS of:
- - the Class A-1 Noteholders' Interest Distribution Amount on the
preceding quarterly payment date,
OVER
- - the amount of interest actually distributed to the Class A-1
Noteholders on that preceding quarterly payment date;
PLUS interest on the amount of that excess, to the extent permitted by
law, at the interest rate borne by the Class A-1 Notes from that
preceding quarterly payment date to the current quarterly payment date.
"Class A-1 Noteholders' Interest Distribution Amount" means, with
respect to any quarterly payment date, the SUM of:
- - the amount of interest accrued at the Class A-1 Note Rate for the
related quarterly interest period on the aggregate principal amount of
the Class A-1 Notes outstanding on the immediately preceding quarterly
payment date after giving effect to all principal distributions to the
Class A-1 Noteholders on that date or, in the case of the first
quarterly payment date, on the Closing Date;
AND
- - the Class A-1 Noteholders' Interest Carryover Shortfall for that
quarterly payment date.
However, the Class A-1 Noteholders' Interest Distribution Amount will
not include any Class A-1 Noteholders' Interest Basis Carryover.
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<PAGE>
"Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any quarterly payment date, the EXCESS of:
- - the Class A-2 Noteholders' Interest Distribution Amount on the
preceding quarterly payment date,
o OVER
- - the amount of interest actually distributed to the Class A-2
Noteholders on that preceding quarterly payment date;
PLUS interest on the amount of that excess, to the extent permitted by
law, at the interest rate borne by the Class A-2 Notes from that
preceding quarterly payment date to the current quarterly payment date.
"ClassA-2 Noteholders' Interest Distribution AmOUNT" means, with
respect to any quarterly payment date, the SUM of:
- - the amount of interest accrued at the Class A-2 Note Rate for the
related quarterly interest period on the aggregate principal amount of
the Class A-2 Notes outstanding on the immediately preceding quarterly
payment date (after giving effect to all principal distributions to the
Class A-2 Noteholders on that date) or, in the case of the first
quarterly payment date, on the Closing Date;
AND
- - the Class A-2 Noteholders' Interest Carryover Shortfall for that
quarterly payment date.
However, the Class A-2 Noteholders' Interest Distribution Amount will
not include any Class A-2 Noteholders' Interest Basis Carryover.
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"Noteholders' Distribution Amount" means, with respect to any quarterly
payment date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution
Amount and the Noteholders' Principal Distribution Amount for that
quarterly payment date.
"Noteholders' Interest Distribution Amount" means, with respect to any
quarterly payment date, the SUM of:
- the Class A-1 Noteholders' Interest Distribution
Amount,
(i) AND
- the Class A-2 Noteholders' Interest Distribution
Amount for that quarterly payment date.
However, the Noteholders' Interest Distribution Amount will not include
any Class A-1 Noteholders' Interest Basis Carryover or Class A-2
Noteholders' Interest Basis Carryover.
"Noteholders' Principal Carryover Shortfall" means, as of the close of any
quarterly payment date, the EXCESS of:
- the Noteholders' Principal Distribution Amount on
that quarterly payment date,
OVER
- the amount of principal actually distributed to the
Noteholders on that quarterly payment date.
"Noteholders' Principal Distribution Amount" means, with respect to any
quarterly payment date, the SUM of:
- the Principal Distribution Amount for that quarterly
payment date,
(i) AND
- the Noteholders' Principal Carryover Shortfall as of
the close of the preceding quarterly payment date.
However, the Noteholders' Principal Distribution Amount will not exceed
the aggregate principal amount of the Notes outstanding on such date.
In addition,
- on the Class A-1 Note Final Maturity Date, the
principal required to be distributed to the Class A-1
Noteholders will include the amount required to
reduce the outstanding aggregate principal amount of
the Class A-1 Notes to zero; and
- on the Class A-2 Note Final Maturity Date, the
principal required to be distributed to the Class A-2
Noteholders will include the amount required to
reduce the outstanding aggregate principal amount of
the Class A-2 Notes to zero.
"Principal Distribution Adjustment" means, with respect to any quarterly
payment date, the amount of the Available Funds on that
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quarterly payment date to be used to make additional principal
distributions to the Noteholders and, after the Notes have been paid in
full, to the Certificateholders, to account for:
- the amount of any insignificant balances remaining
outstanding as of that quarterly payment date on the
Trust Loans after receipt of a final payment from
borrowers or guarantors, when such insignificant
balances are waived in the ordinary course of
business by the master servicer at the direction of
the administrator in accordance with the master
servicing agreement; and
- the amount of principal collections erroneously
treated as interest collections including, without
limitation, by reason of a borrower's failure to
capitalize interest that had been expected to be
capitalized.
However, the Principal Distribution Adjustment for any quarterly
payment date shall not exceed the LESSER of:
- $100,000
(i) AND
- the amount of any Reserve account Excess remaining
after giving effect to all distributions to be made
from the reserve account on that quarterly payment
date other than distributions to NMF or its assignee.
"PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to any quarterly payment
date, the SUM of the following amounts with respect to the related
Collection Period:
- that portion of all collections received by the
master servicer on the Trust Loans and remitted to
the indenture trustee that is allocable to principal,
including the portion of any guarantee payments
received that is allocable to principal of the Trust
Loans LESS the SUM of:
- those collections which were applied by the
trust during that Collection Period to
purchase Serial Loans,
AND
- accrued and unpaid interest on the Trust
Loans for that Collection Period to the
extent interest is not currently being paid
but will be capitalized when repayment
begins on those Trust Loans;
- all Liquidation Proceeds attributable to the
principal balances of Trust Loans which became
Liquidated Student Loans during that Collection
Period in accordance with the master servicer's
customary servicing procedures to the extent received
by the master servicer during the related Collection
Period and remitted to the indenture trustee,
together with all Realized Losses on those Trust
Loans;
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- to the extent attributable to principal, the amount
received by the indenture trustee with respect to
each Trust Loan repurchased by the seller or
purchased by the master servicer as a result of a
material breach of a representation, warranty or
covenant under an obligation which arose during the
related Collection Period;
AND
(II)
- the Principal Distribution Adjustment, if any.
However, the Principal Distribution Amount will exclude all payments
and proceeds, including Liquidation Proceeds of any Trust Loan if its
Purchase Amount was included in the Available Funds for a prior
Collection Period .
"Realized Losses" means the excess of the aggregate principal balances of the
Liquidated Student Loans over the related Liquidation Proceeds to the
extent allocable to principal.
"Securityholders' Interest Distribution Amount" means, with respect to any
quarterly payment date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution
Amount and the
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Certificateholders' Return Distribution Amount for that quarterly
payment date.
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Notes of
Nellie Mae Student Loan Trust 1999-A (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, CEDEL or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlements and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the applicable Depositaries of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of CEDE & CO. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional asset-backed
securities. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and the 's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL 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 and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear,
as the case may be, will instruct the applicable Depositary to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of a calendar year consisting of
twelve 30-day calendar months. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debit will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debit
will be valued instead as of the actual settlement date.
CEDEL 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 CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants may elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants may employ their usual procedures for sending Global Securities
to the applicable Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC on the settlement
date. Thus, to the DTC Participants a cross-market transaction will settle no
differently from a trade between two DTC Participants.
Trading between CEDEL or Euroclear and DTC purchaser. Due to time zone
differences in their favor, CEDEL Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Securities
are to be transferred by the respective clearing system, through Euroclear
Participants, to a DTC Participant. The seller will send instructions to CEDEL
or Euroclear through a CEDEL Participant or a Euroclear Participant at least one
business day prior to settlement. In these cases, CEDEL or Euroclear will
instruct Euroclear Participants, to deliver the Global Securities to the DTC
Participant's account against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment to and
excluding the settlement date, on the basis of a calendar year consisting of
twelve 30-day calendar months. The payment will then be reflected in the account
of the CEDEL Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended
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value date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(1) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to 30% U.S. withholding tax that generally applies to
payments of interest on registered debt issued by U.S. Persons, unless (i) 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 such beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the beneficial owner or
his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payee's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Global Securities
holder, or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he holds (e.g., the
clearing agency, in the case of persons holding directly on the books of the
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clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of these Global Securities.
U.S. Person. As used in this prospectus supplement the term "U.S.
Person" means a beneficial owner of a Note that is for United States federal
income tax purposes (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, (iv) any other person whose income or gain in respect
of a Note is effectively connected with the conduct of a United States trade or
business, or (v) a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. As used in this prospectus supplement, the term "Non-U.S. Person"
means a beneficial owner of a Note that is not a U.S. Person.
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Nellie Mae Student Loan
Trust 1999-A
$-----------
Class A-1 Floating Rate
Asset-Backed Notes
$-----------
Class A-2 Floating Rate
Asset-Backed Notes
$-----------
Floating Rate
Asset-Backed Certificates
Nellie Mae Education
Loan Corporation
SELLER AND MASTER SERVICER
PROSPECTUS SUPPLEMENT
[Names of Underwriters]
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 1, 1999
PROSPECTUS
NELLIE MAE ASSET-BACKED FUNDING TRUSTS
ASSET-BACKED NOTES AND CERTIFICATES
(Issuable in Series)
NELLIE MAE EDUCATION LOAN CORPORATION,
SELLER AND MASTER SERVICER
----------------
The Securities
CONSIDER CAREFULLY THE
RISK FACTORS IN THE Nellie Mae Education Loan Funding Corporation may
PROSPECTUS SUPPLEMENT periodically form trusts which will issue securities.
THAT ACCOMPANIES THIS The securities may be in the form of asset-backed
PROSPECTUS. notes or asset-backed certificates. Each issue of
securities will have its own series designation and
Each issue of will evidence obligations of or interests in the
securities will trust established for that issue.
represent obligations
of, or interests in, Trust Assets
the applicable trust
only. They will not The assets of each trust will include:
represent an
obligation of, or - student loans, legal title to which will be
interest in, the held by an eligible lender trustee on behalf
seller, the master of the trust;
servicer, the - moneys and investments; and
administrator or any - other property described on the cover page
of their affiliates. of the related prospectus supplement.
The securities are NOT
insured or guaranteed Types of Securities
by any entity.
Each series of securities may include one or more
This prospectus may be classes of certificates that represent beneficial
used to offer and sell ownership of the assets of the trust, and one or more
any series of classes of notes that are secured by the assets of
securities only if the trust. A class of certificates or notes may:
accompanied by the
prospectus supplement - be senior or subordinate to other classes;
for that series. and
- receive payments from one or more forms of
credit enhancement that are designed to
reduce the harm to investors caused by
shortfalls in payments on the related
student loans.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
________________, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate
documents that progressively provide more detail:
- this prospectus, which provides general information, some of
which may not apply to your series of securities; and
- the related prospectus supplement that describes the specific
terms of your series of securities, including:
- the timing of interest and principal payments;
- financial and other information about the student
loans;
- information about credit enhancement for each series;
- the ratings for each series; and
- the method of selling the securities.
If the terms of a particular series of securities are described
differently in this prospectus and the related prospectus supplement, you should
rely on the information in the prospectus supplement.
You should rely only on the information provided in this prospectus and
the related prospectus supplement, including the information they incorporate by
reference. We have not authorized anyone to provide you with different
information. The securities are not offered in any state where offering them is
not permitted.
We have made cross-references to captions in this prospectus and the
accompanying prospectus supplement under which you can find further related
discussions. The following table of contents and the table of contents in the
related prospectus supplement indicate where these captions are located.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
FORMATION OF THE TRUSTS...........................................................................................5
Eligible Lender Trustee......................................................................................5
THE SELLER, THE MASTER SERVICER AND THE ADMINISTRATOR.............................................................6
The Seller...................................................................................................6
The Master Servicer and Administrator........................................................................7
USE OF PROCEEDS...................................................................................................7
THE STUDENT LOAN POOLS............................................................................................7
General......................................................................................................7
Origination and Marketing Process............................................................................8
Servicing and Collections Process............................................................................9
Claims and Recovery Rates....................................................................................9
FEDERAL FAMILY EDUCATION LOAN PROGRAM............................................................................10
General.....................................................................................................10
Eligible Lenders, Students and Educational Institutions.....................................................11
Financial Need Analysis.....................................................................................11
Special Allowance Payments..................................................................................11
Stafford Loans..............................................................................................12
Unsubsidized Stafford Loans.................................................................................17
PLUS and SLS Loan Programs.................................................................................17
Consolidation Loan Program..................................................................................19
GUARANTORS UNDER THE FFELP.......................................................................................21
Loan Guarantees.............................................................................................21
Guarantor Reserve Funds.....................................................................................21
Federal Reimbursement Agreements............................................................................22
Eligibility for Federal Reimbursement.......................................................................23
Effect of Annual Claims Rate on Reimbursement of Guarantors.................................................23
Other Federal Agreements....................................................................................25
Rehabilitation of Defaulted Loans...........................................................................25
Federal Advances............................................................................................25
Changes to Federal Agreements...............................................................................25
Department of Education Oversight...........................................................................26
1998 Reauthorization Amendments.............................................................................26
WEIGHTED AVERAGE LIVES OF THE SECURITIES.........................................................................30
POOL FACTORS AND TRADING INFORMATION.............................................................................31
DESCRIPTION OF THE NOTES.........................................................................................31
General.....................................................................................................31
Principal and Interest on the Notes.........................................................................32
The Indenture...............................................................................................33
DESCRIPTION OF THE CERTIFICATES..................................................................................38
General.....................................................................................................38
Principal and Interest on the Certificates..................................................................38
ADDITIONALINFORMATION REGARDING THE SECURITIES...................................................................39
Fixed Rate Securities.......................................................................................39
Floating Rate Securities....................................................................................39
Book-Entry Registration.....................................................................................40
Definitive Securities.......................................................................................41
List of Securityholders.....................................................................................42
Reports to Securityholders..................................................................................42
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.............................................................42
Agreements Covered..........................................................................................42
Sale of Student Loans; Representations and Warranties.......................................................43
Additional Fundings.........................................................................................44
</TABLE>
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<TABLE>
<S> <C>
Accounts....................................................................................................44
Servicing Procedures........................................................................................45
Payments on Student Loans...................................................................................46
Master Servicer Covenants...................................................................................46
Master Servicer Compensation................................................................................47
Payments of Principal and Interest..........................................................................47
Credit and Cash Flow Enhancement............................................................................48
Statements to the Indenture Trustee and the Trust...........................................................48
Evidence as to Compliance...................................................................................49
Matters Regarding the Master Servicer.......................................................................50
Master Servicer Default.....................................................................................50
Rights upon Master Servicer Default.........................................................................51
Waiver of Past Defaults.....................................................................................51
Amendment...................................................................................................52
Payment of Notes............................................................................................52
Termination.................................................................................................52
Optional Redemption.........................................................................................53
Auction of Student Loans....................................................................................53
Administration Agreement....................................................................................53
LEGAL ASPECTS OF THE STUDENT LOANS...............................................................................54
Transfer of the Student Loans...............................................................................54
Consumer Protection Laws....................................................................................54
Loan Origination and Servicing Procedures Applicable to Student Loans.......................................55
Student Loans Generally Not Subject to Discharge in Bankruptcy..............................................55
U.S. FEDERAL INCOME TAX CONSEQUENCES.............................................................................56
Trusts for Which a Partnership Election Is Made.............................................................56
Tax Characterization of the Trust......................................................................56
Tax Consequences to Holders of Debt Securities.........................................................56
Tax Consequences to Holders of Equity Securities.......................................................59
Trusts in Which All Residual Interests Are Retained by the Seller or an Affiliate of the Seller.............64
Tax Characterization of the Trust......................................................................64
ERISA CONSIDERATIONS.............................................................................................65
The Notes...................................................................................................66
The Certificates............................................................................................67
AVAILABLE INFORMATION............................................................................................67
REPORTS TO SECURITYHOLDERS.......................................................................................68
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................68
PLAN OF DISTRIBUTION.............................................................................................68
LEGAL MATTERS....................................................................................................69
</TABLE>
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<PAGE>
FORMATION OF THE TRUSTS
Each trust will be formed under the laws of the jurisdiction set forth
in the related prospectus supplement pursuant to a trust agreement. A trust will
perform only the following activities:
- acquire, hold, sell and manage student loans, the other trust
assets and proceeds from the student loans and other trust
assets; - issue one or more classes of securities; - make
payments on the related securities; and
- engage in other activities that are necessary, suitable or
convenient to accomplish the foregoing or other incidental or
related activities.
Each trust will be capitalized initially with a nominal cash payment.
The right to receive any amount remaining after payment of the securities will
be held by Nellie Mae Funding, LLC ("NMF"), a subsidiary of the seller. On
behalf of each trust, the related eligible lender trustee will use the initial
equity of the trust, together with the proceeds from the sale of the related
series of securities, to purchase student loans pursuant to a loan sale
agreement.
When the eligible lender trustee has purchased student loans on behalf
of a trust, the assets of that trust will include:
- the student loans themselves, legal title to which will be
held by the eligible lender trustee on behalf of the trust;
- all funds collected on the student loans on or after the
applicable cutoff date;
- all moneys and investments on deposit in the collection
account, any reserve account and any other trust accounts or
any other form of credit enhancement that may be obtained for
the benefit of one or more classes of the securities; and
- any other property specified in the related prospectus
supplement.
To the extent provided in the applicable prospectus supplement, the
certificates will represent beneficial ownership of the assets of the trust, and
the notes of the related series will be secured by the assets of the trust. To
facilitate servicing and to minimize administrative burden and expense, the
master servicer, directly or through subservicers, will retain possession of the
promissory notes and other documents related to the student loans as custodian
for the trust and the related eligible lender trustee.
Eligible Lender Trustee
The eligible lender trustee for a trust will be the entity specified in
the related prospectus supplement. On behalf of that trust, the eligible lender
trustee will acquire legal title to all the related student loans pursuant to a
loan sale agreement and will enter into a guarantee agreement with each of the
guarantors of those student loans. The eligible lender trustee will qualify as
an eligible lender and owner of student loans for all purposes under the Higher
Education Act of 1965, as amended, and the related guarantee agreements. If
student loans are not owned by an eligible lender at any point in time, federal
guarantee payments from a guarantor and federal assistance would be lost for
those student loans. SEE "Federal Family Education Loan Program-Eligible
Lenders, Students and Educational Institutions" and "Guarantors Under the
FFELP--Eligibility for Federal Reimbursement".
The liability of the eligible lender trustee in connection with the
issuance and sale of the securities is limited solely to its express obligations
contained in the related trust agreement and loan sale agreement. An eligible
lender trustee may resign at any time. If it does, the administrator for that
trust must appoint a successor eligible lender trustee. The administrator of a
trust may also remove the eligible
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lender trustee if the eligible lender trustee becomes insolvent or ceases to be
eligible to continue as eligible lender trustee. In that event, the
administrator must appoint a successor eligible lender trustee. The resignation
or removal of an eligible lender trustee and appointment of a successor eligible
lender trustee will not become effective until a successor eligible lender
trustee accepts the appointment.
The principal office of each trust and eligible lender trustee will be
specified in the related prospectus supplement.
THE SELLER, THE MASTER SERVICER AND THE ADMINISTRATOR
The Seller
The Nellie Mae Education Loan Corporation ("NMELC"), a Delaware
corporation, is a wholly-owned subsidiary of Nellie Mae Corporation ("Nellie
Mae"). Nellie Mae originates and purchases student loans that it sells to NMELC.
NMELC is in the business of managing student loan assets and selling them to
trusts. In this prospectus, we refer to NMELC in its selling capacity as the
"seller."
The principal executive offices of NMELC are located at 1240 Pautucket
Avenue, Rumford, Rhode Island 02916. Its telephone number is (401) 438-4500.
Nellie Mae is a Delaware business corporation created in 1998 as the
successor to the business of The New England Education Loan Marketing
Corporation ("NEELMC"). Nellie Mae acquires and originates student loans under
the Federal Family Education Loan Program ("FFELP Loans") that are either
guaranteed and reinsured under the Higher Education Act of 1965, as amended, or
directly insured by the Secretary of the Department of Education pursuant to the
Act. Nellie Mae also acquires student loans made under its private loan programs
that are not guaranteed or insured under the Higher Education Act. All
references in this prospectus to "student loans" that are included as assets of
any trust are to FFELP Loans.
On June 30, 1998, NEELMC made a one-time election, permitted under
Section 150(d)(3) of the Internal Revenue Code of 1986, as amended, to transfer
its assets and liabilities to Nellie Mae. As a for-profit corporation, Nellie
Mae operates without the Code's restrictions on activities to which NEELMC was
subject. In return for the transfers, NEELMC received all of the outstanding
equity of Nellie Mae. Nellie Mae also assumed the private, nongovernmental loan
operations previously operated by Nellie Mae, Inc., NEELMC's sister corporation.
During calendar year 1998, Nellie Mae purchased or originated $698
million of FFELP Loans and private student loans. As of March 31, 1999, Nellie
Mae held FFELP Loans and private student loans with an aggregate principal
balance of approximately $2.53 billion.
The principal executive offices of Nellie Mae are located at 50
Braintree Hill Park, Braintree, MA 02184 and its telephone number is (781)
849-1325.
On May 26, 1999, SLM Holding Corp. (Sallie Mae) announced that it
reached agreement with the Nellie Mae Foundation to purchase the outstanding
common stock of Nellie Mae Corporation. This purchase is expected to take place
in July 1999.
The structure of the transactions described in this prospectus seeks to
assure that the transfer of student loans from the seller to each trust will be
treated as a sale of the student loans to that trust and not, in the event of a
bankruptcy of the seller, as a pledge of the student loans to secure a borrowing
by the seller. In the event of the seller's bankruptcy, however, there can be no
assurance that the sale of student loans by the seller to a trust will not be
recharacterized as a pledge of the student loans to secure a borrowing of the
seller. If the sale were to be recharacterized in that way, delays and
reductions in payments to holders of the related notes and certificates could
occur.
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The Master Servicer and Administrator
If specified in the prospectus supplement for a series of securities,
NMELC will provide management and administrative services to the trust as
administrator. The administrator will receive an administration fee as
compensation for performing its obligations and as reimbursement for its
expenses as administrator.
If specified in the prospectus supplement for a series of securities,
NMELC will service the student loans owned by the related trust pursuant to a
servicing agreement between NMELC, as master servicer, and that trust. The
master servicer will receive a master servicing fee as compensation for
performing its obligations and reimbursement for its expenses as master
servicer.
The prospectus supplement for a series of securities may set forth
certain additional information with respect to the administrator and the master
servicer. SEE "Description of the Transfer and Servicing Agreements--Servicing
Procedures."
An administrator or master servicer other than, or in addition to,
NMELC may be specified for a series of securities in the related prospectus
supplement.
USE OF PROCEEDS
On the closing date specified in the applicable prospectus supplement,
the related trust will purchase student loans from the seller and make an
initial deposit into the reserve account or Pre-Funding Account, if any, with
the net proceeds from the sale of that issue of securities. The seller will use
the money it receives for general corporate purposes, which may include
purchasing student loans from its affiliates.
THE STUDENT LOAN POOLS
General
The eligible lender trustee, acting on behalf of the related trust,
will buy a pool of FFELP Loans made to students (or their parents) which the
seller will have selected in accordance with the related loan sale agreement.
The student loans will have been originated under the Federal Family Education
Loan Program (the "FFELP") to meet several criteria, including the following:
- Each student loan is guaranteed as to principal and interest
by a guarantor that is reinsured by the Department of
Education in accordance with the FFELP.
- Each student loan was originated in the United States, its
territories or its possessions in accordance with the FFELP.
- Each student loan contains the terms required by the FFELP,
the applicable guarantee agreements and any other required
terms.
- Each student loan provides for regular payments that fully
amortize the amount financed over its original term to
maturity (exclusive of any deferral or forbearance periods).
- Each student loan satisfies any other criteria that are set
forth in the related prospectus supplement.
The seller will select student loans for inclusion in a trust in accordance with
the criteria described in this prospectus and in the related prospectus
supplement. In no event,
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however, will more than 20% of the student loans by principal balance in any
trust be more than 30 days delinquent as of the related cutoff date and no
student loan will be more than 120 days delinquent as of that date.
The student loans comprising the assets of each trust will be held by
the related eligible lender trustee, as trustee on behalf of that trust. The
eligible lender trustee will also enter into guarantee agreements with the
related guarantors. Under the guarantee agreements, each student loan will be
guaranteed by a guarantor. SEE "Formation of the Trusts".
The prospectus supplement for each series of securities will provide
information about the student loans in the related trust that will include, to
the extent appropriate:
- the composition of the pool,
- the distribution of the pool by loan type and payment status,
- the borrowers' states of residence, and
- the percentages of the student loans guaranteed by the
applicable guarantors.
In the case of certain series of securities, the applicable trust may
be allowed to acquire or originate student loans after the related cutoff date.
Where this is the case, the prospectus supplement will set forth the criteria
that those student loans must meet. In addition, the prospectus supplement will
provide information regarding:
- the duration and conditions of any related Funding Period or
Revolving Period, and
- the circumstances under which Additional Fundings will be
made.
Origination and Marketing Process
In order for student loans to be guaranteed and eligible for federal
assistance, lenders must comply with certain rules set forth in the Act that
govern loan origination practices. A lender that makes student loans may not
offer points, premiums, payments or other inducements, directly or indirectly,
to any educational institution or individual in an attempt to secure student
loan applications, nor may it mail a student loan application to a student to
whom it has not previously made a student loan unless the student requests one.
Generally, the student and the educational institution complete the
application, which is accompanied by a promissory note. The application is then
mailed or electronically transmitted directly to either a lender or the
applicable guarantor. Both the lender and the guarantor must approve the
application and confirm that it is complete . They must also confirm that the
application, the prospective borrower and the educational institution have
complied with all applicable requirements of both the Higher Education Act and
the guarantor. The Act requires that each guarantor have procedures designed to
assure that it guarantees student loans only to students attending institutions
which meet the requirements of the Act. Each lender will only make loans that
the applicable
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<PAGE>
guarantor has approved according to its own requirements and the requirements of
the Higher Education Act. For each application it approves, the guarantor will
issue a guarantee certificate to the lender. The lender will then disburse the
loan, typically in multiple installments, and send a disclosure statement
confirming the terms of the student loan to the borrower.
These procedures differ slightly for Consolidation Loans.
Servicing and Collections Process
To ensure that student loans are repaid on a timely basis, the
applicable guarantee agreements and the Higher Education Act require that the
holders of student loans perform specified due diligence procedures . In the
related servicing agreement, the master servicer agrees to perform these
procedures, as well as certain collection procedures, for the student loans. For
example, if a payment is late, the master servicer may be required to attempt to
contact the delinquent borrower by mail within ten days after the delinquency
and at further specified times by mail and by telephone. The master servicer
will maintain a borrower loan file in which it will note all telephone calls and
letters to the borrower, as well as a synopsis of each. If a delinquent borrower
cannot be located, the master servicer must perform "skip tracing" procedures,
which include contacting the borrower's school and references. If the master
servicer fails to comply with these procedures, the related eligible lender
trustee, as holder of legal title to the student loans on behalf of the related
trust, may find it difficult to obtain the benefits of any guarantee agreement
or to receive the benefits of federal assistance from the Department of
Education in connection with those loans. Even if the master servicer's failure
to comply with the procedures has not caused the loss of the guarantee of the
principal of a student loan, failure to comply with certain procedures may
nonetheless jeopardize coverage under a guarantee agreement for certain accrued
interest amounts.
The master servicer is required to notify the applicable guarantor at
certain prescribed times that a student loan is delinquent before it submits a
claim for payment under the related guarantee agreement. This requirement
enables the guarantor to be aware of seriously delinquent accounts and to be
able to make additional attempts to collect the loan before receiving a claim.
Any student loan that is delinquent beyond a certain number of days is
considered to be in default. When a student loan is in default, the master
servicer will submit a claim for reimbursement to the applicable guarantor. If
the master servicer fails to file a claim within specified times of delinquency,
the guarantor may deny the claim. A failure by the master servicer to file a
guarantee claim in a timely fashion would constitute a breach of its covenants.
If, as a result of a failure of this type, the related guarantee payment is no
longer available to the trust, the master servicer must arrange for the purchase
of that student loan from the trust, unless the prospectus supplement for that
series provides otherwise. The securityholders and the eligible lender trustee
will have no further remedies against the master servicer in this situation. SEE
"Description of the Transfer and Servicing Agreements--Master Servicer
Covenants".
Claims and Recovery Rates
Each prospectus supplement will contain historical information
concerning guarantee claims and recovery rates for the guarantors that guarantee
the student loans held by the related trust as of the applicable closing date.
Because the characteristics of pools of student loans differ, however, the claim
and recovery experience of any series may differ from the guarantors' historical
experience.
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<PAGE>
FEDERAL FAMILY EDUCATION LOAN PROGRAM
General
The Federal Family Education Loan Program under Title IV of the Higher
Education Act provides for loans to be made to students who are enrolled in
eligible institutions, or to parents of such students, to finance a portion of
the cost of attendance. Payment of principal and interest on the student loans
is guaranteed by the applicable guarantor against:
- default of the borrower;
- the death, bankruptcy or disability of the borrower;
- closing of the borrower's school, a false certification by the
borrower's school or an unpaid school refund; or
- a determination that the borrower was not eligible for the
loan.
Subject to certain conditions, a program of federal reinsurance under the Act
entitles guarantors to be reimbursed by the Department of Education for between
75% and 100% of the amount of each guarantee payment. In addition, the eligible
lender trustee, as a holder of the student loans on behalf of the related trust,
is entitled to receive from the Department interest subsidy payments and special
allowance payments for eligible student loans.
The FFELP provides for loans to students and their parents which are
guaranteed by a guarantor and either reinsured or directly insured by the
federal government. Several types of student loans are currently authorized
under the Higher Education Act:
- Stafford Loans to students who demonstrate financial need;
- Unsubsidized Stafford Loans to students who either do not
demonstrate financial need or require additional loans to
supplement their Stafford Loans;
- PLUS Loans to parents of students who are dependents and whose
estimated costs of attending school exceed other available
financial aid; and
- Consolidation Loans to consolidate into a single loan the
borrower's obligations under various federally authorized
student loan programs.
Before July 1, 1994, the Act also authorized SLS Loans to graduate and
professional students, independent undergraduate students and, under certain
circumstances, dependent undergraduate students, to supplement their Stafford
Loans.
Although the description and summaries of the Higher Education Act, the
FFELP, the guarantee agreements and the other statutes, regulations and
amendments referred to in this prospectus describe or summarize the material
provisions of those statutes, regulations and agreements, they do not purport to
be comprehensive and are qualified in their entirety by reference to each actual
statute, regulation or document. Both the Act and the regulations promulgated
under the Act have been the subject of extensive amendments in recent years.
Accordingly, there can be no assurance that future amendments or modifications
will not materially change any of the terms or provisions of the programs
described in this prospectus or of the statutes and regulations that implement
them.
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<PAGE>
Eligible Lenders, Students and Educational Institutions
Lenders eligible to make loans under the FFELP generally include banks,
savings and loan associations, credit unions, pension funds, insurance companies
and, under certain conditions, schools and guarantors. A student loan may only
be made to, or on behalf of, a "qualified student". The term "qualified student"
is defined as a United States citizen or national or otherwise eligible
individual under federal regulations who:
- has been accepted for enrollment or is enrolled and is
maintaining satisfactory academic progress at a participating
educational institution;
- is carrying at least one-half of the normal full-time academic
workload for the course of study the student is pursuing, as
determined by the institution;
- has agreed to notify the holder of the loan promptly of any
address change; and
- meets the "need" requirements described in the application for
the particular loan program, in the case of Stafford Loans.
Eligible schools include institutions of higher education and
proprietary institutions meeting the standards set forth in the Act. In order
for a school to participate in the program, its eligibility must be approved by
the Department of Education under standards established by regulation.
Financial Need Analysis
Subject to certain limits and conditions, student loans generally may
be made in amounts sufficient to cover the student's estimated costs of
attending school, including tuition and fees, books, supplies, room and board,
transportation and miscellaneous personal expenses as determined by the
institution. Each Stafford Loan and Unsubsidized Stafford Loan applicant (and
parents, in the case of a dependent child) must undergo a financial need
analysis. This requires the applicant (and parents, in the case of a dependent
child) to submit a financial need analysis form to a federal processor. The
federal processor evaluates the parents' and student's financial condition under
federal guidelines and calculates the amount that the student and/or the family
is expected to contribute towards the student's cost of education (the "family
contribution"). After receiving information on the family contribution, the
institution then subtracts the family contribution from the student's costs to
attend the institution to determine the student's eligibility for grants, loans
and work assistance. A student's "unmet need" is the difference between the
amount of grants and Stafford Loans for which the borrower is eligible and the
student's estimated cost of attendance. This unmet need may be borrowed through
Unsubsidized Stafford Loans subject to annual and aggregate loan limits
prescribed in the Act. Parents may finance the family contribution amount with
their own resources or with PLUS Loans.
Special Allowance Payments
The Act provides for quarterly special allowance payments to be made by
the Department to holders of student loans to the extent necessary to ensure
that they receive at least specified market interest rates of return on the
loans. The rates for special allowance payments are based on formulas that vary
according to the type of loan, the date the loan was originally made and the
type of funds (I.E., tax-exempt or taxable) used to finance the loan. A special
allowance payment is made for each of the 3-month periods ending March 31, June
30, September 30 and December 31.
The special allowance payment equals the average unpaid principal
balance (including interest which has been capitalized) of all eligible loans
held by a holder during a quarterly period multiplied by the special allowance
percentage. The special allowance percentage is computed by:
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<PAGE>
(1) determining the average of the bond equivalent rates of
3-month Treasury bills auctioned for that quarter;
(2) subtracting the applicable borrower interest rate on the loan;
(3) adding the applicable special allowance margin (described in
the table below); and
(4) dividing the resultant percentage by 4.
If the amount determined by the application of clauses (1), (2) and (3) is in
the negative, the special allowance margin is zero.
<TABLE>
<CAPTION>
Date of First Disbursement Special Allowance Margin
<S> <C>
Before 10/17/86 3.50%
From 10/17/86 through 09/30/92 3.25%
From 10/01/92 through 06/30/95 3.10%
From 07/01/95 through 06/30/98 2.50% (Stafford Loans and
Unsubsidized Stafford Loans that are
In-School, Grace or Deferment);
3.10% (Stafford Loans and
Unsubsidized Stafford Loans that are
in repayment and all other loans)
From 07/01/98 through 06/30/03 2.20% (Stafford Loans and
Unsubsidized Stafford Loans that are
In-School, Grace or Deferment);
2.80% (Stafford Loans and
Unsubsidized Stafford Loans that are
in repayment) and 3.10% for all
other loans
</TABLE>
Special allowance payments are available on variable rate PLUS Loans
and SLS Loans made on or after July 1, 1987 and before July 1, 1994 and on any
PLUS Loans made on or after July 1, 1998, only if the variable rate, which is
reset annually based on the 1-year Treasury bill for loans made before July 1,
1998 or based on the 3-month Treasury bill for loans made on or after July 1,
1998, exceeds the applicable maximum borrower rate.
The maximum borrower rate is between 9% and 12%.
Stafford Loans
With respect to Stafford Loans, the Higher Education Act provides for :
- federal insurance or reinsurance of Stafford Loans made by
eligible lenders to qualified students;
- federal interest subsidy payments on certain eligible Stafford
Loans to be paid by the Department of Education to holders of
the loans in lieu of the borrowers' making interest payments;
and
- special allowance payments representing an additional subsidy
paid by the Department to the holders of eligible Stafford
Loans.
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<PAGE>
In this prospectus we refer to all three types of assistance as "federal
assistance".
INTEREST. The borrower's interest rate on a Stafford Loan may be fixed
or variable. Stafford Loan interest rates are summarized in the chart below.
<TABLE>
<CAPTION>
Maximum Borrower
Trigger Date Borrower Rate Rate Interest Rate Margin
<S> <C> <C> <C>
Before 01/01/81............... 7% 7% N/A
From 01/01/81 through
09/12/83................. 9% 9% N/A
From 09/13/83 through
06/30/88................. 8% 8% N/A
From 07/01/88 through
09/30/92................. 8% for 48 months; thereafter, 8% for 48 months, 3.25% for loans made
3-month Treasury + Interest Rate then 10% before 7/23/92 and for
Margin loans made on or after
7/23/92 and before
10/1/92 to new
student loan
borrowers; 3.10%
for loans made after
7/23/92 and before
7/1/94 to borrowers
with outstanding FFELP
loans
From 10/01/92 through
06/30/94................. 3-month Treasury + Interest Rate 9% 3.10%
Margin
From 07/01/94 through
06/30/95................. 3-month Treasury + Interest Rate 8.25% 3.10%
Margin
From 07/01/95 through
06/30/98................. 3-month Treasury + Interest Rate 8.25% 2.50% (In-School, Grace
Margin or Deferment);3.10% (in
repayment)
From 07/01/98................. 3-month Treasury + Interest Rate 8.25% 1.70% (In-School, Grace
Margin or Deferment); 2.30% (in
repayment)
</TABLE>
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<PAGE>
The trigger date for Stafford Loans made before October 1, 1992 is the
first day of the enrollment period for which the borrower's first Stafford Loan
is made. The trigger date for Stafford Loans made on or after October 1, 1992 is
the date of the disbursement of the borrower's first Stafford Loan. All Stafford
Loans made on or after July 1, 1994 have a variable interest rate regardless of
the applicable rate on any prior loans.
The rate for variable rate Stafford Loans applicable for any 12-month
period beginning on July 1 and ending on June 30 is determined on the preceding
June 1 and is equal to the LESSER of:
- the applicable Maximum Rate
AND
- the sum of
- the bond equivalent rate of 3-month Treasury bills auctioned
at the final auction held before that June 1, and
- the applicable interest rate margin.
In 1992 the Higher Education Act was amended to provide that, for fixed
rate Stafford Loans made on or after July 23, 1992 and certain loans made to new
borrowers on or after July 1, 1988, the lender must have converted the interest
rate on those loans (by January 1, 1995) to an annual variable interest rate
adjusted each July 1 equal to:
- for certain fixed rate Stafford Loans made between July 1,
1988 and July 23, 1992, and for certain fixed rate Stafford
Loans made to new FFELP borrowers on or after July 23, 1992
and before October 1, 1992, the 3-month Treasury bill rate at
the final auction before the preceding June 1 plus 3.25%; and
- for fixed rate Stafford Loans made on or after July 23, 1992
to borrowers with outstanding FFELP Loans, the 3-month
Treasury bill rate at the final auction before the preceding
June 1 PLUS 3.10%,
in each case capped at the applicable interest rate for the loan that existed
before the conversion. The variable interest rate conversion requirement does
not apply to loans made before July 23, 1992 during the first 48 months of
repayment.
INTEREST SUBSIDY PAYMENTS. The Department of Education is responsible
for paying interest on Stafford Loans:
- while the borrower is a qualified student,
- during a grace period and
- during certain deferral periods.
The Department makes quarterly interest subsidy payments to the owner of a
Stafford Loan in an amount equal to the interest that accrues on the unpaid
balance of that loan before repayment begins or during any deferral periods. The
Higher Education Act provides that the owner of an eligible Stafford Loan shall
be deemed to have a contractual right against the United States to receive
interest subsidy payments and special allowance payments in accordance with the
provisions of the Act. However, receipt of interest subsidy payments and special
allowance payments is conditioned on compliance with the requirements of the
Act, including the following:
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- satisfaction of certain need-based criteria,
- the delivery of sufficient information by the borrower and the
lender to the Department to confirm the foregoing, and
- continued eligibility of the loan for federal reinsurance.
If the loan is not held by an eligible lender in accordance with the
requirements of the Act and the applicable federal guarantee agreements, the
loan may lose its eligibility. SEE "--Eligible Lenders, Students and Educational
Institutions" as well as "Formation of the Trusts--Eligible Lender Trustee" and
"Description of the Transfer and Servicing Agreements--Servicing Procedures" in
this prospectus. The seller expects that substantially all of the Stafford Loans
that are to be conveyed to a trust will be eligible to receive interest subsidy
payments and special allowance payments.
Interest subsidy payments and special allowance payments are generally
received within 45 days to 60 days after the master servicer submits to the
Department the applicable forms for any given calendar quarter. However, there
can be no assurance that payments will, in fact, be received from the Department
within that period. The master servicer has agreed to prepare and file with the
Department claim forms and any other required documents or filings on behalf of
each eligible lender trustee as owner of the related student loans on behalf of
the related trust. The master servicer has also agreed to assist each eligible
lender trustee to monitor, pursue and obtain any interest subsidy payments and
special allowance payments with respect to the student loans. The master
servicer will be required to deposit in the related collection account the
interest subsidy payments and special allowance payments for the related student
loans within two business days after it receives and identifies them.
LOAN LIMITS. The Higher Education Act generally requires that
eligible lenders disburse student loans in at least two equal disbursements.
The Act limits the amount a student can borrow in any academic year. The
following chart sets forth the current and historic loan limits.
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<PAGE>
<TABLE>
<CAPTION>
All Students (1) Independent Students
Base Amount Additional
Subsidized and Unsubsidized Maximum
Borrower's Subsidized Subsidized on Unsubsidized on or only on or after Annual Total
Academic Level Pre-1/1/87 or after 1/1/87 after 10/1/93 (2) 7/1/94(3) Amount
<S> <C> <C> <C> <C> <C>
Undergraduate (per year):
1st year $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,000
Graduate (per year) $ 5,000 $ 7,500 $ 8,500 $10,000 $ 18,500
Aggregate Limit:
Undergraduate $12,500 $17,250 $23,000 $23,000 $ 46,000
Graduate (including $25,000 $54,750 $65,500 $73,000 $138,500
undergraduate)
</TABLE>
- -------------------------
(1) The loan limits include both Stafford Loans and federal direct student
loans.
(2) These amounts represent the combined maximum loan amount per year for
Stafford Loans and Unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under an Unsubsidized Stafford
Loan is the difference between the combined maximum loan amount and the
amount the student received in the form of a Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. Moreover, dependent
undergraduate students may also receive these additional loan amounts
if their parents are unable to provide the family contribution amount
and it is unlikely that the student's parents will qualify for a PLUS
Loan.
The annual loan limits are sometimes reduced when the student is
enrolled in a program of less than one academic year or has less than a full
academic year remaining in his program. The Department of Education has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive courses of study.
REPAYMENT. In general, repayment of principal on a Stafford Loan does
not begin while the borrower remains a qualified student, but only after the
applicable grace period, as described below. Any borrower may prepay a loan
voluntarily without premium or penalty, and may waive any grace period or
deferral period related to his loan. In general, each loan must be scheduled for
repayment over a period of not more than ten years after repayment begins. New
borrowers on or after October 7, 1998 who accumulate outstanding loans under the
FFELP totaling more than $30,000 are entitled to extend repayment for up to 25
years, subject to certain scheduled minimum repayment amounts. The Act currently
requires minimum annual payments of $600 or, if greater, the amount of accrued
interest for that year, unless the borrower and the lender agree to lower
payments. The Act and related regulations require lenders to offer the choice of
a standard, graduated, income-sensitive or extended repayment schedule, if
applicable, to all borrowers entering repayment.
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS. After the
borrower stops pursuing at least a half-time course of study, he generally must
begin to repay principal of a Stafford Loan following a grace period. The grace
period is:
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<PAGE>
- at least 9 months but not more than 12 months, if the loan's
interest rate is 7% per year; and
- not more than 6 months for loans made to first-time borrowers
under the FFELP on or after July 1, 1988.
In addition, no principal repayments need be made, subject to certain
conditions, during certain deferral periods.
For new borrowers whose loans are first disbursed on or after July 1,
1993, repayment of principal may be deferred, subject to a maximum deferment of
three years, only:
- while the borrower is at least a half-time student or is
enrolled in an approved graduate fellowship program or
rehabilitation program; or
- when the borrower is seeking, but unable to find, full-time
employment; or
- when for any reason the lender determines that payment of
principal will cause the borrower economic hardship.
In 1992 the Act was amended to permit, and in some cases require,
forbearance of loan collection in certain circumstances (each, a "forbearance
period").
Unsubsidized Stafford Loans
The Unsubsidized Stafford Loan program is designed for students who do
not qualify for the maximum Stafford Loan due to parental and/or student income
and assets in excess of permitted amounts or who need funds in excess of the
maximum permitted under Stafford Loans in order to finance their education.
The basic terms of Unsubsidized Stafford Loans are generally the same
as those of Stafford Loans, including interest rate provisions, annual loan
limits and special allowance payments. The terms of the Unsubsidized Stafford
Loans differ, however, in some respects from the terms of Stafford Loans. The
federal government does not make interest subsidy payments on Unsubsidized
Stafford Loans. The borrower must begin making interest payments on a monthly or
quarterly basis or the interest will be capitalized. Subject to the same loan
limits as those established for Stafford Loans, a student may borrow up to the
amount of his unmet need.
PLUS and SLS Loan Programs
The Higher Education Act authorizes PLUS Loans to be made to parents of
eligible dependent students and previously authorized SLS Loans to be made to
certain categories of students. Since July 1, 1993, only parents who have no
adverse credit history or who are able to secure an endorser without an adverse
credit history are eligible for PLUS Loans. The basic provisions applicable to
PLUS Loans and SLS Loans are similar to those of Stafford Loans with respect to
the federal insurance and reinsurance. However, PLUS and SLS Loans differ from
Stafford Loans, particularly because interest subsidy payments are not available
under the PLUS and SLS programs and, in some instances, special allowance
payments are more restricted.
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<PAGE>
LOAN LIMITS. PLUS Loans and SLS Loans disbursed before July 1, 1993
were limited to $4,000 per academic year with a maximum aggregate amount of
$20,000. Limits for SLS Loans disbursed on or after July 1, 1993 depend upon the
class year of the student and the length of the academic year. The annual loan
limits for SLS Loans first disbursed on or after July 1, 1993 range from $4,000
for first and second year undergraduate borrowers to $10,000 for graduate
borrowers, with a maximum aggregate amount of $23,000 for undergraduate
borrowers and $73,000 for graduate and professional borrowers.
After July 1, 1994, the SLS Loan program was merged with the
Unsubsidized Stafford Loan program, with the borrowing limits reflecting the
combined eligibility under both programs. The annual and aggregate amounts of
PLUS Loans first disbursed on or after July 1, 1993 are limited only to the
difference between the cost of the student's education and other financial aid
received, including scholarship, grants and other student loans.
INTEREST. The interest rate for a PLUS Loan or an SLS Loan depends both
on the date of disbursement and the period of enrollment. The interest rates for
PLUS Loans and SLS Loans are summarized in the following chart.
<TABLE>
<CAPTION>
Interest Rate
Trigger Date Borrower Rate Maximum Borrower Rate Margin
<S> <C> <C> <C>
Before 10/01/81............. 9% 9% N/A
From 10/01/81 through N/A
10/30/82................. 14% 14%
From 11/01/82 through
06/30/87................. 12% 12% N/A
From 07/01/87 through
09/30/92................. 1-year Treasury + Interest Rate Margin 12% 3.25%
From 10/01/92 through PLUS 10%,
06/30/94................. 1-year Treasury + Interest Rate Margin SLS 11% 3.10%
SLS repealed 07/01/94
From 07/01/94 through
06/30/98................. 1-year Treasury + Interest Rate Margin 9% 3.10%
After 6/30/98............... 3-month Treasury + Interest Rate Margin 9% 3.10%
</TABLE>
For PLUS Loans and SLS Loans made before October 1, 1992, the trigger
date is the first day of the enrollment period for which the loan was made; and
for PLUS Loans and SLS Loans made on or after October 1, 1992, the trigger date
is the date of the disbursement of the loan.
For Federal PLUS Loans or Federal SLS Loans that carry a variable rate,
the rate is set annually for 12-month periods (beginning on July 1 and ending on
June 30) on the preceding June 1 to be equal to the LESSER of:
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<PAGE>
- the applicable maximum borrower rate
AND
- the sum of
- the bond equivalent rate of 1-year Treasury bills or
3-month Treasury bills, as applicable, auctioned at
the final auction held before that June 1, and
- the applicable interest rate margin.
A holder of a PLUS Loan or SLS Loan is eligible to receive special
allowance payments during any quarter if:
- the borrower rate is set at the maximum borrower rate and
- the sum of the average of the bond equivalent rates of 3-month
Treasury bills auctioned during that quarter and the interest
rate margin exceeds the maximum borrower rate.
REPAYMENT, DEFERMENTS. In 1992 the Higher Education Act was amended to
grant to each borrower under an SLS Loan the option to defer repaying principal
until he begins to repay his Stafford Loans. Otherwise, borrowers must begin to
repay principal of their PLUS Loans and SLS Loans no later than 60 days after
the date of disbursement, subject to certain deferral and forbearance
provisions. The deferral provisions which apply to PLUS Loans and SLS Loans are
more limited than those applicable to Stafford Loans. However, borrowers may
defer and capitalize repayment of interest during certain periods of educational
enrollment and periods of unemployment or hardship, as specified under the Act.
Further, while interest subsidy payments are not available while repayment is
being deferred, interest may be capitalized during the deferral period if the
borrower does not pay the interest. Maximum loan repayment periods and minimum
payment amounts for PLUS Loans and SLS Loans are the same as those for Stafford
Loans.
Consolidation Loan Program
The Higher Education Act also authorizes a program under which certain
borrowers may consolidate one or more of their student loans into a single
Consolidation Loan that is insured and reinsured on a basis similar to Stafford
Loans. Consolidation Loans may be made in an amount sufficient to pay
outstanding principal, unpaid interest, late charges and collection costs on all
federally insured or reinsured student loans incurred under the FFELP that the
borrower selects for consolidation, as well as loans made under various other
student loan programs and student loans made by different lenders. Under this
program, a lender may make a Consolidation Loan to an eligible borrower who
requests it so long as the lender holds an outstanding loan of the borrower or
the borrower certifies that he has been unable to obtain a Consolidation Loan
from the holders of his outstanding student loans. In 1998 the Act was amended
to allow a lender to make a Consolidation Loans to a borrower whose loans are
held by multiple lenders even if the lender making the Consolidation Loan does
not hold any of the borrower's outstanding loans. A borrower who is unable to
obtain a Consolidation Loan from an eligible lender or a Consolidation Loan with
an income-sensitive repayment plan acceptable to the borrower may obtain a
Consolidation Loan under the direct loan program.
Consolidation Loans that were made on or after July 1, 1994 have no
minimum loan amount, although Consolidation Loans for less than $7,500 must be
repaid in ten years. Applications for Consolidation Loans received on or after
January 1, 1993 but before July 1, 1994 were available only to borrowers who had
aggregate outstanding student loan balances of at least $7,500. For applications
received before January 1, 1993, Consolidation Loans were available only to
borrowers who had aggregate outstanding student loan balances of at least
$5,000.
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To be eligible to obtain a Consolidation Loan, the borrower must be
either in repayment status or in a grace period before repayment begins. In
addition, for applications received before January 1, 1993, the borrower must
not have been delinquent by more than 90 days on any student loan payment; and
for applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Consolidation Loans only if they reenter
repayment through loan consolidation.
In connection with applications received on or after January 1, 1993,
borrowers may, within 180 days after the origination of a Consolidation Loan,
add additional loans ("Add-on Consolidation Loans") made before the origination
of that Consolidation Loan that will be consolidated with it; and in addition,
in 1998, the Act was amended to permit student loans made within the 180-day
period after the date of consolidation to be added to that Consolidation Loan.
If the borrower obtains student loans after the Consolidation Loan is originated
(except as provided above), he may consolidate the new loans and the existing
Consolidation Loan into a new Consolidation Loan. After a Consolidation Loan is
consolidated with any Add-on Consolidation Loans, the interest rate and term of
the Consolidation Loan may be recomputed within the parameters permitted by the
Act. For applications received on or after January 1, 1993, married couples who
agree to be jointly and severally liable will be treated as one borrower for
purposes of loan consolidation eligibility. For applications received on or
after November 13, 1997, borrowers may include federal direct loans in
Consolidation Loans.
Consolidation Loans bear interest at a rate equal to the greater of
the weighted average of the interest rates on the unpaid principal balances of
the consolidated loans and 9% for loans originated before July 1, 1994. For
Consolidation Loans made on or after July 1, 1994 and for which applications
were received before November 13, 1997, the weighted average interest rate must
be rounded up to the nearest whole percent. Consolidation Loans made on or after
July 1, 1994 for which applications were received on or after November 13, 1997
through September 30, 1998 bear interest at the annual variable rate applicable
to Stafford Loans subject to a cap of 8.25%. Consolidation Loans for which the
application is received on or after October 1, 1998 bear interest at a rate
equal to the weighted average interest rate of the loans being consolidated
(rounded up to the nearest one-eighth of one percent) subject to a cap of 8.25%.
Interest on Consolidation Loans accrues and, for applications received
prior to January 1, 1993, is to be paid without interest subsidy by the
Department. For Consolidation Loans received on or after January 1, 1993, all
interest of the borrower is paid during all deferral periods. However,
Consolidation Loan applications received on or after August 10, 1993 will only
be subsidized if all of the underlying loans being consolidated were subsidized
Stafford Loans. Nevertheless, in the case of Consolidation Loans made on or
after November 13, 1997, the portion of a Consolidation Loan that is comprised
of subsidized Stafford Loans will retain its subsidy benefits during deferral
periods. Borrowers may elect to accelerate principal payments without penalty.
No insurance premium may be charged to a borrower and no insurance
premium may be charged to a lender in connection with a Consolidation Loan.
However, a fee may be charged to the lender by a guarantor to cover the costs of
increased or extended liability with respect to a Consolidation Loan, and
lenders must pay a monthly rebate fee to the Department at an annualized rate of
1.05% on principal of and interest on Consolidation Loans for loans disbursed on
or after October 1, 1993 and at an annualized rate of 0.62% for Consolidation
Loan applications received between October 1, 1998 and January 31, 1999). The
rate for special allowance payments for Consolidation Loans is determined in the
same manner as for Stafford Loans.
A borrower must begin to repay his Consolidation Loan within 60 days
after his prior consolidated loans have been discharged. For applications
received on or after January 1, 1993, repayment schedule options must include
the establishment of graduated or income-sensitive repayment plans, subject to
certain limits applicable to the sum of the Consolidation Loan and the amount of
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the borrower's other eligible student loans outstanding. The lender may, at its
option, include graduated and income-sensitive repayment plans in connection
with student loans for which the applications were received prior to that date.
Generally, depending on the total loans outstanding, repayment may be scheduled
over periods no less than ten and not more than 25 years. For applications
received on or after January 1, 1993, the maximum maturity schedule is 30 years
for Consolidation Loans of $60,000 or more.
All eligible student loans of a borrower paid in full through
consolidation are discharged in the consolidation process when the new
Consolidation Loan is made.
GUARANTORS UNDER THE FFELP
The student loans for a series of securities may be guaranteed by one
or more guarantors that will be identified in the related prospectus supplement.
Loan Guarantees
Under the FFELP, guarantors guarantee loans made by lending
institutions such as banks, credit unions, savings and loan associations,
certain schools, pension funds and insurance companies to students or their
parents. Student loans made before October 1, 1993 are guaranteed by guarantors
as to 100% of principal and accrued interest against default, death, disability
or bankruptcy. Student loans made on or after October 1, 1993 are guaranteed as
to 100 percent of principal and accrued interest against death, disability or
bankruptcy and 98% of principal and accrued interest against default. The
guarantor is reimbursed by the Secretary of Education for amounts paid to
lenders pursuant to agreements for reimbursement. See "--Federal Reimbursement
Agreements" in this prospectus.
A lender may submit a default claim to the guarantor after the related
student loan has been delinquent for at least 270 days. However, if the first
day of delinquency occurred prior to October 7, 1998, the default claim may be
submitted after 180 days of delinquency. The lender must submit a default claim
package that includes all information and documentation required under the FFELP
regulations and the guarantor's policies and procedures. Under current
procedures, assuming that the default claim package complies with the
guarantor's loan procedures manual and regulations, the guarantor will pay the
lender for a default claim within 90 days after the lender has filed its claim,
which generally is expected to be 390 days following the date a loan became
delinquent. The guarantor will pay the lender interest accrued on the loan for
up to 450 days after delinquency. The guarantor must file a reimbursement claim
with the Secretary within 45 days after the guarantor has paid the lender for
the default claim.
Guarantor Reserve Funds
A guarantor generally pays claims to lenders for student loans that it
has guaranteed using the cash and reserves that comprise its guarantee funds. In
general, these funds have been funded principally by administrative cost
allowances paid by the Secretary of Education, guarantee fees paid by lenders
(the cost of which may be passed on to borrowers - up to 1% of the principal
amount of the student loan), investment income on moneys in the guarantee fund,
and a portion of the moneys collected from borrowers on guaranteed loans that
have been reimbursed by the Secretary to cover the guarantor's administrative
expenses.
The Secretary is required to demand payment on September 1, 2002 of a
total of one billion dollars from the funds of all the guarantors participating
in the FFELP. The amounts demanded of each guarantor will be determined in
accordance with formulas included in the Higher Education Act. Each guarantor is
required to deposit funds in a restricted account in installments, beginning in
the federal fiscal year ending September 30, 1998, to provide for its payment.
The Secretary has made the determination, and advised each guarantor, of the
amount required to be transferred by that guarantor.
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The Higher Education Act was amended in 1998 to include significant changes
affecting the financial structure of guarantors in the FFELP and their sources
of revenue. These changes will affect the guarantors and their guarantee funds.
SEE "--1998 Reauthorization Amendments" below.
The adequacy of a guarantor's guarantee fund to meet its guarantee
obligations for existing student loans also depends, in significant part, on its
ability to collect revenues generated by guarantees of new student loans. The
federal direct student loan program may adversely affect the volume of new
guarantees. Future legislation may make additional changes to the Act that could
significantly affect the revenues received by guarantors and the structure of
the guarantor program. There can be no assurance that relevant federal laws,
including the Act, will not be further changed in a manner that may adversely
affect the ability of a guarantor to meet its guarantee obligations
Information about the particular guarantors that guarantee the initial
student loans in a trust will be set forth in the related prospectus supplement.
The information will be provided by the respective guarantors. However, neither
the seller nor the underwriters will be able to make any representation as to
its accuracy or completeness.
Federal Reimbursement Agreements
GENERAL
Each guarantor and the Secretary of Education have entered into a
federal reimbursement contracts. Each contract provides that the guarantor will
be reimbursed for a portion of the insurance payments that it makes to eligible
lenders for loans guaranteed by the guarantor before the termination of its
contract or expiration of the authority of the Higher Education Act. Under
certain circumstances, the Secretary can terminate federal reimbursement
contracts or take other actions short of termination to protect the federal
interest. SEE "--Department of Education Oversight" below.
Under the Act and the federal reimbursement contracts, the Secretary
currently agrees to reimburse a guarantor for the amounts it expends in the
discharge of its guarantee obligation (I.E., the unpaid principal balance and
accrued interest on the guaranteed loans) as a result of borrower default. The
Secretary currently agrees to reimburse each guarantor for up to 100% of the
amounts it expends for guaranteed loans made prior to October 1, 1993; up to 98%
of the amounts expends for guaranteed loans made on or after October 1, 1993 but
before October 1, 1998; and up to 95% of the amounts expends for guaranteed
loans made on or after October 1, 1998. Depending on the claims rate of a
guarantor, the 100%, 98% or 95% reimbursement may be reduced as described in
"--Effect of Annual Claims Rate on Reimbursement of Guarantors" below.
The Secretary also agrees to repay 100% of the unpaid principal balance
and accrued interest on guaranteed loans that the guarantor expends in
discharging its guarantee obligation as a result of the bankruptcy, death or
total and permanent disability of a borrower (or in the case of a PLUS Loan, the
death of the student on whose behalf the loan was borrowed) or, in certain
circumstances, as a result of school closure, or if a school fails to make a
refund of loan proceeds which the school owed to the student's lender. The
latter reimbursements are not included in the calculations of the guarantor's
claims rate experience for the purpose of federal reimbursement under the
contracts.
Under present practice, after the Secretary reimburses a guarantor for
a default claim paid on a guaranteed loan, the guarantor continues to seek
repayment from the borrower. The guarantor returns to the Secretary any payments
that it receives from the borrower after deducting and retaining:
- a percentage amount equal to the complement of the
reimbursement percentage in effect at the time the loan was
reimbursed,
PLUS
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- an amount equal to 24% (or 23% beginning on October 1, 2003,
and 18 1/2% in the case of a payment from the proceeds of a
Consolidation Loan) of those payments for certain
administrative costs.
However, the Secretary may require that the defaulted guaranteed loans be
assigned to the Department of Education. In that case, no further collections
activity would be undertaken by the guarantor, and no recoveries could be paid
to the guarantor.
A guarantor may enter into an addendum to its interest subsidy
agreement under which the guarantor would refer certain defaulted guaranteed
loans to the Secretary. Those loans would then be reported to the Internal
Revenue Service to "offset" any tax refunds which may be due the defaulted
borrowers. To the extent that a guarantor originally received less than 100%
reimbursement from the Secretary with respect to a referred loan, it will not
recover any amounts subsequently collected by the federal government which are
attributable to that portion of the defaulted loan for which the guarantor was
not reimbursed.
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans
must be made by an eligible lender under the applicable guarantor's guarantee
program and meet the requirements prescribed by the rules and regulations
promulgated under the Higher Education Act, including the borrower eligibility,
loan amount, disbursement, interest rate, repayment period and guarantee fee
provisions and the other requirements set forth in the Act.
Generally, these procedures require that the lender process the
applicant's completed loan application, determine whether the applicant is an
eligible borrower attending an eligible institution , explain to the borrower
his responsibilities under the loan, ensure that the promissory note evidencing
the loan is executed by the borrower and disburse the loan proceeds as required.
After the loan is made, the lender must establish repayment terms with the
borrower, properly administer deferrals and forbearances and credit the borrower
for payments made. If a borrower becomes delinquent in repaying a loan, a lender
must perform collection procedures that vary depending upon the length of time a
loan is delinquent. The collection procedures consist primarily of telephone
calls, demand letters, skiptracing procedures and requesting assistance from the
applicable guarantor.
Under the Act, a guaranteed loan for which the first day of delinquency
is on or after October 7, 1998 must be delinquent for 270 days if it is
repayable in monthly installments or 330 days if it is payable in less frequent
installments before a lender may obtain payment on the guarantor's guarantee.
These time periods are 180 days and 240 days, respectively, for loans for which
the first day of delinquency was before October 7, 1998. The guarantor must
submit a reimbursement claim to the Secretary within 45 days after it has paid
the lender's default claim. The lender must have exercised reasonable care and
diligence in making, servicing and collecting the guaranteed loan in order for
the lender to be entitled to the guarantor's payment on the guarantee and for
the guarantor to be entitled to reimbursement by the Secretary of Education.
Effect of Annual Claims Rate on Reimbursement of Guarantors
A guarantor's ability to meet its obligations to pay default claims on
student loans that it has guaranteed will depend on the adequacy of its
guarantee fund. That, in turn, will be affected by the default experience of all
the lenders participating in the guarantor's guarantee program. A high default
experience among participating lenders may cause the guarantor's claims rate to
exceed the 5% and 9% levels described below, with the result that the Secretary
of Education would reimburse the guarantor's default claims payment at lower
percentages.
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In general, guarantors are currently entitled to receive reimbursement
payments under federal reimbursement contracts in amounts that vary depending on
their claims rate experience. A guarantor's "claims rate" is computed by
dividing the total amount of its default claims since the previous September 30
by the total original principal amount of student loans in repayment on that
date that it had guaranteed. The formula for computing the percentage of federal
reimbursement under the federal reimbursement contracts is not accumulated over
a period of years but is measured by the amount of federal reimbursement
payments in any one federal fiscal year (I.E., October 1 through September 30)
as a percentage of the original principal amount of loans under the FFELP
guaranteed by the guarantor and in repayment at the end of the preceding fiscal
year. For purposes of computing reimbursement payments to a guarantor, the
original principal amount of loans in repayment means the original principal
amount of all loans guaranteed by that guarantor less the sum of:
- the guarantee payments made on those loans;
- the original principal amount of those loans that have been
fully repaid; and
- the original principal amount of those loans for which the
first principal installment payment has not become due or the
first installment need not be paid because of a deferral
period.
On October 1 of each year the claims rate begins again at zero, regardless of a
guarantor's experience in preceding years.
Under the formula,
- if a guarantor has a claims rate throughout any fiscal year
that does not exceed 5%, the Secretary will make federal
reimbursement payment to that guarantor at
- 100% for loans made before October 1, 1993;
- 98% for loans made on or after October 1, 1993 but
before October 1, 1998; and;
- 95% for loans made on or after October 1, 1998;
- if, beginning at any time in a fiscal year, a guarantor has a
claims rate that is greater than 5% but does not exceed 9%,
the Secretary will make federal reimbursement payments to that
guarantor at
- 90% for loans made before October 1, 1993;
- 88% for loans made on or after October 1, 1993 but
before October 1, 1998; and
- 85% for loans made on or after October 1, 1998;
- if, beginning at any time in a fiscal year, a guarantor has a
claims rate that is greater than 9%, the Secretary will make
federal reimbursement payments to that guarantor at
- 80% for loans made before October 1, 1993;
- 78% for loans made on or after October 1, 1993 but
before October 1, 1998; and
- 75% for loans made on or after October 1, 1998.
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OTHER FEDERAL AGREEMENTS
In addition to guarantees, qualified Stafford Loans and certain
Consolidation Loans acquired under the FFELP benefit from certain federal
subsidies. Each guarantor and the Secretary of Education have entered into an
interest subsidy agreement, which entitles the holders of eligible loans
guaranteed by the guarantor to receive interest subsidy payments from the
Secretary on behalf of certain students while the student is in school, during a
six- to twelve-month grace period after the student leaves school, and during
certain deferral periods, in each case subject to the holders' compliance with
all the requirements of the Act. SEE "Federal Family Education Loan Program --
Stafford Loans -- INTEREST SUBSIDY PAYMENTS" in this prospectus for a more
detailed description of the interest subsidy payments.
REHABILITATION OF DEFAULTED LOANS
The Secretary of Education is authorized to enter into an agreement
with a guarantor under which the guarantor may sell defaulted loans that are
eligible for rehabilitation to an eligible lender. The guarantor must repay the
Secretary an amount equal to 81.5% of the then current principal balance of the
sold defaulted loan, multiplied by the reimbursement percentage in effect for
the guarantor at the time the loan was reimbursed. The amount of the repayment
is deducted from the amount of federal reimbursement payments for the fiscal
year in which the repayment occurs, for purposes of determining the guarantor's
reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the guarantor must have
received consecutive payments for 12 months of amounts owed on the loan. Upon
rehabilitation, a loan is eligible for all the benefits under the Act that it
would have been eligible for had no default occurred. However, no student loan
may be rehabilitated more than once.
FEDERAL ADVANCES
Pursuant to agreements entered into between the guarantors and the
Secretary of Education under the Higher Education Act, the Secretary was
authorized to advance moneys from time to time to guarantors for the purpose of
establishing and strengthening their reserves. If the Secretary seeks to
terminate a guarantor's federal reimbursement contract or to assume its
functions, the Act currently authorizes the Secretary to make advances to the
guarantor to assist it in meeting its immediate cash needs or ensuring the
uninterrupted payment of claims.
CHANGES TO FEDERAL AGREEMENTS
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the federal
reimbursement contracts between the Secretary of Education and the guarantors.
Amendments to the Higher Education Act since 1986 have had the following
effects:
- certain rights of guarantors under their contracts with the
Secretary relating to the repayment of certain advances from
the Secretary were abrogated;
- the Secretary was authorized to withhold reimbursement
payments otherwise due to certain guarantors until specified
amounts of their reserves had been eliminated;
- new reserve level requirements were added for guarantors; and
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- the Secretary's authority to terminate federal reimbursement
contracts and to seize guarantors' reserves was expanded.
There can be no assurance that future legislation will not further
adversely affect the rights of guarantors or holders of loans guaranteed by a
guarantor under a federal reimbursement contract.
DEPARTMENT OF EDUCATION OVERSIGHT
The Secretary of Education has certain oversight powers over
guarantors. Each guarantor is required to maintain its Federal Fund at a current
minimum reserve level of at least 0.25 % of the total amount of all outstanding
student loans guaranteed by that guarantor excluding certain loans transferred
to that guarantor from an insolvent guarantor pursuant to a plan of the
Secretary. SEE "--1998 Reauthorization Amendments" beginning on page 27 of this
prospectus. The Secretary can require the guarantor to submit and implement a
corrective plan in the following circumstances:
- if the guarantor falls below its minimum reserve level in two
consecutive years; or
- if the guarantor's claims rate exceeds 5% in any year; or
- if the secretary determines that the guarantor's
administrative or financial condition jeopardizes its ability
to meet its obligations.
The Secretary of Education may terminate a guarantor's reimbursement contract in
the following circumstances:
- if the guarantor fails to timely submit an acceptable plan to
improve its condition;
- if the Secretary determines that it is in danger of collapse;
or
- if the Secretary determines that termination is necessary to
protect the federal fiscal interest or to ensure the continued
availability of student loans.
If the Department of Education has determined that a guarantor is
unable to meet its insurance obligations, the holders of loans guaranteed by
that guarantor may submit claims directly to the Department and the Department
is required to pay the full guarantee payments due, in accordance with guarantee
claim processing standards no more stringent than those applied by the
terminated guarantor. However the Department's obligation to pay guarantee
claims directly in this fashion is contingent upon its making the determination
referred to above. There can be no assurance that the Department would ever make
such a determination with respect to any guarantor or, if it did, that the
determination or the ultimate payment of the guarantee claims would be made in a
timely manner.
No assurances can be given as to the Secretary's actions if a guarantor
encounters administrative or financial difficulties or that the Secretary will
not demand that a guarantor transfer additional portions, or all, of its
guarantee fund to the Secretary.
1998 REAUTHORIZATION AMENDMENTS
GENERAL
The 1998 Reauthorization Amendments, enacted October 7, 1998, made
various changes to the Higher Education Act that affect guarantors, including
the following:
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- Each guarantor must establish a federal student loan reserve
fund (a "Federal Fund") and an operating fund (an "Operating
Fund") before December 7, 1998, which must be funded, invested
and used as prescribed by the 1998 Reauthorization Amendments.
- Each guarantor's sources of revenue have been modified.
- Guarantors' additional reserves have been recalled.
- The Secretary of Education and each guarantor may enter into
voluntary flexible agreements in lieu of existing agreements.
FEDERAL FUND AND OPERATING FUND
Each guarantor was required to deposit prior to December 7, 1998, all
funds, securities and other liquid assets contained in its reserve fund into the
Federal Fund. Each Federal Fund is an account selected by the guarantor with
the approval of the Secretary of Education. The Federal Fund, as well as any
nonliquid assets such as buildings or equipment developed or purchased by the
guarantor in whole or in part with federal reserve funds of the guarantor, is
considered to be property of the United States (prorated to the extent that an
asset was developed or purchased with federal reserve funds) and must be used in
the operation of the FFELP to pay lender guarantee claims, to pay default
aversion fees into the guarantor's Operating Fund and, to the extent permitted,
to make certain transition payments into the Operating Fund. The Secretary may
direct a guarantor, or its officers and directors, to cease any activity
involving expenditures, use or transfer of the Federal Fund that the Secretary
determines is a misapplication, misuse or improper expenditure of the Federal
Fund or the Secretary's share of any asset. A guarantor is required to maintain
a current minimum reserve level in the Federal Fund of at least 0.25% of the
total amount of all outstanding loans that it has guaranteed excluding certain
loans transferred to the guarantor from an insolvent guarantor pursuant to a
plan of the Secretary.
After the Federal Fund is established, the guarantor is required to
deposit into the Federal Fund:
- all reinsurance payments received from the Secretary;
- a percentage of all amounts collected from defaulted borrowers
equal to the complement of the reinsurance percentage in
effect when the guarantee payment was made;
- all insurance premiums collected from borrowers;
- all amounts received from the Secretary as payment for
supplemental preclaims assistance activity performed before
October 7, 1998;
- 70% of administrative cost allowances received from the
Secretary after October 7, 1998 for loans guaranteed prior to
that date; and
- other receipts specified in regulations of the Secretary.
Funds transferred to the Federal Fund are required to be invested in low-risk
securities and all earnings from the Federal Fund are the sole property of the
United States.
In addition, each guarantor was required to establish an Operating Fund
prior to December 7, 1998. The 1998 Reauthorization Amendments include various
transition rules allowing a guarantor to transfer certain transition amounts
from its Federal Fund to its Operating Fund from time to time during the first
three years following the establishment of the Operating Fund for use in the
performance of its duties under the FFELP. In determining the amounts that it
may transfer, the guarantor must ensure that
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sufficient funds remain in the Federal Fund to pay lender claims within the
required time periods and to meet reserve recall requirements. In general, the
transition rules require that the Federal Fund be repaid any transition amounts
transferred from it to the Operating Fund.
The Operating Fund shall be considered to be the property of the
guarantor, except for any transition amounts transferred from the Federal Fund.
The Secretary may not regulate the uses or expenditure of moneys in the
Operating Fund (but may require necessary reports and audits), except during any
period in which transition funds are owed to the Federal Fund. Moreover, during
that period, moneys in the Operating Fund may only be used for expenses related
to the FFELP.
Funds deposited into the Operating Fund must be invested at the
discretion of the guarantor in accordance with prudent investor standards,
except that transition amounts transferred to the Operating Fund from the
Federal Fund must be invested in the same manner as amounts in the Federal Fund.
After establishing the Operating Fund, the guarantor shall make the following
deposits into the Operating Fund:
- loan processing and issuance fees and account maintenance fees
paid by the Secretary;
- default aversion fees;
- 30% of administrative cost allowances received from the
Secretary after October 7, 1998 for loans guaranteed prior to
that date;
- 24% (decreasing to 23 percent on and after October 1, 2003) of
amounts collected on defaulted loans, excluding collected
amounts required to be transferred to the Federal Fund; and
- other receipts specified in regulations of the Secretary.
In general, funds in the Operating Fund shall be used by the guarantor
for application processing, loan disbursement, enrollment and repayment status
management, default aversion activities, default collection activities, school
and lender training, financial aid awareness and related outreach activities,
compliance monitoring, and other student financial aid related activities, as
selected by the guarantor. The guarantor may transfer funds from the Operating
Fund to the Federal Fund, but any transfers are irrevocable and transferred
funds become the property of the United States.
MODIFICATIONS IN SOURCES OF REVENUE
The 1998 Reauthorization Amendments made the following modifications
with respect to the principal sources of guarantor revenues:
- Reinsurance payment percentages for loans made on and after
October 1, 1998 were reduced as described under "--Effect of
Annual Claims Rate on Reimbursement of Guarantors" in this
prospectus.
- The percentage of the amount of collections on defaulted loans
that may be retained by a guarantor was reduced from 27% to
24%, with a further reduction to 23% on and after October 1,
2003.
- A loan processing and issuance fee, payable by the Secretary
of Education on a quarterly basis, was established equal to:
- for loans originated during fiscal years beginning on
or after October 1, 1998 and before October 1, 2003,
0.65% of the total principal amount of loans on
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which insurance was issued under the FFELP during the
fiscal year by the guarantor; and
- for loans originated during fiscal years beginning on
or after October 1, 2003, 0.40% of the total
principal amount of loans on which insurance was
issued under the FFELP during the fiscal year by the
guarantor; and
- The discretionary administrative cost allowances or expenses
that had been paid at a rate of 0.85% of the loans originated
in each fiscal year was eliminated.
- A default aversion fee was established. This fee, which is
related to the default aversion activities that each guarantor
is required to perform, is payable on a monthly basis from the
Federal Fund to the Operating Fund, in an amount equal to 1%
of the total unpaid principal and accrued interest on a loan
for which a default claim has not been paid as a result of the
loan being brought into current repayment status on or before
the 300th day after the loan became 60 days delinquent.
- An account maintenance fee payable quarterly to the Secretary
was established. If however, certain nationwide caps are met,
the account maintenance fee will be transferred from the
Federal Fund to the Operating Fund. The account maintenance
fee is equal to:
- for fiscal years 1999 and 2000, 0.12% of the original
principal amount of outstanding loans on which
insurance was issued under the FFELP; and
- for fiscal years 2001, 2002 and 2003, 0.10% of the
original principal amount of outstanding loans on
which insurance was issued under the FFELP.
ADDITIONAL RECALLS OF RESERVES
The 1998 Reauthorization Amendments direct the Secretary of Education
to demand that each guarantor participating in the FFELP pay its share of the
following amounts held in its Federal Fund:
- in fiscal year 2002, an aggregate of $85 million;
- in fiscal year 2006, an aggregate $82.5 million; and
- in fiscal year 2007, an aggregate $82.5 million.
The share demanded from each guarantor is determined in accordance with formulas
included in Section 422(i) of the Higher Education Act. If a guarantor charges
the maximum permitted 1% insurance premium, however, the recall may not result
in the depletion of its reserve funds below an amount equal to the amount of
lender claim payments paid during the 90 days before the date of return.
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VOLUNTARY FLEXIBLE AGREEMENTS
The 1998 Reauthorization Amendments authorize the Secretary of
Education to enter into agreements with guarantors which modify or waive many of
the requirements of the FFELP covered under existing agreements and otherwise
required by the Higher Education Act.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The weighted average lives of the notes and the certificates of any
series generally will be influenced by the rate at which the principal balances
of the related student loans are paid. Payment may be in the form of scheduled
amortization or prepayments. For this purpose, the term "prepayments" includes
prepayments in full or in part, including the discharge of student loans by
Consolidation Loans, as a result of:
- borrower default, death, disability or bankruptcy;
- the closing of the borrower's school;
- the school's false certification of borrower eligibility;
- subsequent liquidation of the student loan or collection of
the related guarantee payments; and
- repurchase of a student loan by the seller or the master
servicer for administrative reasons.
All of the student loans held by the trust are prepayable at any time without
penalty to the borrower.
A variety of economic, social and other factors, including the factors
described below and in the applicable prospectus supplement, influence the rate
at which student loans are prepaid. In general, the rate of prepayments may tend
to increase when cheaper alternative financing becomes available at interest
rates below those applicable to the student loans. However, because many student
loans bear interest at a rate that is either actually or effectively floating,
it is impossible to predict whether changes in prevailing interest rates will
correspond to changes in the interest rates on student loans. In addition, under
certain circumstances, the seller or the master servicer will be obligated to
repurchase, or arrange for the repurchase of, student loans from a given trust
under the related loan sale agreement or servicing agreement, as applicable, as
a result of the breach of applicable representations and warranties or
covenants. SEE "Description of the Transfer and Servicing Agreements--Sale of
Student Loans; Representations and Warranties" and "--Master Servicer Covenants"
in this prospectus. SEE ALSO "Description of the Transfer and Servicing
Agreements--Termination" and "--Optional Redemption" in this prospectus
regarding the option of the seller or other party to purchase the student loans
from a given trust. Moreover, the addition of student loans to a trust,
including during any Funding Period or Revolving Period, could affect the
weighted average lives of the securities of the related series. SEE "Description
of the Transfer and Servicing Agreements--Additional Fundings" in this
prospectus.
On the other hand, scheduled payments on the student loans, as well as
their maturities, may be extended pursuant to applicable grace, deferral and
forbearance periods, and for other reasons. The rate of defaults resulting in
losses on student loans, as well as the severity and timing of those losses, may
affect the rate of payment of the principal of, and the yield on, the notes and
the certificates. The rate of default factors may, in turn, affect the ability
of the guarantors to make necessary guarantee payments.
In light of the above considerations, there can be no assurance
regarding the amount of principal payments which will be made on the notes or
the certificates of a given series on each distribution date,
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since that amount will depend, in part, on the amount of principal collected on
the related pool of student loans during the applicable collection period. Any
reinvestment risk resulting from a faster or slower rate of prepayment of the
loans will be borne entirely by the noteholders and the certificateholders of
the related series. The related prospectus supplement may set forth certain
additional information with respect to the maturity and prepayment
considerations applicable to that pool of student loans and series of
securities.
POOL FACTORS AND TRADING INFORMATION
The "note pool factor" for each class of notes and the "certificate
pool factor" for each class of certificates (each, a "pool factor") will be a
seven-digit decimal computed by the indenture trustee before each distribution
date. Each pool factor will indicate the remaining outstanding principal amount
of the related class of notes or certificates as of that distribution date
(after giving effect to payments to be made on that distribution date), as a
fraction of the initial outstanding principal amount of the related class of
notes or the initial certificate balance of the related class of certificates.
Each pool factor will be 1.0000000 as of the closing date of the related series,
and thereafter will decline to reflect reductions in the outstanding principal
amount of the related class of notes or certificates, as applicable. A
securityholder's portion of the aggregate outstanding principal amount of the
related class of notes or certificates, as applicable, is the product of:
- the original denomination of the securityholder's note or
certificate,
TIMES
- the applicable pool factor.
If so provided in the related prospectus supplement with respect to a
trust, the securityholders will receive reports on or about each distribution
date concerning various matters including the payments the trust has received on
the student loans, the pool balance and the applicable pool factor.
Securityholders of record during any calendar year will be furnished information
for tax reporting purposes not later than the latest date permitted by law. SEE
"Additional Information Regarding the Securities--Reports to Securityholders" in
this prospectus.
DESCRIPTION OF THE NOTES
GENERAL
Each trust may issue one or more classes of notes of a given series
under an indenture. A form of the indenture has been filed as an exhibit to the
Registration Statement of which this prospectus is a part. The following
summarizes important terms of the notes and the indenture. It does not purport
to be complete and is qualified in its entirety by reference to the actual
provisions of the notes and the indenture.
Unless otherwise specified in the related prospectus supplement, each
class of notes initially will be represented by one or more notes registered in
the name of the nominee of The Depository Trust Company except as set forth
below. In this prospectus we refer to DTC and any successor depository selected
by the administrator as the "Depository". Unless otherwise specified in the
related prospectus supplement, the notes will be available for purchase in
denominations of $1,000 and integral multiple increments in book-entry form
only. DTC has informed the seller that its nominee will be Cede & Co., unless
another nominee is specified in the related prospectus supplement. Thus, either
Cede & Co. or another specified nominee is expected to be the holder of record
of the notes of each class. Unless and
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until definitive notes are issued under the limited circumstances described in
this prospectus or the related prospectus supplement, no noteholder will be
entitled to receive a physical instrument representing a note. All references in
this prospectus or in the related prospectus supplement to actions by holders of
notes held in book-entry form refer to actions taken by DTC upon instructions
from its participating organizations for each class of notes of the related
series and all references in this prospectus to distributions, notices, reports
and statements to noteholders refer to distributions, notices, reports and
statements to DTC or its nominee, as the case may be, as the registered holder
of the notes for distribution to noteholders in accordance with DTC's
procedures. SEE "Additional Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities" in this prospectus.
PRINCIPAL AND INTEREST ON THE NOTES
The related prospectus supplement will describe for each class of notes
of the related series the timing and priority of payment, seniority, allocations
of losses, interest rate, amount of principal payments or method for determining
them and amount of interest payments or method for determining them. The right
of holders of any class of notes to receive payments of principal and interest
may be senior or subordinate to the holders of any other class or classes of
notes of that series, as described in the related prospectus supplement. Unless
otherwise provided in the related prospectus supplement, payments of interest on
the notes of each series will be made prior to payments of principal. Each class
of notes may have a different interest rate, which may be a fixed, variable or
adjustable interest rate or any combination of the three. The related prospectus
supplement will specify the interest rate, or the method for determining the
interest rate, for each class of notes of the related series. SEE ALSO
"Additional Information Regarding the Securities--Fixed Rate Securities" and
"--Floating Rate Securities" in this prospectus. One or more classes of the
notes of a series may be redeemable in whole or in part under the circumstances
specified in the related prospectus supplement. Those circumstances may include
the exercise by the seller, or any other party that the related prospectus
supplement may name, of an option to purchase the related student loans.
Unless otherwise specified in the related prospectus supplement, all
classes of notes within a series will have the same priority as to interest
payments. Under certain circumstances, however, the amount available for
interest payments could be less than the amount of interest payable on the notes
on any of the dates specified for payments in the related prospectus supplement
(each, a "distribution date"). In that case, each class of notes will receive
its ratable share of the aggregate amount available for payment of interest on
the notes of that series based upon the aggregate amount of interest due on that
class. SEE "Description of the Transfer and Servicing Agreements--Payments of
Principal and Interest" and "--Credit and Cash Flow Enhancement" in this
prospectus.
In the case of a series of notes which includes two or more classes of
notes, the sequential order and priority of payment of principal and interest,
and any schedule or formula or other provisions determining principal and
interest payments, on each class will be set forth in the related prospectus
supplement. Payments of principal and interest on any class of notes will be
made on a pro rata basis among all the notes of that class.
In the case of a series of notes relating to a trust that has a
Pre-Funding Account or Collateral Reinvestment Account, any amount that remains
on deposit in the applicable account on the distribution date that occurs on or
immediately after the last day of the related Funding Period or Collection
Period, as applicable, after giving effect to all Additional Fundings on or
prior to that date, will be distributed as principal of the notes in an
aggregate principal amount described in the related prospectus supplement.
SEE "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" in this prospectus for a description of
the reserve account and the distribution of amounts in excess of the "Specified
Reserve Account Balance" as that term is defined in the related prospectus
supplement.
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THE INDENTURE
MODIFICATION OF INDENTURE. If a majority of the holders of the
outstanding notes of a series give their consent, the indenture trustee and the
related trust may execute a supplemental indenture to add to, change or
eliminate any provisions relating to the notes in the indenture and, in so
doing, may modify in any manner the rights of the related noteholders, except as
provided below.
Unless otherwise specified in the related prospectus supplement,
without the consent of the holder of each outstanding note in a series that
would be affected, no supplemental indenture will:
- change the due date of any installment of principal or
interest on that note or reduce its principal amount, interest
rate or redemption price;
- change the place of payment where, or the currency in which,
interest or principal on that note is payable;
- impair the right of the holder of that note to sue to enforce
certain payment provisions of the indenture;
- change the provisions of the indenture regarding how the
trust, the seller, any of their affiliates, or any obligor on
the notes may, as a holder of a note, vote;
- permit the creation of any lien ranking before or on a parity
with the lien of the indenture with respect to any of the
collateral for the notes of that series;
- terminate the lien of the indenture on the collateral; or
- deprive the holder of any note of the security created by the
lien of the indenture.
In addition, holders of certain percentages of the aggregate amount of the
outstanding notes of a given series must:
- approve any supplemental indenture;
- consent to waiving compliance with certain provisions of the
indenture concerning defaults and the consequences of
defaults;
- approve giving direction to the related eligible lender
trustee to sell or liquidate the student loans in the related
trust, if the proceeds of the sale would be insufficient to
pay the principal amount and accrued but unpaid interest on
the outstanding notes of that series; and
- consent to amending sections of the indenture to alter any
percentages required for consent.
Unless otherwise specified in the related prospectus supplement with
respect to a series of notes, without the consent of the holder of each
outstanding note affected, no supplemental indenture will reduce any percentages
required for consent.
Unless otherwise specified in the applicable prospectus supplement, the
related trust and indenture trustee may also enter into supplemental indentures,
without obtaining the consent of noteholders of that series, in order to:
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- add any provisions to or change in any manner or eliminate any
of the provisions of the related indenture; or
- modify in any manner the rights of noteholders of that series,
so long as doing so will not, in the opinion of counsel
satisfactory to the indenture trustee, materially and
adversely affect the interest of any noteholder of that
series.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. Each indenture will
list certain "Events of Default" with respect to the notes of the related
series. Events of Default will impact interest and principal payments on those
notes. Unless otherwise specified in the related prospectus supplement, Events
of Default under the indenture will consist of the following:
- a default for five days or more on any interest payment on a
note of that series after the interest payment first becomes
due and payable;
- a default on either the principal payment or an installment of
the principal of a note of that series when it first becomes
due and payable;
- a default in the observance or performance of any covenant or
agreement of the applicable trust made in the related
indenture that continues for 30 days after
- the trust has been notified by the indenture trustee,
or
- the trust and the indenture trustee have been
notified by the holders of at least 25% in principal
amount of the notes then outstanding (if, however,
the trust demonstrates that it is making a good faith
attempt to cure the default, the 30-day period may be
extended to 90 days by the indenture trustee); or
- the discovery that any representation or warranty made by the
applicable trust in the indenture or in any certificate
delivered in connection with the indenture was incorrect in a
material respect as of the time made, if not cured within 30
days after
- the trust has been notified by the indenture trustee,
or
- the trust and indenture trustee have been notified by
the holders of at least 25% in principal amount of
the Notes then outstanding (if, however, the trust
demonstrates that it is making a good faith attempt
to cure such default, the 30-day period may be
extended to 90 days by the indenture trustee); or
- certain events of bankruptcy, insolvency, receivership or
liquidation of the trust.
However, the amount of principal required to be distributed on any
distribution date to noteholders of a series under the related indenture will
generally be limited to amounts available after payment of all prior obligations
of the related trust. Therefore, unless otherwise specified in the related
prospectus supplement, the failure to pay principal on a class of notes
generally will not result in the occurrence of an Event of Default until the
final scheduled distribution date for that class of notes. With respect to any
series of notes, if interest is paid at a variable rate based on an index, the
related prospectus supplement may provide that, if for any distribution date the
interest rate on those notes as calculated based on the index is greater than an
alternate rate calculated for that distribution date based on interest
collections on the student loans (the amount of such difference, the "index
shortfall carryover"), the interest rate for that distribution date will be the
alternate rate and the index shortfall carryover will be payable as described in
the prospectus supplement. Unless otherwise provided in the prospectus
supplement, payment of the index shortfall carryover will be lower in priority
than payment of interest on the notes at their interest rate, whether the
interest rate is based on the index or on the
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alternate rate. Accordingly, the failure to pay the index shortfall carryover on
any distribution date generally shall not constitute a default in the payment of
interest on the notes.
If an Event of Default should occur and be continuing with respect to
the notes of any series, the related indenture trustee, or holders of a majority
in principal amount of the notes of that series then outstanding, may declare
the principal of the notes to be immediately due and payable. Unless otherwise
specified in the related prospectus supplement, the declaration may be rescinded
by the holders of a majority in principal amount of the notes of that series
then outstanding if:
- the eligible lender trustee on behalf of the related trust has
paid (or deposited with the indenture trustee) a sum
sufficient to pay:
- all principal and interest on the notes and all other
amounts that would then be due under the related
indenture or on the notes if the Event of Default
giving rise to the acceleration had not occurred, and
- all sums paid or advanced by the indenture trustee
under the indenture and the reasonable compensation,
expenses, disbursements and advances of the indenture
trustee and its agents and counsel;
and
- all Events of Default, other than failure to pay the principal
of the notes that became due solely as a result of the
acceleration, have been cured or, under the circumstances
described below, have been waived.
If the notes of any series have been declared to be due and payable
following an Event of Default, the related indenture trustee in its discretion
may:
- exercise remedies as a secured party,
- require the related eligible lender trustee to sell the
student loans, or
- elect to have the related eligible lender trustee maintain
possession of the student loans and continue to apply
collections on the student loans as if there had been no
declaration of acceleration.
Unless otherwise specified in the related prospectus supplement, however, the
indenture trustee is prohibited from directing the eligible lender trustee to
sell the student loans in the related trust following an Event of Default, other
than a default in the payment of any principal or a default for five days or
more in the payment of any interest on any note of that series, unless:
- the holders of all the outstanding notes of that series
consent to the sale;
- the proceeds of the sale are sufficient to pay in full the
principal and accrued interest on the outstanding notes at the
date of the sale; or
- the indenture trustee determines that the collections on the
student loans would not be sufficient on an ongoing basis to
make all payments on the notes as they would have become due
if the obligations had not been declared due and payable, and
the indenture trustee obtains the consent of the holders of
66 2/3% of the aggregate principal amount of the notes of that
series then outstanding.
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Subject to the provisions of the applicable indenture relating to the
duties of the indenture trustee, if an Event of Default should occur and be
continuing with respect to a series of notes, the indenture trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders of the notes, if the indenture
trustee reasonably believes that it will not be adequately indemnified against
the related costs, expenses and liabilities that it might incur. Subject to the
indemnification provisions and certain limitations contained in the indenture,
the holders of a majority in principal amount of the outstanding notes of a
given series will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the indenture trustee, and
the holders of a majority in principal amount of the notes of that series then
outstanding may, in certain cases, waive any default with respect to those
notes, EXCEPT:
- a default in the payment of principal or interest, or
- a default in respect of a covenant or provision of the
indenture that cannot be modified without the waiver or
consent of all the holders of the outstanding notes.
Unless otherwise specified in the related prospectus supplement, no
holder of notes of any series will have the right to institute any proceeding
with respect to the related indenture, UNLESS:
- the holder has previously notified the applicable indenture
trustee in writing of a continuing Event of Default;
- the holders of at least 25% in principal amount of the
outstanding notes of that series have requested in writing
that the indenture trustee institute a proceeding in its own
name as indenture trustee;
- the holder or holders have offered the indenture trustee
reasonable indemnity;
- the indenture trustee has for 60 days failed to institute the
proceeding; and
- no direction inconsistent with the written request has been
given to the indenture trustee during the 60-day period by the
holders of a majority in principal amount of the outstanding
notes of that series.
In addition, each indenture trustee and the holders of the related
notes will covenant that they will not at any time institute against the trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
In the absence of an express agreement to the contrary, none of the
following parties will be personally liable for the payment of principal or
interest on the notes of any series or for the agreements of the trust contained
in the related indenture: the indenture trustee, the seller, the administrator,
the master servicer, the eligible lender trustee in its individual capacity, any
holder of a certificate, or any of their respective owners, beneficiaries,
agents, officers, directors, employees, successors or assigns.
INDENTURE COVENANTS. Each indenture will provide that the related trust
may not consolidate with or merge into any other entity, UNLESS:
- the resulting or surviving entity is organized under the laws
of the United States, any of the several states or the
District of Columbia;
- the resulting or surviving entity expressly assumes the
trust's obligation to make due and punctual payments on the
notes of the related series and to perform every agreement and
covenant of the trust under the indenture;
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- no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation;
- the trust has been advised that the ratings of the notes and
the certificates of that series would not be reduced or
withdrawn by the applicable rating agencies as a result of the
merger or consolidation; and
- the trust has received an opinion of counsel to the effect
that the consolidation or merger would have no material
adverse federal or Rhode Island state tax consequence to the
trust or to the holder of any note or certificate of that
series.
Each trust is prohibited from taking various actions, including the
following:
- to sell, transfer, exchange or otherwise dispose of any of the
assets of the trust except as expressly permitted by the
applicable indenture, Transfer and Servicing Agreements or
related documents (collectively, the "Related Documents");
- to claim any credit on, or make any deduction from, the
principal and interest payable on the notes of that series
other than amounts withheld under the Internal Revenue Code or
applicable state law, or to assert any claim against any
present or former holder of the notes because of the payment
of taxes levied or assessed upon the trust;
- to dissolve or liquidate in whole or in part except as
contemplated by the Related Documents;
- to permit the validity or effectiveness of the applicable
indenture to be impaired or to permit any person to be
released from any covenants or obligations with respect to the
notes under the indenture except as may be expressly permitted
by the terms of the indenture; or
- to permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on, or extend to
or otherwise arise upon or burden, the assets of the trust, or
any interest in those assets or the proceeds of those assets,
except as expressly permitted by the Related Documents.
No trust may engage in any activity other than those specified under
the section of the related prospectus supplement entitled "Formation of the
Trust". No trust will incur, assume or guarantee any indebtedness other than
indebtedness incurred under the notes of the related series and the indenture or
otherwise in accordance with the Related Documents.
ANNUAL COMPLIANCE STATEMENT. Each trust will be required to file
annually with the applicable indenture trustee a written statement that it has
fulfilled its obligations under the related indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. Each indenture trustee will be
required to mail each year to the related noteholders a brief report about,
among other things, its eligibility and qualification to continue as indenture
trustee under the indenture; any amounts it advanced under the indenture; the
amount, interest rate and maturity date of certain indebtedness that the trust
may owe to the indenture trustee in its individual capacity; the property and
funds physically held by the indenture trustee in its capacity as indenture
trustee; and any action taken that materially affects the notes but has not
previously been reported.
SATISFACTION AND DISCHARGE OF THE INDENTURE. The indenture will be
discharged with respect to the collateral securing the related notes when all
the notes have been delivered to the indenture trustee for cancellation or, with
certain limitations, when funds sufficient to pay the notes in full have been
deposited with the indenture trustee.
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THE INDENTURE TRUSTEE. The indenture trustee for a series of notes will
be specified in the related prospectus supplement. The indenture trustee for any
series may resign at any time, in which event the trust will be obligated to
appoint a successor indenture trustee for that series. A trust may also remove
the indenture trustee if it ceases to be eligible to continue as indenture
trustee under the indenture or if it becomes insolvent. In that event, the trust
must appoint a successor indenture trustee for the notes of that series. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of notes does not become effective until the successor
indenture trustee has accepted its appointment.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Unless otherwise specified in the related prospectus supplement, each
trust will issue one or more classes of certificates of a given series under a
trust agreement. A form of the trust agreement has been filed as an exhibit to
the Registration Statement of which this prospectus is a part. The following
summarizes important terms of the certificates and the trust agreement. It does
not purport to be complete and is qualified in its entirety by reference to the
actual provisions of the certificates and the trust agreement.
Unless otherwise specified in the related prospectus supplement, each
class of certificates will initially be represented by a single certificate
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related prospectus supplement and except for the
certificates of a given series that are purchased by NMF, the certificates will
be available for purchase in book-entry form only in minimum denominations of
$1,000 and integral multiple increments of $1,000.
The seller has been informed by DTC that DTC's nominee will be Cede &
Co., unless another nominee is specified in the related prospectus supplement.
Accordingly, Cede & Co. is expected to be the holder of record of the
certificates of each series except for those purchased by NMF. Unless and until
Definitive Certificates are issued under the limited circumstances described in
this prospectus or in the related prospectus supplement, no certificateholder,
other than NMF, will be entitled to receive a physical certificate representing
a certificate. All references in this prospectus and in the related prospectus
supplement to actions by certificateholders other than NMF refer to actions
taken by DTC upon instructions from its participating organizations and all
references in this prospectus and in the related prospectus supplement to
distributions, notices, reports and statements to certificateholders other than
NMF refer to distributions, notices, reports and statements to DTC or its
nominee, as the case may be, as the registered holder of the certificates, for
distribution to certificateholders in accordance with DTC's procedures. SEE
"Additional Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities" in this prospectus.
Unless otherwise specified in the related prospectus supplement,
certificates of a given series that are owned by NMELC or its affiliates will be
entitled to equal and proportionate benefits under the applicable trust
agreement, except that the certificates owned by NMELC and its affiliates will
be deemed not to be outstanding for the purpose of determining whether the
required percentage of certificateholders has given any request, demand,
authorization, direction, notice, consent or other action under the Related
Documents. However, if NMELC or its affiliates own all the certificates of given
series, their certificates will be deemed outstanding for all purposes.
PRINCIPAL AND INTEREST ON THE CERTIFICATES
The related prospectus supplement will describe for each class of
certificates of a given series the timing and priority of distributions,
seniority, allocations of losses, pass-through rate and amount of principal
payments or method for determining them, and amount of interest payments
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or method for determining them. Payments of interest on the certificates will
be made on each distribution date and will be made prior to payments of
principal on the certificates. Each class of certificates may have a
different pass-through rate, which may be a fixed, variable or adjustable
pass-through rate or any combination of the three. The related prospectus
supplement will specify the pass-through rate for each class of certificates
of a given series or the method for determining the pass-through rate. SEE
ALSO "Additional Information Regarding the Securities--Fixed Rate Securities"
and "--Floating Rate Securities" in this prospectus. Unless otherwise
provided in the related prospectus supplement, payments on the certificates
of a given series will be subordinate to payments on the notes of that series
as more fully described in the prospectus supplement. Payments of interest
and principal on any class of certificates will be made on a pro rata basis
among all the certificates of that class.
In the case of a series of certificates that includes two or more
classes, the timing, sequential order, priority of payment or amount of interest
and principal payments, and any schedule or formula or other provisions for
determining principal and interest payments for each class of certificates shall
be set forth in the related prospectus supplement.
SEE "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--RESERVE ACCOUNT" in this prospectus for a description of
the reserve account and the distribution of amounts in excess of the "Specified
Reserve Account Balance" as that term is defined in the related prospectus
supplement.
ADDITIONAL INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of securities may be "fixed rate securities" that bear
interest at a fixed rate per year or "floating rate securities" that bear
interest at a variable or adjustable rate per year, as more fully described
below and in the applicable prospectus supplement. Each class of fixed rate
securities will bear interest at the annual interest rate, if a note, or
interest return or pass-through rate, if a certificate, specified in the
applicable prospectus supplement. Unless otherwise set forth in the applicable
prospectus supplement, interest on each class of fixed rate securities will be
computed on the basis of a 360-day year of twelve 30-day months. SEE
"Description of the Notes--Principal and Interest on the Notes" and "Description
of the Certificates--Principal and Interest on the Certificates" in this
prospectus.
FLOATING RATE SECURITIES
Each class of floating rate securities will bear interest during each
"Interest Reset Period", as that term is defined in the related prospectus
supplement, at an annual rate determined by reference to an interest rate basis,
plus or minus the spread, if any, or multiplied by the spread multiplier, if
any, in each case as specified in the related prospectus supplement. The
"spread" is the number of basis points (one basis point being equal to one
one-hundredth of a percentage point) that may be specified in the applicable
prospectus supplement for a particular class, and the "spread multiplier" is the
percentage that may be specified in the prospectus supplement for a class.
The applicable prospectus supplement will designate the interest rate
basis for a given floating rate security based on LIBOR, commercial paper rate,
federal funds rate, U.S. Treasury securities rate, negotiable certificates of
deposit rate or other rates set forth in the prospectus supplement.
As specified in the applicable prospectus supplement, floating rate
securities of a given class may also have either or both of the following (in
each case expressed as an annual rate):
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- a maximum limitation, or ceiling, on the rate at which
interest may accrue during any interest period; and
- a minimum limitation, or floor, on the rate at which interest
may accrue during any interest period.
In addition to any maximum interest rate that may be applicable to any class of
floating rate securities, the interest rate applicable to any class of floating
rate securities will not exceed the maximum rate permitted by applicable law.
Each trust that issues a class of floating rate securities will
appoint, and enter into agreements with, a calculation agent to calculate
interest on that class. The applicable prospectus supplement will identify the
calculation agent which may be the administrator, the eligible lender trustee or
the indenture trustee for that series. In the absence of manifest error, all
determinations of interest by the calculation agent shall be conclusive for all
purposes and binding on the holders of the floating rate securities. Unless
otherwise specified in the applicable prospectus supplement, all percentages
resulting from any calculation of the rate of interest on a floating rate
security will be rounded, if necessary, to the nearest 1/100,000 of 1%
(.0000001), with five one-millionths of a percentage point being rounded upward.
BOOK-ENTRY REGISTRATION
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities for its participating
organizations ("Participants") and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, securities held through DTC may do so only through Participants and Indirect
Participants. In addition, securityholders will receive all distributions of
principal and interest from the related indenture trustee or the related
eligible lender trustee, as applicable, through Participants and Indirect
Participants. Under a book-entry format, securityholders may experience some
delay in their receipt of payments, since payments will be forwarded by the
applicable trustee to DTC's nominee. DTC will forward those payments to its
Participants, which thereafter will forward them to Indirect Participants or
securityholders. It is anticipated that, except for NMF, the only
"securityholder", "certificateholder" and "noteholder" with respect to any
series will be DTC's nominee. Securityholders will not be recognized by the
applicable trustee as noteholders or certificateholders under the indenture or
trust agreement, as the case may be, and securityholders will be permitted to
exercise the rights of securityholders only indirectly through DTC and its
Participants.
Under the rules, regulations and procedures creating DTC and affecting
its operations (the "DTC Rules"), DTC is required to make book-entry transfers
of securities among Participants on whose behalf it acts with respect to the
securities and to receive and transmit principal and interest payments on the
securities. Participants and Indirect Participants with which securityholders
have accounts with respect to the securities are likewise required to make
book-entry transfers and receive and transmit payments of principal and interest
on the securities on behalf of their respective securityholders. Accordingly,
although securityholders will not possess securities, the DTC Rules provide a
mechanism by which Participants will receive payments and will be able to
transfer their interests.
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Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and certain banks, the ability of a
securityholder to pledge securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to the
securities, may be limited since securityholders will not possess physical
certificates for their securities.
DTC has advised the seller that it will take any action that a
securityholder is permitted to take under the related indenture or trust
agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that those
actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, neither the administrator nor the applicable
trustee for any trust will have any liability for any aspect of the records
relating to payments or the payments themselves, made on account of beneficial
ownership interests of the securities held by DTC's nominee, or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
DEFINITIVE SECURITIES
Unless otherwise specified in the related prospectus supplement and
except with respect to the certificates of a given series that may be purchased
by the NMF, the notes and the certificates of a given series will be issued in
fully registered, certificated form ("definitive notes" and "definitive
certificates", respectively, and "definitive securities", collectively) to
noteholders or certificateholders or their respective nominees, rather than to
DTC or its nominee, only in any of the following circumstances:
- if the administrator advises the applicable trustee in writing
that DTC is no longer willing or able to discharge properly
its responsibilities as depository for the securities and the
administrator is unable to locate a qualified successor;
- if the administrator, at its option, elects to terminate the
book-entry system through DTC; or
- if after the occurrence of an Event of Default or a Master
Servicer Default (as defined below), securityholders
representing at least a majority of the outstanding principal
amount of the notes or the certificates, as the case may be,
of that series give written notice to the applicable trustee
through DTC that the continuation of a book-entry system for
the notes or certificates through DTC or its successor is no
longer in the best interest of the securityholders.
Upon the occurrence of any event described in the bullet points above,
the applicable trustee will be required to notify all applicable securityholders
through Participants of the availability of definitive securities. When DTC
surrenders the definitive securities, the applicable trustee will reissue to the
securityholders the corresponding securities as definitive securities upon
receipt of instructions for re-registration. From then on, payments of principal
and interest on the definitive securities will be made by the applicable
trustee, in accordance with the procedures set forth in the related indenture or
trust agreement, as the case may be, directly to the holders of definitive
securities in whose names the definitive securities were registered at the close
of business on the applicable record date specified in the related prospectus
supplement. Payments will be made by check mailed to the address of each holder
as it appears on the register maintained by the applicable trustee. However, the
final payment on any definitive security will be made only upon presentation and
surrender of that definitive security at the office or agency specified in the
notice of final distribution.
Definitive securities will be transferable and exchangeable at the
offices of the applicable trustee or of a registrar named in a notice delivered
to the holders of definitive securities. No service charge will be imposed for
any registration of transfer or exchange, but the applicable trustee may require
payment of a sum sufficient to cover any related tax or other governmental
charge that may be imposed.
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LIST OF SECURITYHOLDERS
Unless otherwise specified in the related prospectus supplement,
holders of the notes of a series evidencing at least 25% of the aggregate
outstanding principal balance of those notes may, by written request to the
related indenture trustee, obtain access to the list of all noteholders
maintained by the indenture trustee for the purpose of communicating with other
noteholders with respect to their rights under the indenture or under the notes.
The indenture trustee may elect not to afford the requesting noteholders access
to the list if it agrees to mail the desired communication or proxy, for and at
the expense of the requesting noteholders, to all noteholders of that series.
Unless otherwise specified in the related prospectus supplement, three
or more certificateholders of any series or one or more holders of certificates
of that series evidencing at least 25% of the certificate balance of those
certificates may, by written request to the eligible lender trustee, obtain
access to the list of all certificateholders for the purpose of communicating
with other certificateholders with respect to their rights under the related
trust agreement or under the certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of securities, on each distribution date,
the administrator will provide to securityholders of record as of the related
record date a statement setting forth substantially the same information as is
required to be provided on the periodic report to the indenture trustee and the
trust described under "Description of Transfer and Servicing
Agreements--Statements to the Indenture Trustee and the Trust" in this
prospectus. Those statements will be filed with the SEC during the period
required by Rule 15d-1 under the Securities Exchange Act of 1934, as amended.
The statements provided to securityholders will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of each trust, the applicable
trustee will mail to each person, who at any time during that calendar year was
a holder of securities issued by that trust and received any payment, a
statement containing certain information to enable the securityholder to prepare
its federal income tax return. SEE "U.S. Federal Income Tax Consequences" in
this prospectus.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
Agreements Covered
In the sections that follow, we have summarized certain terms of the
following agreements (collectively, the "Transfer and Servicing Agreements"):
- the loan sale agreement, under which the related eligible
lender trustee will purchase student loans from the seller on
behalf of the applicable trust;
- the loan servicing agreement, under which the master servicer
will service the student loans for the trust;
- the administration agreement, under which the administrator
will undertake certain administrative duties for the trust and
the student loans; and
- the trust agreement, under which a trust will be created and
the related certificates will be issued.
Forms of each of the Transfer and Servicing Agreements have been filed as
exhibits to the Registration Statement of which this prospectus is a part.
However, the following summaries do not purport to be
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complete and are qualified in their entirety by reference to the actual
provisions of the Transfer and Servicing Agreements.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On the closing date specified with respect to any given trust in the
related prospectus supplement, the seller will sell and assign to the related
eligible lender trustee on behalf of the trust, without recourse except as
provided in the loan sale agreement, its entire interest in those student loans
as well as in all collections received and to be received on the loans on and
after the cutoff date specified in the related prospectus supplement. The sale
will be effected under the related loan sale agreement. Each student loan will
be identified in a schedule appearing as an exhibit to the loan sale agreement,
which may be in electronic form. Concurrently with the sale and assignment of
the student loans, the eligible lender trustee will execute, authenticate and
deliver the related certificates and notes. The net proceeds received from the
sale of the related certificates and notes will be applied to the purchase of
the student loans.
In each loan sale agreement, the seller will make certain
representations and warranties to the related trust with respect to the student
loans for the benefit of the certificateholders and the noteholders of that
series, including the following:
- Each student loan, on the date it is transferred to the trust,
is free and clear of all security interests, liens, charges
and encumbrances and no offsets, defenses or counterclaims
with respect to any loan have been asserted or threatened.
- The information provided in the loan sale agreement with
respect to the student loans is true and correct as of the
cutoff date.
- Each student loan, at the time it was originated, complied and
at the closing date complies, in all material respects, with
applicable federal and state laws, including the Higher
Education Act and applicable restrictions imposed by the
FFELP, and with the applicable guarantee agreement.
Unless otherwise provided in the related prospectus supplement,
following the discovery by or notice to the seller of a breach of any
representation or warranty with respect to a student loan that materially and
adversely affects the interests of the related noteholders or certificateholders
in that loan, the seller will repurchase that loan from the eligible lender
trustee unless the breach is cured within 60 days. However, if a breach does not
affect any guarantor's obligation to guarantee payment of that loan, it will be
deemed not to have a material adverse effect on the noteholders' or
certificateholders' interests.
Any required repurchase will be made within 30 days following the end
of the 60-day cure period. The repurchase price will be equal to the unpaid
principal balance of that loan plus accrued and unpaid interest to the day of
repurchase (the "Purchase Amount"). Alternatively, the seller may, at its
option, remit all or a portion of the Purchase Amount by substituting into the
related trust a student loan that meets certain criteria set forth in the loan
sale agreement as a replacement for the student loan as to which the breach
occurred (a "Qualified Substitute Student Loan"). In addition, the seller will
reimburse the related trust for any accrued interest amounts that a guarantor
refuses to pay under its guarantee agreement, or for any interest subsidy
payments and special allowance payments that are lost or that must be repaid to
the Department of Education as a result of a breach of the seller's
representations or warranties with respect to that loan. The repurchase,
substitution and reimbursement obligations of the seller will constitute the
sole remedy available to the trust, the related noteholders and the related
certificateholders for an uncured breach. The seller's repurchase and
reimbursement obligations are contractual obligations under the related loan
sale agreement and they may
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be enforced against the seller. However, a breach of those obligations by the
seller will not constitute an Event of Default.
To assure uniform quality in servicing and reduce administrative costs,
the applicable eligible lender trustee on behalf of the trust will appoint the
master servicer as custodian of the promissory notes and other documents related
to the student loans. The records and computer systems of the seller and the
master servicer will reflect the sale and assignment by the seller of the
student loans to the related eligible lender trustee on behalf of the trust. The
administrator will file UCC financing statements reflecting the sale and
assignment.
ADDITIONAL FUNDINGS
In the case of a trust that has a Pre-Funding Account or a Collateral
Reinvestment Account, it will use funds on deposit in that account from time to
time during the related Funding Period or Revolving Period, as applicable, for
the following purposes:
(i) to make interest payments to noteholders and
certificateholders in lieu of collections of interest on
certain of the student loans to the extent that interest is
not paid currently but is capitalized and added to the
principal balance of those loans; and
(ii) to fund the addition of student loans to the trust as
described in the related prospectus supplement.
The additional student loans may be purchased by the trust from the seller or
may be originated by the trust, if and to the extent specified in the related
prospectus supplement.
There can be no assurance that substantially all of the amounts on
deposit in any Pre-Funding Account or Collateral Reinvestment Account will be
expended during the related Funding Period or Revolving Period. If the amount
initially deposited into a Pre-Funding Account or a Collateral Reinvestment
Account for a series has not been reduced to zero by the end of the related
Funding Period or Revolving Period, respectively, the amounts remaining on
deposit will be distributed to the related securityholders as described in the
related prospectus supplement.
If and to the extent specified in the related prospectus supplement,
the trust may use payments on the student loans, or may exchange student loans
with the seller, in order to pay for the addition of student loans after any
Funding Period or Revolving Period. If and to the extent specified in the
related prospectus supplement, a trust that does not have a Pre-Funding Account
or a Collateral Account may also use payments on the student loans, or may
exchange student loans with the seller, in order to pay for the addition of
student loans to that trust after the closing date for the securities issued by
that trust.
ACCOUNTS
With respect to each trust, the administrator will establish and
maintain with the applicable indenture trustee one or more accounts
(collectively, the "collection account"). The collection account will be in the
name of the indenture trustee on behalf of the related noteholders and
certificateholders, and all payments made on the related student loans will be
deposited in it. Any other accounts to be established with respect to a trust,
including any reserve account, any Pre-Funding Account and any Collateral
Reinvestment Account, will be described in the related prospectus supplement.
For any series of securities, funds in the collection account, any
reserve account, any Pre-Funding Account, any Collateral Reinvestment Account
and any other accounts identified in the related prospectus supplement
(collectively, the "Issuer Accounts") will be invested in "eligible investments"
as provided in the applicable trust indenture. "Eligible investments"
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are generally limited to investments acceptable to the applicable rating
agencies as being consistent with their ratings of the securities. Except as
described below or in the related prospectus supplement, eligible investments
are limited to financial obligations or instruments that mature not later than
the business day immediately before the next applicable distribution date.
However, to the extent permitted by the rating agencies, funds in any reserve
account may be invested in instruments that will not mature before the next
distribution date and will not be sold to meet any shortfalls. Thus, the amount
of cash in any reserve account at any time may be less than the balance of the
reserve account. If the amount required to be withdrawn from any reserve account
to cover shortfalls in collections on the related student loans, as provided in
the related prospectus supplement, exceeds the amount of cash in the reserve
account, a temporary shortfall in the amounts paid to the related noteholders or
certificateholders could result. Such a shortfall could, in turn, increase the
average lives of the notes or certificates of that series. Except as otherwise
specified in the related prospectus supplement, investment earnings on funds
deposited in the Issuer Accounts, net of losses and investment expenses
(collectively, "Investment Earnings"), will be deposited in the collection
account on each distribution date and will be treated as collections of interest
on the related student loans.
The Issuer Accounts will be maintained as eligible deposit accounts. An
"eligible deposit account" is EITHER:
- a segregated account with an eligible institution,
OR
- a segregated trust account with the corporate trust department
of a depository institution organized under the laws of the
United States, any of the several states or the District of
Columbia or any domestic branch of a foreign bank, having
corporate trust powers and acting as trustee for funds
deposited in that account, so long as any of the securities of
that depository institution have a credit rating from each
applicable rating agency in one of its generic rating
categories that signifies investment grade.
An "eligible institution" is a depository institution organized under the laws
of the United States, any one of the several states or the District of Columbia
or any domestic branch of a foreign bank that meets both the following criteria:
- it has a long-term unsecured debt rating acceptable to the
rating agencies or a short-term unsecured debt rating or
certificate of deposit rating acceptable to the rating
agencies, and
- its deposits are insured by the Federal Deposit Insurance
Corporation.
SERVICING PROCEDURES
Under each loan servicing agreement, the master servicer will agree to
service and otherwise manage the student loans acquired from time to time for
the related trust. Each loan servicing agreement requires the master servicer
to:
- perform all services and duties customary to the servicing of
student loans, including all collection practices,
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- do so in the same manner in which the master servicer services
student loans in its own portfolio, and
- comply with all standards and procedures provided for in the
Higher Education Act, the guarantee agreements and all other
applicable federal and state laws.
Without limiting the foregoing, the duties of the master servicer with respect
to each trust under the related loan servicing agreement include, but are not
limited to, the following:
- to collect and deposit into the collection account all
payments on the student loans (including to claim and obtain
any guarantee payments, interest subsidy payments and special
allowance payments with respect to the loans);
- to respond to borrower inquiries and investigate
delinquencies; and
- to send out statements and payment coupons.
In addition, the master servicer will keep ongoing collection and other records
with respect to the student loans and will furnish monthly and annual statements
to the administrator, in accordance with the master servicer's customary
practices and as otherwise required in the related loan servicing agreement.
The master servicer may from time to time perform its servicing
obligations under any loan servicing agreement through subservicing agreements
with affiliated or unrelated third-party loan servicers. Details with respect to
any subservicing agreements and third-party servicers will be provided in the
applicable prospectus supplement.
PAYMENTS ON STUDENT LOANS
With respect to each trust, the master servicer will deposit into the
related collection account, within two business days after receipt and
identification, all payments and other proceeds on the related student loans
that it receives during each Collection Period specified in the related
prospectus supplement. The eligible lender trustee will deposit into the
collection account, within two business days after receipt and identification,
all interest subsidy payments and all special allowance payments for the student
loans received during the related Collection Period.
MASTER SERVICER COVENANTS
With respect to each trust, the master servicer will make the following
covenants in the related loan servicing agreement:
- to fulfill all its obligations regarding the student loans;
- to comply in all material respects with all requirements of
law in connection with servicing the student loans, the
failure to comply with which would have a materially adverse
effect on the related certificateholders or noteholders;
- not to permit any student loan to be rescinded or cancelled
except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the
related eligible lender trustee and any related indenture
trustee;
- to do nothing to impair the rights of the related noteholders
and the related certificateholders in the student loans; and
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- not to reschedule, revise, defer or otherwise compromise
payments due on any student loan except pursuant to any
applicable deferral or forbearance periods or otherwise in
accordance with its guidelines for servicing student loans in
general, and those of the seller in particular, and any
applicable FFELP or guarantor requirements.
Unless otherwise specified in the related prospectus supplement, each
loan servicing agreement provides that if the administrator or the master
servicer discovers, or receives written notice, that any covenant of the master
servicer set forth above has not been complied with in all material respects
(and the noncompliance has not been cured within 60 days and has a materially
adverse effect on the interests of the noteholders or the certificateholders in
a student loan), the master servicer must arrange for the purchase of that loan
as of the first day following the end of the 60-day period that is the last day
of a Collection Period. In that event, the master servicer will deposit into the
collection account an amount equal to the Purchase Amount of the loan. At the
same time, the trust's interest in the purchased student loan will automatically
be assigned to the master servicer or its designee, which will then be entitled
to all payments made on that loan. [In addition, if so specified in the related
prospectus supplement, the master servicer will reimburse the related trust for
any related accrued interest amounts that a guarantor refuses to pay under its
guarantee agreement, or for any prior related interest subsidy payments and
special allowance payments that are lost or that must be repaid to the
Department of Education as a result of the master servicer's breach.]
If, because of a breach of the seller's representations and warranties
contained in the loan sale agreement, the seller must repurchase a student loan
that would otherwise have to be purchased by the master servicer in the
circumstances described in the preceding paragraph, the master servicer will not
be required to do so.
MASTER SERVICER COMPENSATION
Unless otherwise specified in the related prospectus supplement, the
master servicer will be entitled to receive a servicing fee for each Collection
Period at the annual percentage (specified in the related prospectus supplement)
of the outstanding principal balance of the student loans as of the last day of
the related Collection Period, together with any other administrative fees and
similar charges specified in the related prospectus supplement, as compensation
for servicing the related student loans in that trust (the "Servicing Fee").
Unless otherwise provided in the related prospectus supplement, the Servicing
Fee (together with any portion of the Servicing Fee that remains unpaid from
prior distribution dates) will be paid before any payment on the related
securities.
The Servicing Fee will compensate the master servicer for performing
the functions of a third-party servicer of student loans as an agent for their
beneficial owner. Those functions include collecting and posting all payments,
responding to inquiries of borrowers, investigating delinquencies, pursuing,
filing and directing the payment of any guarantee payments, interest subsidy
payments or special allowance payments, accounting for collections and
furnishing periodic accounting reports to the related administrator.
PAYMENTS OF PRINCIPAL AND INTEREST
With respect to each series of securities, beginning on the
distribution date specified in the related prospectus supplement, payments of
principal and interest on each class of the securities will be made by the
applicable trustee to the noteholders and the certificateholders of that series.
The timing, calculation, allocation, order, source, priorities of and
requirements for all payments to each class of notes and all payments to each
class of certificates of that series will be set forth in the related prospectus
supplement.
With respect to each trust, collections on the related student loans
will be distributed from the collection account on each distribution date to
noteholders and certificateholders to the extent provided in the related
prospectus supplement. Credit and cash flow enhancement, such as a
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reserve account, will be available to cover any shortfalls in the amount
available for payment on that date to the extent specified in the related
prospectus supplement. As more fully described and unless otherwise specified in
the related prospectus supplement, payments of principal and/or interest on a
class of securities of a given series will be subordinate to payments of
interest on one or more other classes of that series, and payments on the
certificates of that series may be subordinate to payments on the notes of that
series.
CREDIT AND CASH FLOW ENHANCEMENT
GENERAL. Each prospectus supplement will specify the amounts and types
of any applicable credit enhancement arrangements and identify any third-party
credit enhancement provider. If and to the extent provided in the related
prospectus supplement, credit enhancement may be in the form of subordination of
one or more classes of securities, reserve accounts, over-collateralization,
letters of credit, credit or liquidity facilities, surety bonds, guaranteed
investment contracts, repurchase obligations, interest rate swaps, interest rate
caps, interest rate floors, currency swaps, other agreements with respect to
third-party payments or other support, cash deposits or any other arrangements
described in the related prospectus supplement or any combination of two or more
of the foregoing. If specified in the applicable prospectus supplement, credit
enhancement for a class of securities may cover one or more other classes of
securities of the same series, and credit enhancement for a series of securities
may cover one or more other series of securities.
The presence of a reserve account and other forms of credit enhancement
for the benefit of any class or series of securities is intended to enhance the
likelihood of receipt by the securityholders of that class or series of the full
amount of principal and interest due them and to decrease the likelihood that
they will experience losses. Unless otherwise specified in the related
prospectus supplement, the credit enhancement for a class or series of
securities will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance and related accrued
interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by any credit enhancement, securityholders
of the affected class or series will bear their allocable share of deficiencies,
as described in the related prospectus supplement. In addition, if a form of
credit enhancement covers more than one series of securities, securityholders of
those series will be subject to the risk that the credit enhancement could be
exhausted by the claims of securityholders of the other series.
RESERVE ACCOUNT. If so provided in the related prospectus supplement,
the loan sale agreement will require the seller to establish a reserve account
for a series or class of securities. The reserve account will be maintained in
the name of the applicable indenture trustee. Unless otherwise provided in the
related prospectus supplement, the reserve account will be funded from proceeds
of the sale of the securities on the closing date in the amount stated in the
related prospectus supplement. As further described in the related prospectus
supplement, the amount on deposit in the reserve account will be increased on
each subsequent distribution date up to the "Specified reserve account Balance"
as that term is defined in the related prospectus supplement, by depositing in
the reserve account the amount of collections on the related student loans
remaining on each distribution date after all other required payments on that
date have been made. Amounts in the reserve account will be available to cover
shortfalls in amounts due to the holders of those classes of securities as
specified in the related prospectus supplement. The related prospectus
supplement will also specify how amounts on deposit in the reserve account in
excess of the Specified reserve account Balance, after giving effect to all
other payments required to be made by the applicable trust, will be distributed.
STATEMENTS TO THE INDENTURE TRUSTEE AND THE TRUST
Prior to each distribution date with respect to each series of
securities, the administrator will prepare and provide to the related indenture
trustee and the related eligible lender trustee an information
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statement as of the close of business on the last day of the preceding
Collection Period. The statement will include the following information, and any
other information specified in the related prospectus supplement, for the
related distribution date or the preceding Collection Period, to the extent
applicable:
- the amount of the principal payment on each class of the notes
and the certificates;*
- the amount of the interest payment on each class of the notes
and the certificates, together with the applicable interest
rates;*
- the "Pool Balance", as that term is defined in the prospectus
supplement, as of the close of business on the last day of the
preceding Collection Period;
- the aggregate outstanding principal amount and the note pool
factor of each class of the notes, and the "Certificate
Balance", as that term is defined in the prospectus
supplement, and the certificate pool factor for each class of
the certificates, each after giving effect to principal
payments reported under the first bullet above;
- the amount of the Servicing Fee paid to the master servicer
and the Administration Fee paid to the administrator for that
Collection Period;*
- the interest rate for each class of floating rate notes and
the interest return or pass-through rate for each class of
floating rate certificates in effect for the next interest
period;
- the amount of aggregate realized losses, if any, for that
Collection Period;
- the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, the
Certificateholders' Interest Carryover Shortfall and the
Certificateholders' Principal Carryover Shortfall, as those
terms are defined in the related prospectus supplement, if
any, in each case as applicable to each class of securities,
and the changes in those amounts from the preceding statement;
- the aggregate Purchase Amounts for any related student loans
that were repurchased in that Collection Period;
- the balance of the reserve account, if any, on that
distribution date, after giving effect to changes on that
date;
- - for each date during the Funding Period, if any, the remaining
Pre-Funding Amount or, for each date during the Revolving Period,
if any, the amount on deposit in the Collateral Reinvestment
Account; and
- - the principal balance and number of student loans conveyed to or
originated by the trust during that Collection Period.
The information for the notes or certificates of any series listed above that
is marked with an asterisk (*) will be expressed as a dollar amount per $1,000
of the initial principal amount of the notes or the initial Certificate Balance
of the certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each loan servicing agreement will require that a firm of independent
public accountants furnish to the related trust and indenture trustee annually a
statement, based on their examination of
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certain documents and records and on such accounting and auditing procedures as
they consider appropriate under the circumstances, as to the master servicer's
compliance during the preceding twelve months with all applicable loan servicing
standards under the loan servicing agreement and as to its related accounting
records and computer files and certain other matters. The first annual
accountants' statement will cover the period beginning on the applicable closing
date. If one or more subservicers are servicing the student loans on behalf of
the master servicer, the accountants' statement may relate to the subservicer
rather than the master servicer.
Each loan servicing agreement will also require that a master servicer
certificate be delivered to the related trust and indenture trustee concurrently
with the delivery of each annual accountants' statement of compliance. The
master servicer certificate shall be signed by an officer of the master servicer
in which he will state that, to his knowledge, the master servicer has fulfilled
its obligations under the loan servicing agreement throughout the preceding
twelve months or, if there has been a default in the fulfillment of any of its
obligations, he will describe each default. The first annual master servicer
certificate will cover the period beginning on the applicable closing date. The
master servicer has agreed to give the administrator, the related indenture
trustee and eligible lender trustee notice of certain Master Servicer Defaults
under each loan servicing agreement.
Copies of the above statements and certificates may be obtained by
securityholders by a request in writing addressed to the applicable trustee.
MATTERS REGARDING THE MASTER SERVICER
Each loan servicing agreement will provide that the master servicer may
not resign from its duties as master servicer, except upon determination that
the master servicer is no longer permitted to perform those duties under
applicable law. No resignation of the master servicer will become effective
until the related indenture trustee or a successor servicer has assumed the
master servicer's servicing obligations and duties under the loan servicing
agreement.
Each loan servicing agreement will further provide that neither the
master servicer nor any of its directors, officers, employees or agents will be
under any liability to the related trust or the related noteholders or
certificateholders for taking any action or for refraining from taking any
action under the loan servicing agreement, or for errors in judgment.
Nevertheless, unless otherwise limited in the related prospectus supplement,
neither the master servicer nor any of the foregoing persons will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of the master servicer's
duties or for reckless disregard of its duties. In addition, each loan servicing
agreement will provide that the master servicer is under no obligation to appear
in, prosecute or defend any legal action that is not incidental to its servicing
responsibilities under the loan servicing agreement and that, in its opinion,
may cause it to incur any expense or liability. Each loan servicing agreement
will, however, provide that the master servicer may undertake any reasonable
action that it deems necessary or desirable in the interests of the
securityholders.
Under the circumstances specified in each loan servicing agreement, any
entity into which the master servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the master servicer
is a party, or any entity succeeding to the business of the master servicer will
be the successor of the master servicer under the loan servicing agreement so
long as that corporation or other entity assumes the obligations of the master
servicer.
MASTER SERVICER DEFAULT
Except as otherwise provided in the related prospectus supplement, a
"Master Servicer Default" will occur under the related loan servicing agreement
in the following circumstances:
- if the master servicer fails to deliver to the indenture
trustee for deposit in any of the Issuer Accounts any required
payment, and its failure continues unremedied for three
business days
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after written notice from the indenture trustee or the related
eligible lender trustee is received by the master servicer or
after discovery by the master servicer;
- if the master servicer fails to observe or perform in any
material respect any of its other covenants or agreements
under the loan servicing agreement; or
- if an insolvency event with respect to the master servicer
occurs.
An "insolvency event" means, with respect to any person, any of the following:
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings with respect to that person and certain
actions by that person indicating its insolvency, reorganization pursuant to
bankruptcy proceedings or inability to pay its obligations.
RIGHTS UPON MASTER SERVICER DEFAULT
Unless otherwise specified in the related prospectus supplement, as
long as a Master Servicer Default under a loan servicing agreement remains
unremedied, the related indenture trustee, or holders of notes of the related
series evidencing not less than 75% in principal amount of the then outstanding
notes, may terminate all the rights and obligations of the master servicer under
that loan servicing agreement. Thereupon a successor servicer will be appointed
by the related indenture trustee or the indenture trustee will succeed to all
the responsibilities, duties and liabilities of the master servicer under that
agreement, and will be entitled to similar compensation arrangements. If,
however, a bankruptcy trustee or similar official has been appointed for the
master servicer, and no Master Servicer Default other than the appointment
itself has occurred, the bankruptcy trustee or official may have the power to
prevent the indenture trustee or the noteholders from effecting a transfer. In
the event that the indenture trustee is unwilling or unable to act, it may
appoint, or petition a court of competent jurisdiction to appoint, a successor
master servicer whose regular business includes the servicing of student loans.
The indenture trustee may provide for compensation to be paid but in no event
more than the servicing compensation payable to the master servicer under that
loan servicing agreement, unless a greater amount will not result in a
downgrading of the notes and certificates by any applicable rating agency.
In the event a Master Servicer Default occurs and is continuing, the
indenture trustee or the noteholders, as described above, may remove the master
servicer, without the consent of the related eligible lender trustee or any of
the certificateholders of the related series. Moreover, only the indenture
trustee or the noteholders, and not the eligible lender trustee or the
certificateholders, have the ability to remove the master servicer if a Master
Servicer Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each trust, unless otherwise specified in the related
prospectus supplement, the holders of notes evidencing at least a majority in
principal amount of the then outstanding notes, or the holders of certificates
evidencing not less than a majority of the outstanding Certificate Balance in
the case of Master Servicer Default which does not adversely affect the
indenture trustee or the noteholders of the related series, may, on behalf of
all the noteholders and certificateholders, waive any default by the master
servicer in the performance of its obligations under the related loan servicing
agreement and the consequences of that default, except a default in making any
required deposits to, or payments from, any of the Issuer Accounts in accordance
with the loan servicing agreement. In this way, the noteholders have the
ability, except as noted above, to waive defaults by the master servicer which
could materially adversely affect the related certificateholders. However, no
waiver will impair the noteholders' or the certificateholders' rights with
respect to subsequent defaults.
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AMENDMENT
Unless otherwise provided in the related prospectus supplement, each of
the Transfer and Servicing Agreements may be amended by the parties, without the
consent of the related noteholders or certificateholders, for the purpose of
adding, changing or eliminating any provisions of the Transfer and Servicing
Agreements or modifying any rights of noteholders or certificateholders so long
as that action will not, in the opinion of counsel satisfactory to the indenture
trustee and eligible lender trustee, materially and adversely affect the
interest of any noteholder or certificateholder. Unless otherwise provided in
the related prospectus supplement, each of the Transfer and Servicing Agreements
also may be amended by the seller, the administrator, the master servicer, the
related eligible lender trustee and the related indenture trustee, as
applicable, with the consent of the holders of notes of the related series that
represent at least a majority in principal amount of the then outstanding notes
and the holders of certificates of the related series evidencing at least a
majority of the Certificate Balance for the purpose of adding, changing or
eliminating any provisions of the Transfer and Servicing Agreements or modifying
any rights of the noteholders or certificateholders. Nevertheless, no amendment,
without the consent of the holders of all the outstanding notes and
certificates, may:
- increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments (including any
guarantee payments) on the student loans or required payments
to the noteholders or certificateholders; or
- reduce the percentage of the notes or certificates which are
required to consent to any amendment.
Each trust agreement will prohibit the related eligible lender trustee
from commencing a voluntary proceeding in bankruptcy relating to that trust
without the unanimous prior approval of all certificateholders of the related
series, including NMF, and the delivery to the eligible lender trustee by each
certificateholder, including NMF, of a certificate certifying that the
certificateholder reasonably believes that the trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all the outstanding notes of a given series
and the satisfaction and discharge of the related indenture, the eligible lender
trustee will succeed to all the rights of the indenture trustee, and the
certificateholders of that series will succeed to all the rights of the
noteholders of that series, under the related loan servicing agreement, except
as otherwise provided in the applicable prospectus supplement.
TERMINATION
With respect to each trust, the obligations of the seller, the master
servicer, the administrator, the related eligible lender trustee and the
indenture trustee under the related Transfer and Servicing Agreements will
terminate upon:
- the maturity or other liquidation of the last student loan in
that trust and the disposition of any amount received upon
liquidation of any remaining student loans; and
- the payment to the noteholders and the certificateholders of
the related series of all amounts required to be paid to them
under the Transfer and Servicing Agreements.
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OPTIONAL REDEMPTION
If so specified in the prospectus supplement for a given trust, the
seller or another party will have the option to avoid excessive administrative
expenses by purchasing from the related eligible lender trustee all the
remaining student loans in that trust. The option can only be exercised when, as
of the end of any Collection Period immediately before a distribution date, the
then outstanding pool balance has declined to the level specified in the
prospectus supplement. If the option is exercised, the remaining student loans
will be purchased at a price equal to the aggregate Purchase Amounts of those
loans as of the end of that Collection Period. The funds will be used to retire
the related notes and certificates concurrently with receipt of the funds. Upon
termination of a trust, as more fully described in the related prospectus
supplement, all right, title and interest in the student loans and other funds
of that trust, after giving effect to any final distributions to noteholders and
certificateholders of the related series, will be conveyed and transferred to
the seller or the other party named in the prospectus supplement.
AUCTION OF STUDENT LOANS
If so provided in the related prospectus supplement, all remaining
student loans held by a trust will be offered for sale by the indenture trustee
on any distribution date occurring on or after a date specified in such
prospectus supplement. The seller and unrelated third parties may offer bids for
the student loans. The indenture trustee will accept the highest bid equal to or
greater than the aggregate Purchase Amounts of the student loans as of the end
of the Collection Period immediately preceding the related distribution date.
The proceeds of such sale will be used to redeem all the related notes and to
retire all the related certificates.
ADMINISTRATION AGREEMENT
The administrator will enter into an administration agreement with each
trust and the related indenture trustee under which the administrator will
provide the notices and perform other administrative obligations required by the
related indenture, trust agreement, loan sale agreement and loan servicing
agreement. Unless otherwise specified in the related prospectus supplement with
respect to any trust, the administrator will be entitled to an administration
fee as specified in the related prospectus supplement (the "Administration Fee")
as compensation for the performance of its obligations under the administration
agreement and as reimbursement for its expenses. Unless otherwise specified by
the related prospectus supplement, the administrator under each administration
agreement will be NMELC.
Except as otherwise provided in the related prospectus supplement, an
"Administrator Default" will occur under an administration agreement in the
following circumstances:
- if the administrator fails to direct the indenture trustee to
make any required distributions from any of the Issuer
Accounts, and the failure continues unremedied for three
business days after the indenture trustee or the eligible
lender trustee has given written notice;
- if the administrator fails to observe or perform in any
material respect any of its other covenants or agreements in
the administration agreement; or
- if an insolvency event occurs with respect to the
administrator.
Unless otherwise specified in the related prospectus supplement, the
procedures for terminating the rights and obligations of the administrator and
appointing a successor administrator following the occurrence of an
Administrator Default under the administration agreement and for waiving
defaults by the administrator under the administration agreement will be
identical to those for replacing the master servicer and appointing a successor
master servicer following the occurrence of a Master Servicer Default under the
loan servicing agreement and for waiving defaults by the master servicer under
the loan
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servicing agreement, except that those procedures will apply to the
administrator and the administration agreement rather than the master servicer
and the loan servicing agreement.
LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF THE STUDENT LOANS
The seller intends that its transfer of the student loans to the
related eligible lender trustee on behalf of the related trust will constitute a
valid sale and assignment of those student loans. Nevertheless, if the transfer
of the student loans is deemed to be an assignment of collateral as security for
the benefit of a trust, a security interest in the student loans may be
perfected under the provisions of 20 U.S.C. Section 1087-2(d)(3), either through
the taking of possession of the student loans or by the filing of notice of the
security interest in the manner provided by the applicable UCC for perfection of
security interests in accounts. One or more financing statements covering the
student loans will be filed under the UCC to protect the interest of the
eligible lender trustee in the event the transfer by the seller is deemed to be
an assignment of collateral as security for the benefit of the trust.
If the transfer of the student loans is deemed to be an assignment as
security for the benefit of a trust, there are certain limited circumstances
under the UCC in which prior or subsequent transferees of student loans coming
into existence after the related closing date could have an interest in the
loans with priority over the interest of the eligible lender trustee. A tax or
other government lien on property of the seller that arises before a student
loan comes into existence may also have priority over the interest of the
related eligible lender trustee in that loan. Under the loan sale agreement,
however, the seller will warrant that it has caused the student loans to be
transferred to the related eligible lender trustee on behalf of the trust free
and clear of the lien of any third party. In addition, the seller will covenant
that it will not sell, pledge, assign, transfer or grant any lien on any student
loan held by a trust, or any interest in a loan held by a trust, other than to
the eligible lender trustee on behalf of that trust, except as provided below.
Under each loan servicing agreement, the master servicer, or its
designee, as custodian for the related trust, will have custody of the
promissory notes evidencing the student loans following their sale to the
related eligible lender trustee. Although the accounts and computer records of
the seller and master servicer will be marked to indicate the sale and although
the seller will cause UCC financing statements to be filed with the appropriate
authorities, the student loans will not be physically segregated, stamped or
otherwise marked to indicate that they have been sold to the eligible lender
trustee. If, through inadvertence or otherwise, any of the student loans were to
be sold to another party, or a security interest in them were to be granted to
another party, and that party purchased or took a security interest in the loans
in the ordinary course of its business and took possession of the loans, then
the purchaser or secured party might acquire an interest in those student loans
that would be superior to the interest of the eligible lender trustee, provided
that the purchaser or secured party acquired or took a security interest in the
student loans for new value and without actual knowledge of the interest of the
eligible lender trustee in them. SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties" in this
prospectus.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. Those requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. Although those requirements are generally do not apply to student
loans, in certain circumstances a trust may be liable for certain violations of
consumer protection laws that may apply to the student loans, either as assignee
or as the party directly responsible for obligations arising after the transfer.
For a discussion of a trust's rights in the event that the student loans were
not originated or serviced in all material respects in compliance with
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applicable laws, SEE "Description of the Transfer and Servicing Agreements--Sale
of Student Loans; Representations and Warranties" and "--Master Servicer
Covenants" in this prospectus.
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Higher Education Act, including its implementing regulations,
imposes specified requirements, guidelines and procedures for originating and
servicing student loans. Generally, those procedures require, among other
things, processing of completed loans applications, determining whether an
applicant is an eligible borrower under applicable standards including a review
of a financial need analysis, explaining to the borrower his responsibilities
under the loan, confirming that the related promissory note is executed by the
borrower, and disbursing the loan proceeds. After the loan is made, the lender
must establish repayment terms with the borrower, properly administer deferrals
and forbearances, and credit the borrower for payments made. If a borrower
becomes delinquent, a lender or servicing agent must perform certain collection
procedures primarily by telephone calls and demand letters, which vary depending
upon the length of time the loan is delinquent. The master servicer has agreed
under the loan servicing agreement to perform collection and servicing
procedures for the related trust. However, failure to follow these procedures or
failure of the originator of the loan to follow loan origination procedures
could result in adverse consequences, including the Department of Education's
refusal to make reinsurance payments to the guarantors or to make interest
subsidy payments and special allowance payments to the eligible lender trustee
for those loans or the guarantors' refusal to honor their guarantee agreements
with the eligible lender trustee for those loans. Failure of the guarantors to
receive reinsurance payments from the Department could adversely affect their
ability or legal obligation to make guarantee payments to the related eligible
lender trustee for those loans.
Loss of any guarantee payments, interest subsidy payments or special
allowance payments could adversely affect the amount of "Available Funds", as
defined in the prospectus supplement, on any distribution date and the related
trust's ability to pay principal and interest on the notes and certificates of
that series. Under certain circumstances, unless otherwise specified in the
related prospectus supplement, the loan sale agreement and loan servicing
agreement grant the related trust the right to cause the seller to repurchase
any student loan, or to cause the master servicer to arrange for the purchase of
any student loan, if a breach of the representations, warranties or covenants of
the seller or the master servicer, as the case may be, with respect to that loan
has a material adverse effect on the interest of the trust and the breach is not
cured within any applicable cure period. SEE "Description of the Transfer and
Servicing Agreements--Sale of Student Loans; Representations and Warranties" and
"--Master Servicer Covenants" in this prospectus. The failure of the seller to
make a required repurchase, or the failure of the master servicer to make a
required purchase arrangement, would constitute a breach of the related loan
sale agreement and loan servicing agreement, enforceable by the related eligible
lender trustee on behalf of the related trust or by the related indenture
trustee on behalf of the noteholders of that series. However, such a failure
would not constitute an Event of Default under the indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Student loans are generally not dischargeable by a borrower in
bankruptcy pursuant to the U.S. Bankruptcy Code, unless EITHER:
- the loan first became due more than seven years (exclusive of
any applicable suspension of the repayment period) before the
date of the bankruptcy,
OR
- excepting the debt from discharge will impose an undue
hardship on the debtor and the debtor's dependents.
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U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is, in the opinion of Brown & Wood LLP ("Federal Tax
Counsel"), special tax counsel to each trust and counsel to the Underwriters, a
summary of material U.S. federal income tax consequences of the purchase,
ownership and disposition of the securities. The summary does not purport to
deal with U.S. federal income tax consequences applicable to all categories of
securityholders, some of which may be subject to special rules. For example, it
does not discuss the tax treatment of securityholders that are insurance
companies, regulated investment companies or dealers in securities. Moreover,
there are no cases or Internal Revenue Service rulings on similar transactions
involving debt and/or equity interests issued by a trust with terms similar to
those of the securities. As a result, the IRS may disagree with all or a part of
the discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the
securities.
The following summary is based upon current provisions of the Internal
Revenue Code, the Treasury regulations promulgated thereunder and judicial or
ruling authority, all of which are subject to change, which change may be
retroactive. Each trust will be provided with an opinion of Federal Tax Counsel
regarding the U.S. federal income tax matters discussed below. An opinion of
Federal Tax Counsel, however, is not binding on the IRS or the courts. No ruling
on any of the issues discussed below will be sought from the IRS. For purposes
of the following summary, references to the trust, the securities and related
terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each trust and the securities and related terms, parties
and documents applicable to such trust. Taxpayers and preparers of tax returns
(including those filed by any partnership or other issuer) should be aware that
under applicable Treasury Regulations a provider of advice on specific issues of
law is not considered an income tax return preparer unless the advice:
- is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the
consequences of contemplated actions, and
- is directly relevant to the determination of an entry on a tax
return.
Accordingly, taxpayers should consult their respective tax advisors and tax
return preparers regarding the preparation of any item on a tax return, even
where the anticipated tax treatment has been discussed herein.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO THE
FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF OFFERED SECURITIES SPECIFIC TO THAT PROSPECTIVE
INVESTOR.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion to the trust that the
trust will not be an association (or publicly traded partnership) taxable as a
corporation for U.S. federal income tax purposes. This opinion will be based on
the assumption that the terms of the trust agreement and related documents will
be complied with, and on counsel's conclusions that the nature of the income of
the trust will exempt it from the rule that certain publicly traded partnerships
are taxable as corporations.
TAX CONSEQUENCES TO HOLDERS OF DEBT SECURITIES
TREATMENT OF THE SECURITIES AS INDEBTEDNESS. Federal Tax Counsel will
deliver its opinion to the trust that certain classes of securities will qualify
as debt for U.S. federal income tax purposes ("Debt Securities"). The seller
will agree, and the Debt Security holders will agree by their purchase of the
Debt
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Securities, to treat the Debt Securities as debt for U.S. federal income tax
purposes. The discussion below assumes this characterization of such Debt
Securities is correct. If, contrary to the opinion of counsel, the IRS
successfully asserted that any class of Debt Securities is not debt for U.S.
federal income tax purposes such Securities would be equity interests in the
trust ("Equity Securities") and would be treated in the manner described below.
ORIGINAL ISSUE DISCOUNT. The discussion below assumes that all payments
on the Debt Securities are denominated in U.S. dollars, that the interest rate
formula for the Debt Securities meets the requirements for "qualified stated
interest" under Treasury regulations (the "OID regulations") relating to
original issue discount ("OID"), and that any OID on the Debt Securities (I.E.,
any excess of the stated redemption price at maturity of the Debt Securities,
generally the principal amount of the Debt Securities, over their issue price)
does not exceed a DE MINIMIS amount (I.E., 1/4% of their principal amount
multiplied by the number of full years included in their term), all within the
meaning of the OID regulations. If these conditions are not satisfied with
respect to any given series of Debt Securities, additional tax considerations
with respect to such Debt Securities will be disclosed in the related prospectus
supplement. The Code requires that a prepayment assumption be used in computing
the accrual of OID. The prepayment assumption is to be determined under Treasury
regulations that have yet to be issued. The legislative history of the OID
provisions of the Code provides, however, that the calculation and accrual of
OID should be based on the prepayment assumption used by the parties in pricing
the transaction. In the event that any of the Debt Securities are issued with
OID, the prepayment assumption will be set forth in the related prospectus
supplement. Furthermore, although premium amortization and accrued market
discount on debt instruments such as the Debt Securities, which are subject to
prepayment based on the payments on other debt instruments, is to be determined
under regulations yet to be issued, the legislative history of these Code
provisions provides that the same prepayment assumption used to calculate OID,
whether or not the debt instrument is issued with OID, should be used.
INTEREST INCOME ON THE DEBT SECURITIES. Based on the above assumptions,
except as discussed in the following paragraph, the Debt Securities will not be
considered issued with OID. The stated interest thereon will be taxable to a
Debt Security holder as ordinary interest income when received or accrued in
accordance with such Debt Security holder's method of tax accounting. Under the
OID regulations, a holder of a Debt Security that was issued with a DE MINIMIS
amount of OID must include such OID in income, on a pro rata basis, as principal
payments are made on the Debt Security . Alternatively, a Debt Security holder
may elect to accrue all interest, discount, including DE MINIMIS market discount
or OID, and premium in income as interest, based on a constant yield method. If
such an election were made with respect to a Debt Security with market discount,
the Debt Security holder would be deemed to have made an election to include in
income currently market discount with respect to all debt instruments having
market discount that such Debt Security holder acquires during the year of the
election and thereafter. Similarly, a Debt Security holder that makes this
election for a Debt Security that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Debt Security holder owns
or acquires. The election to accrue interest, discount and premium under a
constant yield method with respect to a Debt Security is irrevocable. A
purchaser who buys a Debt Security for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
Qualified Stated Interest, which is taxable in accordance with the
holder's method of accounting, is interest that is unconditionally payable
(I.E., late payments are penalized) at least annually at a single fixed rate.
The trust intends to treat the interest paid on the Debt Securities as Qualified
Stated Interest.
A holder of a Debt Security that has a fixed maturity date of not more
than one year from the issue date of such Debt Security (a "Short-Term
Security") may be subject to special rules. An accrual basis holder of a
Short-Term Security (and certain cash method holders, including regulated
investment companies, banks and securities dealers, as set forth in Section 1281
of the Code) generally will be required to report interest income as interest
accrues on a ratable basis over the term of each interest period or, at the
election of the holder, on a constant yield basis (I.E., treating the instrument
as accruing
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interest at a single rate). Cash basis holders of a Short-Term Security will, in
general, be required to report interest income as interest is paid or, if
earlier, upon the taxable disposition of the Short-Term Security. However, a
cash basis holder of a Short-Term Security reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Security
until the taxable disposition of the Short-Term Security. A cash basis taxpayer
may elect under Section 1282 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Security in income as it
accrues, but would not be subject to the interest expense deferral rule referred
to in the preceding sentence. Certain special rules apply if a Short-Term
Security is purchased for more or less than its principal amount.
OPTIONAL ELECTION. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with respect to
a Debt Security, including stated interest, acquisition discount, OID, DE
MINIMIS OID, market discount, DE MINIMIS market discount, and unstated interest,
as adjusted by any amortizable bond premium or acquisition premium, using the
constant yield method described above.
SALE OR OTHER DISPOSITION. If a Debt Security holder sells a Debt
Security, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the Debt Security. The adjusted tax basis of a Debt Security to a
particular Debt Security holder will equal the holder's cost for the Debt
Security, increased by any market discount, acquisition discount, OID and gain
previously included by the Debt Security holder in income with respect to the
Debt Security and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by the
Debt Security holder with respect to the Debt Security. Any such gain or loss
will be capital gain or loss if the Debt Security was held as a capital asset,
except for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses generally may be used only to
offset capital gains.
FOREIGN DEBT SECURITY HOLDERS. Interest paid (or accrued) to a Debt
Security holder who is a nonresident alien, foreign corporation or other
non-U.S. person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to U.S. federal income tax and
withholding tax, PROVIDED that:
- the interest is not effectively connected with the conduct of
a trade or business within the U.S. by the foreign person,
- the foreign person is not actually or constructively a "10
percent shareholder" of the trust, the seller or NMF,
including a holder of 10% of the outstanding Equity Securities
or a "controlled foreign corporation" with respect to which
the trust, the seller or NMF is a "related person" within the
meaning of the Code, and
- the foreign person provides the person who is required to
withhold U.S. tax with respect to the Debt Securities with an
appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial
owner of the Debt Security is a foreign person and providing
the foreign person's name and address.
If a Debt Security is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the foreign person that owns the Debt Security . If such interest is not
portfolio interest, then it will be subject to U.S. federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
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Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Debt Security by a foreign person generally will be
exempt from U.S. federal income and withholding tax, PROVIDED that:
- such gain is not effectively connected with the conduct of a
trade or business in the U.S. by the foreign person, and
- in the case of an individual foreign person, the foreign
person is not present in the U.S. for 183 days or more in the
taxable year.
If the interest, gain or income on a Debt Security held by a foreign
person is effectively connected with the conduct of a trade or business in the
U.S. by the foreign person (although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement), the holder generally
will be subject to U.S. federal income tax on the interest, gain or income at
regular U.S. federal income tax rates. In addition, if the foreign person is a
foreign corporation, it may be subject to a branch profits tax equal to 30% of
its "effectively connected earnings and profits" within the meaning of the Code
for the taxable year, as adjusted for certain items, unless it qualifies for a
lower rate under an applicable tax treaty as modified by the branch profits tax
rules.
Final regulations dealing with backup withholding and information
reporting on income paid to a Non-U.S. Holder and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transaction rules. THE DISCUSSION SET
FORTH ABOVE DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT.
PROSPECTIVE INVESTORS IN THE DEBT SECURITIES WHO ARE NON-U.S. HOLDERS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISOR WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
BACKUP WITHHOLDING. Each holder of a Debt Security, other than an
exempt holder such as a corporation, tax-exempt organization, qualified pension
and profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident, will be required to
provide, under penalties of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt Debt
Security holder fail to provide the required certification, the trust will be
required to withhold 31% of the amount otherwise payable to the holder, and
remit the withheld amount to the IRS as a credit against the holder's U.S.
federal income tax liability.
TAX CONSEQUENCES TO HOLDERS OF EQUITY SECURITIES
The following discussion only applies to securities treated as equity
for U.S. federal income tax purposes and assumes that all payments on the Equity
Securities are denominated in U.S. dollars, that a series of securities includes
a single class of Equity Securities and that any such Equity Securities are sold
to persons other than NMF. If these conditions are not satisfied with respect to
any given series of securities, any additional tax considerations with respect
to such Equity Securities will be disclosed in the applicable prospectus
supplement.
CLASSIFICATION AS A PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. The seller and the master
servicer will agree, and the Equity Security holders will agree by their
purchase of Equity Securities, to treat the trust as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the trust, the partners of the partnership being the Equity Security
holders, including NMF in
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its capacity as recipient of distributions from the reserve account, if any, and
certain other securities being treated as debt of the partnership. However, the
proper characterization of the arrangement involving the trust, the Equity
Security holders, the seller and the master servicer is not clear because there
is no authority on transactions comparable to that contemplated herein.
Under the provisions of Subchapter K, a partnership is not considered a
separate taxable entity. Instead, partnership income is taxed directly to the
partners and each partner generally is viewed as owning a direct undivided
interest in each partnership asset. The partnership is generally treated as an
entity, however, for computing partnership income, determining the tax
consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest. The
following discussion is a summary of some of the material U.S. federal income
tax consequences of classifying the trust as a partnership. Prospective owners
of Equity Securities should consult their own tax advisors regarding the U.S.
federal income tax consequences discussed below, as well as any other material
U.S. federal income tax consequences that may result from applying the
provisions of Subchapter K to the ownership and transfer of a Equity Security.
PARTNERSHIP TAXATION. As a partnership, the trust will not be subject
to U.S. federal income tax. Rather, each Equity Security holder will be required
to separately take into account its allocated share of income, gains, losses,
deductions and credits of the trust. The trust's income will consist primarily
of interest and finance charges earned on the student loans including
appropriate adjustments for market discount, OID and bond premium, investment
income from investments of amounts on deposit in any related trust accounts and
any gain upon collection or disposition of student loans. The trust's deductions
will consist primarily of interest accruing with respect to the Equity
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of student loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the trust agreement and related documents). The trust agreement will
provide, in general, that the Equity Security holders will be allocated taxable
income of the trust for each interest period (as described in the applicable
prospectus supplement) equal to the sum of:
- the interest that accrues on the Equity Securities in
accordance with their terms for such interest period,
including interest accruing at the pass-through rate for such
interest period and interest on amounts previously due on the
Equity Securities but not yet distributed;
- any trust income attributable to discount on the student loans
that corresponds to any excess of the principal amount of the
Equity Securities over their initial issue price; and
- all other amounts of income payable to the Equity Security
holders for such interest period.
All remaining taxable income of the trust will be allocated to NMF.
Based on the economic arrangement of the parties, this approach for
allocating trust income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Equity Security holders. Moreover,
even under the foregoing method of allocation, Equity Security holders may be
allocated income equal to the entire amount of interest accruing on the Equity
Securities for an interest period, based on the pass-through rate plus the other
items described above, even though the trust might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Equity Securities on the accrual
basis and Equity Security holders may become liable for taxes on trust income
even if they have not received cash from the trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Equity Security
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holders but Equity Security holders may be purchasing Equity Securities at
different times and at different prices, Equity Security holders may be required
to report on their tax returns taxable income that is greater or less than the
amount reported to them by the applicable trust.
An individual taxpayer's share of expenses of the trust including fees
to the master servicer but not interest expenses are miscellaneous itemized
deductions which are deductible to the extent they exceed two percent of the
individual's adjusted gross income. Accordingly, such deductions might be
disallowed to the individual in whole or in part and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the trust.
The trust intends to make all tax calculations relating to income and
allocations to Equity Security holders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the student loans,
the trust might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Equity Security holders.
COMPUTATION OF INCOME. Taxable income of the trust will be computed at
the trust level and then allocated pro rata to the Equity Security holders.
Consequently, the method of accounting for taxable income will be chosen by, and
any elections (such as those described above with respect to the market discount
rules) will be made by, the trust rather than the Equity Security holders. The
trust intends, to the extent possible, to
- have its taxable income computed under the accrual method of
accounting, and
- adopt a calendar-year taxable year for computing its taxable
income.
The tax year of the trust, however, is generally determined by reference to the
tax years of the Equity Security holders. As a result, an owner of an Equity
Security would be required to include its pro rata share of trust income for a
taxable year as determined by the trust in such Equity Security holder's gross
income for its taxable year in which the trust's taxable year ends.
DETERMINING THE BASES OF TRUST ASSETS. The trust will become a
partnership on the first date when Equity Securities are held by more than one
person. On that date, each of the Equity Security holders should be treated as
having purchased a pro rata share of the assets of the trust, subject to the
liability for the Equity Securities, followed immediately by a deemed
contribution of such assets to the newly formed partnership. The partnership's
basis in the trust's assets would therefore equal the sum of the Equity Security
holders' bases in their respective interests in the trust's assets immediately
prior to the deemed contribution to the partnership. To the extent that the fair
market value of the assets deemed contributed to the partnership varied from the
bases of such assets to the partnership, the allocation of taxable income to the
Equity Security holders would be adjusted in accordance with Section 704(c) of
the Code to account for such variations.
Under Section 708 of the Code a partnership is considered to terminate
if 50% or more of the partnership interests are sold or exchanged within a
12-month period. If such a termination occurs, the partnership is deemed to
distribute its assets to its partners, including NMF as transferee partner, who
are then deemed to recontribute those assets to a new partnership. The new
partnership would have a basis in those assets equal to the basis of the
contributing partners in their partnership interests. If the trust were
characterized as a partnership and a sale of Equity Securities terminated the
partnership under Section 708 of the Code, the purchaser's basis in its
ownership interest would automatically be reflected in its pro rata portion of
the trust's assets.
DISCOUNT AND PREMIUM. To the extent that OID, if any, on the student
loans exceeds a DE MINIMIS amount, the trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Equity Security
holders.
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Moreover, the purchase price paid by the trust for the student loans
may be greater or less than the remaining principal balance of the student loans
at the time of purchase. If so, the student loans will have been acquired at a
premium or discount, as the case may be. As indicated above, the trust will make
this calculation on an aggregate basis, but might be required to recompute it on
a loan by loan basis.
If the trust acquires the student loans at a market discount or
premium, it will elect to include any such discount in income currently as it
accrues over the life of the student loans or to offset any such premium against
interest income on the student loans. As indicated above, a portion of such
market discount income or premium deduction may be allocated to Equity Security
holders.
DISPOSITION OF EQUITY SECURITIES. Generally, capital gain or loss will
be recognized on a sale of Equity Securities in an amount equal to the
difference between the amount realized and the seller's tax basis in the Equity
Securities sold. To the extent the trust is characterized as a partnership, an
Equity Security holder's tax basis in an Equity Security will generally equal
the holder's cost increased by the holder's share of trust income includible in
gross income and decreased by any distributions received with respect to such
Equity Security. In addition, both the tax basis in the Equity Security and the
amount realized on a sale of an Equity Security would include the holder's share
of the Equity Securities and other liabilities of the trust. A securityholder
acquiring Equity Securities at different prices may be required to maintain a
single aggregate adjusted tax basis in such Equity Securities and, upon sale or
other disposition of some of the Equity Securities, allocate a pro rata portion
of such aggregate tax basis to the Equity Securities sold, rather than
maintaining a separate tax basis in each Equity Security for purposes of
computing gain or loss on a sale of that Equity Security.
Any gain on the sale of an Equity Security attributable to the
securityholder's share of unrecognized accrued market discount on the student
loans would generally be treated as ordinary income to the holder and could give
rise to special tax reporting requirements. The trust does not expect to have
any other assets that would give rise to such special reporting requirements.
If an Equity Security holder is required to recognize an aggregate
amount of income, not including income attributable to disallowed itemized
deductions described above, over the life of the Equity Securities that exceeds
the aggregate cash distributions with respect thereto, such excess will
generally give rise to a capital loss upon the retirement of the Equity
Securities.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Equity Security
holders in proportion to the principal amount of Equity Securities owned by them
as of the close of the last day of such month. As a result, a holder purchasing
Equity Securities may be allocated tax items attributable to periods before the
actual transaction.
The use of such a monthly convention may not be permitted by existing
laws and regulations. If a monthly convention is not allowed, which will affect
the tax liability and tax basis of the holder or only applies to transfers of
less than all of the partner's interest, taxable income or losses of the trust
might be reallocated among the Equity Security holders. NMF is authorized to
revise the trust's method of allocation between transferors and transferees to
conform to a method permitted by future laws, regulations or other IRS guidance.
SECTION 754 ELECTION. In the event that an Equity Security holder sells
an Equity Security at a profit or loss, the purchasing Equity Security holder
will have a higher or lower basis in the Equity Security than the selling Equity
Security holder had. The tax basis of the trust's assets will not be adjusted to
reflect that higher or lower basis unless the trust were to file an election
under Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the trust will not make
such an election. As a result, Equity Security holders might be allocated a
greater
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or lesser amount of trust income than would be appropriate based on their own
purchase price for Equity Securities.
ADMINISTRATIVE MATTERS. The Eligible Lender Trustee is required to keep
or cause to be kept complete and accurate books of the trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
taxable year of the trust will be the calendar year. The eligible lender trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the trusts and will report each Equity Security holder's
allocable share of items of trust income and expense to holders and the IRS on
Schedule K-1. The trust will provide the Schedule K-1 information to nominees
that fail to provide it with the information statement described below and such
nominees will be required to forward such information to the beneficial owners
of the Equity Securities. Generally, securityholders must file tax returns that
are consistent with the information returns filed by the trust or be subject to
penalties unless the securityholder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Equity Securities
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 Equity Securities so held, including:
- the name, address and taxpayer identification number of the
nominee, and
- as to each beneficial owner
- the name, address and identification number of such
person,
- whether such person is a U.S. 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
- certain information on Equity Securities that were
held, bought or sold on behalf of such person
throughout the year.
In addition, brokers and financial institutions that hold Equity Securities
through a nominee are required to furnish directly to the trust information as
to themselves and their ownership of Equity Securities. A clearing agency
registered under Section 17A of the Exchange Act that holds Equity Securities as
a nominee is not required to furnish any such information statement to the
trust. The information referred to above for any calendar year must be furnished
to the trust on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust with the information
described above may be subject to penalties.
Unless otherwise provided by the Code, applicable Treasury regulations
or other pronouncements, NMF will be designated as the "tax matters partner" in
the related trust agreement and, as such, will be responsible for representing
the Equity Security holders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Equity Security holders, and,
under certain circumstances, an Equity Security holder may be precluded from
separately litigating a proposed adjustment to the items of the trust. An
adjustment could also result in an audit of an Equity Security holder's returns
and adjustments of items not related to the income and losses of the trust.
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FOREIGN EQUITY SECURITY HOLDERS. It is not clear whether a trust would
be considered to be engaged in a trade or business in the U.S. for purposes of
U.S. federal withholding taxes with respect to non-U.S. persons because there is
no clear authority dealing with that issue under facts substantially similar to
those described in this prospectus. Although it is not expected that the trust
would be engaged in a trade or business in the U.S. for such purposes, the trust
will withhold as if it were so engaged in order to protect itself from possible
adverse consequences of a failure to withhold. The trust expects to withhold on
the portion of its taxable income that is allocable to foreign Equity Security
holders pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 34% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require a trust to change its withholding procedures. In
determining a holder's withholding status, a trust may rely on IRS Form W-8, IRS
Form W-9 or other forms as specified by applicable Treasury regulations or other
Treasury or IRS pronouncements.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the trust's income. Each foreign holder of an
Equity Security must obtain a taxpayer identification number from the IRS and
submit that number to the trust on IRS Form W-8 or other applicable form, in
order to assure appropriate crediting of the taxes withheld. A foreign holder
generally would be entitled to file with the IRS a claim for refund with respect
to taxes withheld by the trust, taking the position that no taxes were due
because the trust was not engaged in a U.S. trade or business. However, interest
payments made or accrued to an Equity Security holder who is a foreign person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the trust. If these interest payments
are properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Equity Security holders will be
subject to U.S. federal income tax and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable treaty. In such case, a
foreign holder would only be entitled to claim a refund for that portion of the
taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
In general, the New Withholding Regulations do not significantly alter
the substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transaction rules. THE DISCUSSION SET
FORTH ABOVE DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT.
PROSPECTIVE INVESTORS IN THE EQUITY SECURITIES WHO ARE NON-U.S. HOLDERS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISOR WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
BACKUP WITHHOLDING. Distributions made on the Equity Securities and
proceeds from the sale of the Equity Securities will be subject to a "backup"
withholding tax of 31% if, in general, the Equity Security holder fails to
comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER OR AN
AFFILIATE OF THE SELLER
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that a trust which issues
one or more classes of securities properly treated as debt for U.S. federal
income tax purposes to investors and all the Residual Interests of which are
retained by the seller or an affiliate thereof will not be an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
trust agreement and related documents will be complied with, and on Federal Tax
Counsel's conclusions that the trust will constitute a mere security arrangement
for the issuance of debt by the single holder of a Residual Interest.
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TREATMENT OF THE SECURITIES AS INDEBTEDNESS. The seller will agree, and
the securityholders will agree by their purchase of securities, to treat the
securities as debt for U.S. federal income tax purposes. Federal Tax Counsel
will, except as otherwise provided in the related prospectus supplement, advise
the trust that the securities will be (or, in certain cases, should be)
classified as debt for U.S. federal income tax purposes. Assuming that the
characterization of the securities as debt for U.S. federal income tax purposes
is correct, the U.S. federal income tax consequences to securityholders
described above under the heading "Trusts for Which a Partnership Election Is
Made--Tax Consequences to Holders of the Debt Securities" would apply to the
securityholders.
If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that one or more classes of securities did not represent
debt for U.S. federal income tax purposes, such class or classes of securities
might be treated as equity interests in the trust. If so treated, the trust
would, most likely in the view of Federal Tax Counsel, be treated as a publicly
traded partnership that would not be taxable as a corporation because it would
qualify for an applicable "safe harbor" that the IRS has provided. Therefore,
the partnership would not be subject to U.S. federal income tax. Assuming such
characterization of the securities is correct, the U.S. federal income tax
consequences to Security holders described above under the heading "Trusts for
Which a Partnership Election Is Made--Tax Consequences to Holders of the Equity
Securities" would apply to the securityholders.
Nonetheless, treatment of securities as equity interests in such a
partnership could have adverse tax consequences to certain holders of such
securities. For example, income to certain tax-exempt entities including pension
funds would be "unrelated business taxable income", income to foreign holders
may be subject to U.S. withholding tax and U.S. tax return filing requirements,
and individual holders might be subject to certain limitations on their ability
to deduct their share of trust expenses.
THE U.S. FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON EACH
SECURITYHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, and
the Internal Revenue Code impose certain requirements on:
- employee benefit plans;
- certain other retirement plans and arrangements, including:
- individual retirement accounts and annuities,
- Keogh plans, and
- collective investment funds and separate accounts
and, as applicable, insurance company general
accounts) in which those plans, accounts or
arrangements are invested that are subject to the
fiduciary responsibility provisions of ERISA and
Section 4975 of the Code ; and
- persons who are fiduciaries with respect to the Plans in
connection with the investment of Plan assets.
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The term "Plans" includes the plans and arrangements listed in the first two
bullet points above.
Certain employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA requirements. Accordingly, assets of plans not subject to ERISA
requirements may be invested in notes without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and state
law. However, if a plan is not subject to ERISA requirements but is qualified
and exempt from taxation under Sections 401(a) and 501(a) of the Code, the
prohibited transaction rules set forth in Section 503 of the Code will apply.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that the Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons (parties in interest under ERISA and disqualified persons under the
Code, collectively, "Parties in Interest") who have certain specified
relationships to the Plan unless a statutory, regulatory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. These
prohibited transactions generally are set forth in Section 406 of ERISA and
Section 4975 of the Code.
THE NOTES
Unless otherwise specified in the related prospectus supplement, the
notes of each series may be purchased by a Plan. A trust, the seller, any
underwriter, the eligible lender trustee, the indenture trustee, the master
servicer, the administrator, any provider of credit support or any of their
affiliates may be considered to be or may become Parties in Interest with
respect to certain Plans. Prohibited transactions under Section 406 of ERISA and
Section 4975 of the Code may arise if a note is acquired by a Plan with respect
to which any of the foregoing are Parties in Interest unless the transactions
are subject to one or more statutory or administrative exemptions, such as:
- Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts certain transactions effected on behalf of a Plan by
an "in-house asset manager";
- PTCE 90-1, which exempts certain transactions between
insurance company separate accounts and Parties in Interest;
- PTCE 91-38, which exempts certain transactions between bank
collective investment funds and Parties in Interest;
- PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest; or
- PTCE 84-14, which exempts certain transactions effected on
behalf of a Plan by a "qualified professional asset manager".
There can be no assurance that any of these class exemptions will apply
with respect to any particular Plan's investment in notes or, even if it were
deemed to apply, that any exemption would apply to all prohibited transactions
that may occur in connection with the investment. Accordingly, prior to making
an investment in the notes, investing Plans should determine whether the
applicable trust, NMF, any underwriter, the eligible lender trustee, the
indenture trustee, the master servicer, the administrator, or any provider of
credit support or any of their affiliates is a Party in Interest with
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<PAGE>
respect to that Plan and, if so, whether the transaction is subject to one or
more statutory, regulatory or administrative exemptions.
Any Plan fiduciary considering whether to invest in notes on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to the investment. Each Plan fiduciary also should determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the notes is appropriate for the Plan, considering the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio, as well as whether the investment is permitted under the Plan's
governing instruments.
THE CERTIFICATES
Unless otherwise specified in the prospectus supplement, no
certificates of any series may be purchased by a Plan or by any entity whose
underlying assets include Plan assets by reason of a plan's investment in that
entity (each, a "Benefit Plan"). The purchase of an equity interest in a trust
will result in the assets of that trust being deemed assets of a Benefit Plan
for the purposes of ERISA and the Code and certain transactions involving the
trust may then be deemed to constitute prohibited transactions under Section 406
of ERISA and Section 4975 of the Code. A violation of the "prohibited
transaction" rules may result in an excise tax or other penalties and
liabilities under ERISA and the Code.
By its acceptance of a certificate, each certificateholder will be
deemed to have represented and warranted that it is not a Benefit Plan.
If a given series of certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, the
exception will be discussed in the related prospectus supplement.
* * *
A Plan fiduciary considering the purchase of the securities of a given
series should consult its tax and/or legal advisors regarding whether the assets
of the related trust would be considered plan assets, the possibility of
exemptive relief from the prohibited transaction rules and other issues and
their potential consequences.
AVAILABLE INFORMATION
The seller has filed with the SEC a registration statement for the
securities (together with all amendments and related exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended. This prospectus and
the accompanying prospectus supplement, both of which form part of the
Registration Statement, do not contain all the information contained in the
Registration Statement. For further information, you may inspect and copy the
Registration Statement at the public reference facilities maintained by the SEC
at
- 450 Fifth Street, N.W., Washington, D.C. 20549;
and at the SEC's regional offices at
- Seven World Trade Center, Suite 1300, New York, New York
10048; and
- 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, copies of the Registration Statement may be obtained from the
Public Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of certain prescribed fees.
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<PAGE>
You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-732-0330. In addition, the
Registration Statement may be accessed electronically through the SEC's
Electronic Data Gathering, Analysis and Retrieval system at the SEC's World Wide
Website located at HTTP://WWW.SEC.GOV.
REPORTS TO SECURITYHOLDERS
Unless definitive securities are issued for an series of securities,
periodic unaudited reports as described in the related prospectus supplement
containing information concerning the student loans in the related trust will be
prepared by the administrator on behalf of the trust and sent only to Cede &
Co., as nominee of DTC and registered holder of the securities. Reports will not
be sent to any beneficial holder of the securities. The reports will not
constitute financial statements prepared under generally accepted accounting
principles.
The master servicer will file with the SEC such periodic reports as are
required under the Securities Exchange Act of 1934, as amended, and the related
rules and regulations. Each trust intends to suspend the filing of reports under
the Exchange Act, when and if filing is no longer required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by or for a trust, pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this prospectus and before the termination of the
offering of any series of securities shall be deemed to be incorporated by
reference into this prospectus. Any statement contained in this prospectus or in
a document incorporated or deemed to be incorporated by reference shall be
deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus or in any subsequently
filed document that also is or is deemed to be incorporated by reference in this
prospectus modifies or supersedes that statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The administrator will provide without charge to each person to whom a
copy of this prospectus is delivered, on the written or oral request of that
person, a copy of any or all of the documents incorporated in this prospectus by
reference, except the exhibits to such documents (unless the exhibits are
specifically incorporated by reference). Written requests for such copies should
be directed to Nellie Mae Education Loan Corporation, 1240 Pawtucket Avenue,
Rumford, Rhode Island 02916, Attention: Mary Jo Feldman. Telephone requests for
such copies should be directed to (401) 438-4500.
PLAN OF DISTRIBUTION
The seller and the underwriters named in each prospectus supplement
will enter into an underwriting agreement for the notes of the related series
and an underwriting agreement for the certificates of that series. Under the
terms of the underwriting agreements, the seller will agree to cause the related
trust to sell to the underwriters, and each of the underwriters will severally
agree to purchase, the principal amount of each class of notes and certificates,
as the case may be, of the related series set forth in the agreements and in the
prospectus supplement.
In each of the underwriting agreements with respect to any given series
of securities, the several underwriters will agree, subject to the applicable
terms and conditions, to purchase all the notes and certificates, as the case
may be, which are described in the agreements and offered by this prospectus and
the related prospectus supplement if any of notes and certificates, as the case
may be, are purchased.
Each prospectus supplement will either
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<PAGE>
- set forth the price at which each class of notes and
certificates, as the case may be, being offered will be
offered to the public and any concessions that may be offered
to certain dealers participating in the offering of the notes
and certificates, as the case may be; or
- specify that the notes and certificates, as the case may be,
are to be resold by the underwriters in negotiated
transactions at varying prices to be determined at the time of
sale. After the initial public offering of any the notes and
certificates, as the case may be, the public offering prices
and concessions may be changed.
Until the distribution of the securities is completed, SEC rules may
limit the ability of the underwriters and certain selling group members to bid
for and purchase the securities. As an exception to these rules, the
underwriters are permitted to engage in certain transactions that stabilize the
price of the securities. These consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the securities.
If an underwriter creates a short position in the securities in
connection with the offering (I.E., if it sells more securities than are set
forth on the cover page of the related prospectus supplement), the underwriter
may reduce that short position by purchasing securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters
and selling group members. This means that if the underwriter purchases
securities in the open market to reduce the underwriters' short position or to
stabilize the price of the securities, it may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of those purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the seller nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the securities. In addition, neither
the seller nor the underwriters make any representation that the underwriters
will engage in those transactions or that those transactions, once commenced,
will not be discontinued without notice.
Each underwriting agreement will provide that the seller will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or contribute to the payments that the
several underwriters may be required to make.
Each trust may, from time to time, invest the funds in its Issuer
Accounts in eligible investments acquired from the underwriters.
Under each of the underwriting agreements with respect to a given
series of securities, the closing of the sale of any class of securities subject
to either agreement will be conditioned on the closing of the sale of all the
other classes subject to either agreement.
The place and time of delivery of the securities for which this
prospectus is delivered will be set forth in the related prospectus supplement.
LEGAL MATTERS
Ann M. O'Rourke, General Counsel of Nellie Mae, will pass upon certain
legal matters relating to the securities of each series for the related trust,
the seller, the master servicer and the administrator.
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<PAGE>
Brown & Wood LLP will pass upon federal income tax matters on behalf of
each trust and upon certain legal matters relating to the securities of each
series for the underwriters. From time to time, Brown & Wood llp has provided
and expects to continue to provide legal services to Nellie Mae Corporation and
its affiliates.
S-70
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection
with the offering of $1,000,000 of the Asset-Backed Notes and Asset-Backed
Certificates under this Registration Statement, other than underwriting
discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee................................... $ 278
Legal fees and expenses................................ *
Accounting fees and expenses........................... *
Blue Sky fees and expenses............................. *
Rating agency fees..................................... *
Eligible lender trustee fees and expenses.............. *
Indenture trustee fees and expenses.................... *
Printing expenses...................................... *
Miscellaneous.......................................... *
---------
Total................................ $ *
---------
---------
</TABLE>
- -----------------------
* To be provided by amendment
Item 15. Indemnification of Directors and Officers.
The By-Laws of Nellie Mae Education Loan Corporation specify that
Nellie Mae Education Loan Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceedings, had no reasonable cause to believe his or
her conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
The By-Laws of Nellie Mae Education Loan Corporation further specify
that Nellie Mae Education Loan Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or sit by or in the right of the
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<PAGE>
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust, or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery of the State of Delaware or such other court shall deem proper.
Item 16. Exhibits.
<TABLE>
<S> <C>
1.1 Form of underwriting agreement for notes*
1.2 Form of underwriting agreement for certificates*
3.1 Certificate of Incorporation of the Registrant*
3.2 By-laws of the Registrant*
3.3 Form of certificate of trust (to be included as an exhibit to
Exhibit 4.2)*
4.1 Form of indenture between the trust and the indenture trustee
(including a form of note as an exhibit to the indenture)*
4.2 Form of trust agreement among the seller, the trust and the
eligible lender trustee (including a form of certificate as an
exhibit to the trust agreement)*
4.3 Form of note (to be included as an exhibit to Exhibit 4.1)*
4.4 Form of certificate (to be included as an exhibit to Exhibit
4.2)*
5.1 Opinion of Ann M. O'Rourke, General Counsel of Nellie Mae
Corporation, the corporate parent of the Registrant, as to the
legality of the notes and certificates*
8.1 Opinion of Brown & Wood LLP with respect to certain tax matters*
23.1 Consent of Ann M. O'Rourke (included as part of 5.1)*
23.2 Consent of Brown & Wood LLP (included as part of 8.1)*
24.1 Powers of Attorney**
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
25.1 Statement of eligibility of the indenture trustee under the
Trust Indenture Act of 1939 *
99.1 Form of loan sale agreement among the seller, the trust and the
eligible lender trustee*
99.2 Form of loan servicing agreement among the master servicer,
the trust and the eligible lender trustee*
99.3 Form of administration agreement among the trust, the
indenture trustee and the Registrant, as administrator*
</TABLE>
------------------------------
* To be provided by amendment
** Previously filed
Item 17. Undertakings.
(a) AS TO RULE 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this Registration
Statement (or the most recent post-effective
amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in this Registration Statement;
and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in
this Registration Statement or any material change to
such information in this Registration Statement;
PROVIDED, HOWEVER, that the undertakings set forth in clauses (i) and (ii) above
do not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended, that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) AS TO DOCUMENTS SUBSEQUENTLY FILED THAT ARE INCORPORATED HEREIN BY
REFERENCE:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) AS TO THE INDENTURES:
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements, Notes and
Certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(d) AS TO INDEMNIFICATION:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, such Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(e) AS TO LIABILITY:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to
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<PAGE>
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(f) AS TO THE INDENTURE TRUSTEE:
To file an application for the purpose of determining the eligibility
of the indenture trustee to act under subsection (a) of Section 310 of the Trust
Indenture Act of 1939, as amended, in accordance with the rules and regulations
prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act
of 1939, as amended.
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements (including, without limitation, the security rating
requirement at time of sale) for filing on Form S-3 and has duly caused this
Amendment No. 1 to Registration Statement on Form S-3 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Rumford, State of
Rhode Island, on the 1st day of July, 1999.
NELLIE MAE EDUCATION LOAN CORPORATION
(Registrant)
By: *
----------------------
Name: Lawrence W. O'Toole
Title: President
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------- --------
<S> <C>
*
- -------------------- President (and chief executive officer),
Lawrence W. O'Toole Director
/s/John F. Remondi
- -------------------- Treasurer (chief financial officer and chief
John F. Remondi accounting officer), Director
</TABLE>
*By: /s/John F. Remondi
--------------------
John F. Remondi, Attorney-in-Fact
pursuant to previously filed Power of Attorney
Dated: July 1, 1999
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