<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1999
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHEC FUNDING, LLC
(Exact name of Registrant as specified in its charter)
on behalf of itself and trusts with respect to which
it is the settlor, sponsor or depositor
Delaware Applied for
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
--------------------------------------
CHEC FUNDING, LLC
2728 N. Harwood Street
Dallas, Texas 75201
(214) 981-5000
(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
----------------------------
Bruce Winn
Director and Vice President
Corporation Service Company
1013 Centre Street
Wilmington, DE 19805
(800) 927-9800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copy to:
Reed D. Auerbach
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
AGGREGATE MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED (1) REGISTERED (2) PER UNIT (2) PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Notes and Certificates $1,000,000 100% $1,000,000 $264
</TABLE>
(1) The securities are also being registered for the purpose of market making.
(2) Estimated solely for the purpose of calculating the registration fee.
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
INTRODUCTORY NOTE
This Registration Statement contains (i) a form of Prospectus
relating to the offering of a series of Asset Backed Notes and/or Asset
Backed Certificates by various Centex Home Equity Loan Trusts created from
time to time by CHEC Funding, LLC and (ii) two forms of Prospectus Supplement
relating to the offering by Centex Home Equity Loan Trusts of the particular
series of Asset Backed Certificates or of Asset Backed Notes and Asset Backed
Certificates described therein. Each form of Prospectus Supplement relates
only to the securities described therein and is a form which, among others,
may be used by CHEC Funding, LLC to offer Asset Backed Notes and/or Asset
Backed Certificates under this Registration Statement.
In addition, if and to the extent required by applicable law, each
Prospectus and the related Prospectus Supplement will also be used after the
completion of the related offering in connection with certain offers and
sales related to market-making transactions in the offered securities. In
order to register under Rule 415 those securities which may be offered and
sold in market-making transactions, the appropriate box on the cover page of
the Registration Statement has been checked and the undertakings required by
Item 512(a) of Regulation S-X have been included in Item 17 of Part 17.
<PAGE>
(To Prospectus dated _________________________ , ____)
$-----------------
CENTEX HOME EQUITY LOAN TRUST ____-_
Centex Home Equity Loan Asset-Backed Notes, Series ____-_
Centex Credit Corporation
d/b/a Centex Home Equity Corporation
Seller and Servicer
[Centex Logo]
CHEC Funding, LLC
Depositor
<TABLE>
<CAPTION>
NOTE PROCEEDS
PRINCIPAL NOTE PRICE TO UNDERWRITING TO THE
BALANCE RATE PUBLIC DISCOUNT DEPOSITOR
--------- ---- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Class A-1 Notes $ Fixed * % % %
Class A-2 Notes $ Fixed * % % %
Class A-3 Notes $ Variable ** % % %
</TABLE>
- ------------------
* subject to an interest rate cap
** subject to an available funds cap
[begin sidebar]
- --------------------------------------------------------------------------------
The notes represent non-recourse obligations of the trust only and do not
represent an interest in or obligation of [the Trust owners]. Centex Home Equity
Corporation, the indenture trustee, the owner trustee or any of their
affiliates.
- --------------------------------------------------------------------------------
[end sidebar]
The trust:
- - is a Delaware business trust formed pursuant to a trust agreement between
________ and ____________
- - will issue three classes of notes, which are offered by this prospectus
supplement; and
- - will issue a transferor interest, which is not offered by this propsectus
supplement.
The notes:
- - are principally secured by the assets of the trust, which consist of one
group of closed-end, fixed-rate home equity loans, one group of closed end,
adjustable-rate home equity loans with conforming balances and one group of
closed-end, adjustable-rate home equity loans with non-conforming balances;
- - currently have no trading market; and
- - are not insured or guaranteed by any governmental agency.
Credit enhancement will be provided in the form of overcollateralization,
limited crosscollateralization and irrevocable and unconditional financial
guaranty insurance policies issued by _____________________.
REVIEW THE INFORMATION IN "RISK FACTORS" BEGINNING ON PAGE S-__ OF THIS
PROSPECTUS SUPPLEMENT AND PAGE __ OF THE PROSPECTUS.
After the initial distribution of the notes, this prospectus and prospectus
supplement may be used in market making transactions in the notes. In connection
with any market making transactions, certain information in this prospectus
supplement will be updated from time to time.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE NOTES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The underwriters named below will purchase the notes from the depositor. See
"Underwriting" in this prospectus supplement. The notes will be issued in
book-entry form only on or about __________ ___, ____.
[UNDERWRITER LOGO]
________________ ____, ________
<PAGE>
For 90 days following the date of this prospectus supplement, all dealers
selling the notes will deliver a prospectus supplement and prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not permitted.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
---------------------
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Summary..............................................S-3
Risk Factors.........................................S-11
The Note Insurer.....................................S-23
Description of the Home Equity Loans.................S-23
Prepayment and Yield Considerations..................S-46
The Trust............................................S-55
Description of the Notes.............................S-56
Description of the Agreements........................S-69
Use of Proceeds......................................S-76
Certain Federal Income Tax Considerations............S-76
Certain State Tax Considerations.....................S-78
Erisa Considerations.................................S-78
Legal Investment Considerations......................S-79
Underwriting.........................................S-80
Experts..............................................S-80
Legal Matters........................................S-81
Ratings..............................................S-81
Index of Defined Terms...............................S-82
Annex I; Global Clearance, Settlement and Tax
Documentation Procedures...........................S-83
PROSPECTUS
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<CAPTION>
CAPTION PAGE
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<S> <C>
Prospectus Supplement................................5
Reports to Holders...................................5
Available Information................................6
Incorporation of Certain Documents
by Reference.......................................6
Introduction.........................................7
The Depositor........................................8
The Seller and the Servicer..........................8
Description of the Securities.......................15
The Trust Funds.....................................23
Accounts............................................26
Enhancement.........................................28
The Agreements......................................30
Certain Matters Regarding the Servicer..............37
Certain Legal Aspects of the Home
Equity Loans......................................45
Use of Proceeds.....................................52
Federal Income Tax Consequences.....................53
State Tax Consequences..............................75
ERISA Considerations................................75
Legal Investment....................................79
Plan of Distribution................................80
Legal Matters.......................................80
</TABLE>
<PAGE>
SUMMARY
- - This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the notes, you should read carefully this entire
prospectus supplement and accompanying prospectus.
- - This summary provides an overview to aid your understanding and is
qualified by the full description of this information in this prospectus
supplement and the accompanying prospectus.
- - You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined
Terms" beginning on page S-___ in this prospectus supplement.
ISSUER
- - Centex Home Equity Loan Trust ____-_.
DEPOSITOR
- - CHEC Funding, LLC, a Delaware limited liability company and wholly owned
subsidiary of Centex Credit Corporation d/b/a Centex Home Equity
Corporation.
SELLER AND SERVICER
- - __________________________
THE TRANSFEROR
- - The holder of the transferor interest, which initially will be the
depositor or an affiliate of the depositor.
OWNER TRUSTEE
- - _______________________
INDENTURE TRUSTEE
- - _______________________
NOTE INSURER
- - ____________________.
CLOSING DATE
- ------- --, -----.
CUT-OFF DATE
- - For each home equity loan, the later of (1) the opening of business on
______ __, ____ and (2) the date of its origination but in no event later
than the closing date.
- - All statistical information relating to the home equity loans presented in
this prospectus supplement is given as of the statistical calculation date.
STATISTICAL CALCULATION DATE
- --------- ---, -----
DISTRIBUTION DATE
The ___ day of each month, or if the ___ day is not a business day, then the
next succeeding business day. The first distribution date will be ________ __,
____.
RECORD DATE
With respect to any distribution date and the fixed rate notes, the close of
business on the last business day of the month immediately preceding the
calendar month in which the distribution date occurs. With respect to any
distribution date and the variable rate notes, the close of business on the last
business day immediately preceding the distribution date. If definitive notes
are issued, the record date will in all cases be the close of business on the
last business day of the month immediately preceding the calendar month in which
the distribution date occurs.
BUSINESS DAY
A business day is any day other than a Saturday or Sunday, or any other day that
banking institutions in the following cities are authorized or required by law
or executive order to be
S-3
<PAGE>
closed: New York, Dallas; [where the corporate trust offices of the owner
trustee or indenture trustee are located]; or [where the note insurer is
located].
REMITTANCE PERIOD
For purposes of calculating amounts payable on any distribution date, the
applicable Remittance Period is the calendar month immediately preceding the
calendar month in which the distribution date occurs.
THE NOTES
GENERAL
On the closing date, the trust will issue the notes and the transferor interest.
Only the notes are being offered under this prospectus supplement. We have
included information with respect to the transferor interest solely to provide
you with a better understanding of the notes.
GROUP I NOTES
The Group I notes will be the Class A-1 notes. Distributions on the Group I
notes will be primarily derived from payments on the home equity loans in Group
I.
GROUP II NOTES
The Group II notes will be the Class A-2 notes. Distributions on the Group II
notes will be primarily derived from payments on the home equity loans in Group
II.
GROUP III NOTES
The Group III notes will be the Class A-3 notes. Distributions on the Group III
notes will be derived principally from payments on the home equity loans in
Group III.
FIXED RATE NOTES
The Class A-1 notes and the Class A-2 notes.
VARIABLE RATE NOTES
The Class A-3 notes.
DENOMINATIONS
The notes will be offered for purchase in denominations of $1,000 and multiples
of $1 above $1,000.
BOOK-ENTRY REGISTRATION
We will issue the notes in book-entry form. You will hold your interests either
through a depository in the United States or through one of two depositories in
Europe. While the notes are in book-entry form they will be registered in the
name of the nominee of depository in the United States.
THE STATED MATURITY
The final scheduled distribution date for each class of notes is
_____________________.
TRANSFEROR INTEREST
Payments on the transferor interest are subordinated to payments on the notes,
as more fully described in this prospectus supplement. The transferor interest
will be held by the transferor.
DISTRIBUTIONS TO NOTEHOLDERS
GENERAL
You will be entitled to receive payments of interest on each distribution date.
We may reduce the amount of interest that you are entitled to receive on any
distribution date as a result of the application of the Soldiers' and Sailors'
Civil Relief Act of 1940. The amount of principal you will be entitled to
receive will vary depending on a number of factors, including the payments
received on the home equity loans. If you hold a note on the applicable record
date, you will be entitled to receive payments on the related distribution date.
FIXED RATE NOTE INTEREST
- - The interest rate on any distribution date with respect to the Class A-1
notes will be __% (or ___% for each distribution date after the first
distribution date on which the servicer has the option to purchase the home
equity loans), subject to an interest rate cap.
S-4
<PAGE>
- - The interest rate on any distribution date with respect to the Class A-2
notes will be __% (or ___% for each distribution date after the first
distribution date on which the servicer has the option to purchase the home
equity loans), subject to an interest rate cap.
The interest period with respect to each distribution date for a fixed rate note
is the calendar month preceding the month of the distribution date. For example,
if the distribution date occurs on _________, the interest period would be the
month of _________. Each calendar month will be deemed to have 30 days and each
year will be deemed to have 360 days. Therefore, if you are a holder of a fixed
rate note you would use the following formula to calculate your interest payment
on any distribution date:
30 x IR x PB = your interest payment
---
360
IR = the applicable per annum fixed interest rate, subject to (1) an
interest rate cap and (2) an increase if the servicer does not exercise its
option to terminate the trust by purchasing all of the home equity loans.
PB = the principal balance of your fixed rate note immediately prior to any
distributions on the distribution date. If you are a holder of a fixed rate
note, we will increase the interest payment we owe to you for a
distribution date by any unpaid amounts we owe to you from prior
distribution dates, plus accrued interest at the applicable note rate.
If you are a holder of a fixed rate note, you will not receive additional funds
on future distribution dates to compensate you for any reduction in the amount
of interest paid to you on a prior distribution date because of an interest rate
cap.
VARIABLE RATE NOTE INTEREST
- - The interest rate on any distribution date with respect to the Class A-3
notes will equal one-month LIBOR plus __% (or one-month LIBOR plus __% for
each distribution date after the first distribution date on which the
servicer has the option to purchase the home equity loans), subject to an
available funds cap.
The interest period with respect to each distribution date and the variable rate
notes is the period from and including the previous distribution date (or the
closing date in the case of the first distribution date) to and including the
day preceding the related distribution date. Interest on the variable rate notes
will accrue during the related interest period on the basis of the actual number
of days elapsed in the related interest period and a year consisting of 360
days. Therefore if you are a holder of a variable rate note, you would use the
following formula to calculate your interest payment on any distribution date:
N x IR x PB = your interest payment
---
360
N = number of days in the interest period
IR = the per annum floating interest rate for the interest period,
subject to both (1) an available funds cap and (2) an increase if the
servicer does not exercise its option to terminate the trust by purchasing
all of the home equity loans.
PB = the principal balance of your variable rate note immediately prior to
any distributions on the distribution date.
If you are a holder of a variable rate note, we will increase the interest
payment we owe to you for a distribution date by any unpaid amounts we owe to
you from prior distribution dates, plus accrued interest at the applicable note
rate.
Additionally, we will pay to you the amount by which we reduce the interest
payment we owe to you as a holder of a variable rate note because of the
available funds cap on future distribution dates, on a subordinated basis, to
the extent that money is available to make these payments.
PRINCIPAL PAYMENTS
On each distribution date, you will generally be entitled to a principal amount
equal to principal collections with respect to the group of home equity loans
associated with your notes plus amounts necessary to reach the required level of
overcollateralization for that distribution date.
S-5
<PAGE>
Amounts available to make this payment will be principal collections as well as
excess interest with respect to your home equity loans.
TRUST PROPERTY
The trust property includes:
- - a pool of closed-end fixed rate home equity loans, a pool of closed end,
adjustable-rate home equity loans with principal balances that may not
conform to Freddie Mac and Fannie Mae guidelines and a pool of closed-end
adjustable rate home equity loans with principal balances that may not
conform to Freddie Mac and Fannie Mae guidelines, in each case secured
primarily by first and second deeds of trust or mortgages on one-to
four-family residential properties transferred to the trust on the closing
date;
- - payments on the home equity loans received on and after the cut-off date;
- - property that secured a home equity loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
- - amounts on deposit in the accounts specified in this prospectus supplement;
- - rights under any hazard insurance policies, if any, covering the mortgaged
properties; and
- - proceeds of the foregoing.
Each class of notes will also have the benefit of a separate note insurance
policy issued by ___________________
THE HOME EQUITY LOANS
GENERAL
We will divide the home equity loans into three groups. Each of the home equity
loan groups will constitute a separate sub-trust. The Group I and Group II home
equity loan groups will contain home equity loans that bear interest at fixed
rates. The Group III home equity loan group will contain home equity loans that
bear interest at variable rates [that adjust semi-annually based on six-month
LIBOR and the applicable gross margin (subject to the limitations described in
this prospectus supplement). The initial rate adjustment date for those home
equity loans that bear interest at an adjustable rate is either (a) six months
after the date of origination of the related home equity loan or (b) two years
after the date of origination of the related home equity loan.
All of the home equity loans in the trust have been originated by the seller, an
affiliate of the seller or a broker for simultaneous assignment to the seller.
The home equity loans are secured primarily by first and second lien mortgages
or deeds of trust primarily on one-to-four family residential properties and
manufactured housing treated as real property under applicable state law. None
of the home equity loans is insured by a primary mortgage insurance policy.
The home equity loans are not and will not be guaranteed by the depositor, the
seller, the servicer, the note insurer, the transferor, the owner trustee, the
indenture trustee or any of their affiliates.
The statistical information presented in this prospectus supplement is with
respect to _________ home equity loans, of which ________ are fixed-rate home
equity loans and _______ are adjustable-rate home equity loans as of the
statistical calculation date. Prior to the closing date additional home equity
loans will be added to each home equity loan group and some home equity loans
may be removed from each home equity loan group, subject to the consent of the
note insurer. As a result, the characteristics of the home equity loans in each
home equity loan group as of the cut-off date will differ from the
characteristics presented in this prospectus supplement as of the statistical
calculation date. The depositor does not expect a material change in the
aggregate characteristics of any home equity loan group.
The home equity loans are secured by mortgaged properties located in ___ states
and the District of Columbia.
GROUP I HOME EQUITY LOANS
The home equity loans in Group I will have the following characteristics as of
the statistical calculation date:
- - number of home equity loans: ________
S-6
<PAGE>
- - aggregate principal balance: $__________
- - average principal balance: $___________
- - maximum principal balance: $_________
- - minimum principal balance: $_________
- - last maturity date: __________________
- - interest rates range: ___% to ____%
- - weighted average interest rate: ______% (approximate)
- - weighted average remaining term to stated maturity, based on principal
balance: _____ months (approximate)
- - remaining term to stated maturity range: ___ months to _____ months
- - weighted average combined loan-to-value ratio: ______% (approximate)
- - no original combined loan-to-value ratio exceeded _____%
- - balloon loans: _____% (approximate)
- - secured by first lien on the mortgaged property: ______%
- - secured by second lien on the mortgaged property: ______%
GROUP II HOME EQUITY LOANS
The home equity loans in Group II will have the following characteristics as of
the statistical calculation date:
- - all home equity loans in Group II:
- - number of home equity loans: ______
- - aggregate principal balance: $_________
- - average principal balance: $__________
- - maximum principal balance: $__________
- - minimum principal balance: $__________
- - last maturity date: _______________
- - interest rates range: ______% to _____%
- - weighted average interest rate: ______% (approximate)
- - weighted average remaining term to stated maturity, based on principal
balance: _____ months (approximate)
- - remaining term to stated maturity range: ___ months to ____ months
- - weighted average combined loan-to-value ratio: _____% (approximate)
- - no original combined loan-to-value ratio exceeded _____%
- - balloon loans: _____% (approximate)
- - secured by first lien on the mortgaged property: _____%
- - secured by second lien on the mortgage property: _____%
GROUP III HOME EQUITY LOANS
The home equity loans in Group III will have the following characteristics as of
the statistical calculation date:
- - all home equity loans in Group III:
- - number of home equity loans: ______
- - aggregate principal balance: $_________
- - average principal balance: $__________
- - maximum principal balance: $__________
- - minimum principal balance: $__________
- - last maturity date: _______________
- - weighted average interest rate: ______% (approximate)
- - interest rates range: ______% to _____%
- - weighted average remaining term to stated maturity, based on principal
balance: _____ months (approximate)
- - remaining term to stated maturity range: ___ months to ____ months
- - weighted average loan-to-value ratio: _____% (approximate)
- - no original loan-to-value ratio exceeded _____%
- - weighted average gross margin: _____% (approximate)
- - weighted average maximum interest rate: _______% (approximate)
- - maximum interest rate range: __% to __%
- - weighted average minimum interest rate: ______% (approximate)
- - minimum interest rate range: __% to __%
- - Six-Month number of home equity loans: ____Adjustable Rate Loans:
- - weighted average remaining period until interest rate adjustment:
approximately __ months
- - initial payment adjustment: effective for the seventh monthly payment
period
- - initial interest rate adjustment cap: ____%
- - semi-annual interest rate adjustment cap: ____%
S-7
<PAGE>
- - lifetime interest rate cap: _____%
- - 2/28 Adjustable Rate Loans:
- - number of home equity loans: ________
- - weighted average remaining period until next interest rate adjustment:
approximately ___ months
- - initial payment adjustment: effective for the 25th monthly payment
period
- - initial interest rate adjustment cap: ____%
- - semi-annual interest rate adjustment cap: ____%
- - lifetime interest rate cap: _____%
DELINQUENCY ADVANCES AND COMPENSATING INTEREST
Each month the servicer will determine the amount of any unpaid interest due on
the home equity loans. If the servicer believes that unpaid interest can be
recovered, then the servicer will either:
- - advance the unpaid interest to the trust out of its own funds; or
- - advance the unpaid interest to the trust out of collections on the home
equity loans that are not required to be distributed on the related
distribution date.
The servicer will reimburse the trust for amounts advanced from trust
collections prior to the date on which these amounts are required to be a part
of any amounts distributable to you.
The servicer will provide to the trust the amount of any shortfall in the
anticipated collection of interest on a home equity loan that is caused by a
full prepayment of a home equity loan or a prepayment of at least six times a
mortgagor's monthly payment up to the amount of the aggregate servicing fee due
on the related distribution date. The servicer is entitled to be reimbursed by
the trust for any delinquency advances from the related home equity loan. The
servicer is also entitled to be reimbursed by the trust for any delinquency
advances, as well as unreimbursed payments of compensating interest, from all
the home equity loans [in the related group] to the extent funds are available
after making other required distributions on the related distribution date.
SERVICING ADVANCES
Unless the servicer determines that any proposed advance is not recoverable from
the related home equity loan, the servicer will pay all "out of pocket" costs
and expenses incurred in the performance of its servicing obligations,
including, but not limited to:
- - expenditures in connection with a foreclosed home equity loan prior to
its liquidation;
- - the cost of any enforcement or judicial proceedings, including
foreclosures; and
- - the cost of the management and liquidation of property acquired in
satisfaction of the related home equity loan.
The servicer is entitled to be reimbursed by the trust for any servicing
advances from the related home equity loan group [and also from all the home
equity loans to the extent funds are available after making other required
distributions on the related distribution date.]
CREDIT ENHANCEMENT
NOTE INSURANCE POLICIES
___________________ will issue three note guaranty insurance policies for the
benefit of each class of notes.
The note insurance policies will unconditionally and irrevocably guarantee the
timely payment of interest on and the ultimate payment of the principal amount
of each class of notes.
On each distribution date, the owner trustee will, for each class of notes,
calculate to what extent the funds available to make the payments of principal
and interest are insufficient to (1) pay current interest on the notes or (2)
reduce the principal balance of the related notes to an amount equal to the
principal balance of the home equity loans in the related home equity loan
group. If an insufficiency exists, then the owner trustee will make a draw on
the related note insurance policy. In addition, each note insurance policy will
guarantee the full payment of the principal balance on each class of notes on
the final scheduled distribution date.
S-8
<PAGE>
The note insurance policies do not cover any shortfalls related to the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended, or as a result of the
application of any interest rate cap or available funds cap.
If for any reason the note insurer does not make the payments required in the
related note insurance policy, you will have to rely solely on the home equity
loans for your payments of interest and principal and you may suffer a loss.
OVERCOLLATERALIZATION
Overcollateralization is calculated as the amount by which the aggregate
principal balance of the home equity loans in the related home equity loan group
exceeds the principal balance of the class of notes related to the home equity
loan group. The notes will not have the benefit of any overcollateralization on
the date the notes are issued. Following the date the notes are issued, excess
interest collections, if any, will be applied as accelerated payments of
principal to the related class of notes until the overcollateralization level
for the home equity loan group equals the required overcollateralization amount
for the home equity loan group.
If there are not sufficient excess interest collections with respect to a
particular home equity loan group, the related overcollateralization amount will
not be increased to or maintained at the required level. In addition, realized
losses on the home equity loans in a particular home equity loan group will
reduce the amount of overcollateralization with respect to the related class of
notes. If realized losses on the home equity loans in a particular home equity
loan group result in the overcollateralization amount for the home equity loan
group becoming negative, to the extent that excess amounts are not available
from that home equity loan group or from the other home equity loan groups, a
draw will be made on the related note insurance policy. The required
overcollateralization amount for each home equity loan group may be reduced or
eliminated by the note insurer without your consent.
CROSSCOLLATERALIZATION
Each home equity loan group provides for limited crosscollateralization of the
notes related to the other home equity loan groups. Excess amounts generated by
one home equity loan group will be available to fund:
- - shortfalls in the payment of interest on the notes related to the other
home equity loan groups as a result of defaults;
- - principal losses on the home equity loans in another home equity loan
group to the extent not covered by excess interest or
overcollateralization in the other home equity loan group; and
- - the reimbursement of the note insurer [and the owner trustee] for amounts
owed with respect to the other home equity loan groups.
OPTIONAL TERMINATION BY THE SERVICER
The servicer may, at its option, terminate the trust on the first distribution
date on which the aggregate outstanding principal balance of the home equity
loans in all groups is equal to or less than 10% of the aggregate outstanding
principal balance of the home equity loans on the cut-off date.
OPTIONAL PURCHASE OF DEFAULTED HOME EQUITY LOANS
The servicer has the option, but is not obligated, to purchase from the trust
any home equity loan that becomes delinquent for two consecutive monthly
installments, subject to the limitations described in the sale and servicing
agreement.
CERTAIN FEDERAL TAX CONSIDERATIONS
In the opinion of Stroock & Stroock & Lavan LLP, counsel to the seller and the
issuer, for federal income tax purposes, the notes will be treated as debt and
the "trust fund" (as defined in the prospectus) will not be an association,
publicly traded partnership or taxable mortgage pool taxable as a corporation.
By your purchase of a note, you will be agreeing to treat the notes as debt for
federal income tax purposes.
ERISA CONSIDERATIONS
Subject to the considerations and conditions described under "ERISA
CONSIDERATIONS" in the prospectus and in this prospectus
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supplement, we expect that the notes may be purchased by a pension or other
employee benefit plan or arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended, and/or Section 4975 of the Internal Revenue
Code of 1986, as amended, pursuant to certain prohibited transaction class
exemptions which are based on the identity of the fiduciary of the plan
purchasing the notes.
LEGAL INVESTMENT CONSIDERATIONS
The notes will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in comparably rated securities may
not be legally authorized to invest in the notes.
NOTE RATINGS
It is a condition to the issuance of the notes that they receive ratings of
"AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and "Aaa" by Moody's Investors Service, Inc.
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RISK FACTORS
You should consider the following risk factors together with all the
information contained in this prospectus supplement and the related prospectus
in deciding whether to purchase any of the notes.
HOME EQUITY LOANS ARE
ONLY SOURCE OF REPAYMENT The notes will be payable solely from the assets of
the trust fund and from the credit enhancement
described in this prospectus supplement. You will
have no recourse to the depositor, the seller, the
servicer or any other person for any default on the
notes or any failure to receive distributions on the
notes. In addition, certain home equity loans and/or
any balance remaining immediately after making all
payments due on the notes and other payments
specified in this prospectus supplement, will be
promptly released or remitted to the holder of the
tranferor interest or any other designated person and
will no longer be available for making payments to
holders. Consequently, you must rely solely upon
payments with respect to the home equity loans and
the other assets constituting the trust fund for the
notes, including amounts available as credit
enhancement, which include bond insurance,
overcollateralization and crosscollateralization, for
the payment of principal of and interest on the
notes.
You will be required under the indenture to proceed
only against the home equity loans and other assets
constituting the trust fund in the case of a default
with respect to the notes and may not proceed against
any assets of the depositor, the seller, the servicer
or any other person. There is no assurance that the
market value of the home equity loans or any other
assets will at any time be equal to or greater than
the aggregate principal amount of the notes then
outstanding plus accrued interest. In addition, upon
an event of default under the indenture and a sale of
the assets in the trust fund, the trustee, the
servicer, the credit enhancer, and any other service
provider specified in the prospectus supplement will
be entitled to receive the proceeds of the sale to
the extent of unpaid fees and other amounts owed to
them prior to distributions on the notes. Proceeds of
a sale of the assets may be insufficient to pay in
full the principal of and interest on the notes, and
you may suffer a loss on your investment.
PERFORMANCE MAY BE AFFECTED
BY THE SERVICER'S LIMITED Although the seller began originating home equity
EXPERIENCE loans in 1994, prior to October 1997 the seller sold
substantially all of its home equity loans in whole
loan transactions, and did not continue to service
those home equity loans. As a result, the servicer
has approximately two years of historical loss data
relating to its home equity loan portfolio that you
may refer to for purposes of examining the loss
experience of home equity loans similar to the home
equity loans being sold to the trust. Moreover, the
servicing of home equity loans of the type included
in the trust (as compared to the servicing of
conforming or prime home equity loans) requires
special skill and diligence. The servicing of these
types of home equity loans generally requires more
attention to each account, earlier and more frequent
contact with borrowers in default and
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commencing the foreclosure process at an earlier
stage of default. The servicer has limited experience
servicing home equity loans similar to the home
equity loans being sold to the trust. The servicer
will directly service all of the home equity loans in
the trust. The servicer's relative lack of experience
in servicing home equity loans may result in greater
losses on the home equity loans and result in
accelerated prepayments on your notes. You will bear
any reinvestment risk resulting from any accelerated
prepayments.
THE BORROWERS HAVE LESS THAN
PERFECT CREDIT The seller's underwriting standards generally are
less stringent than those of Fannie Mae or Freddie
Mac with respect to a borrower's credit history,
collateral and in other respects. The home equity
loans originated or acquired by the seller or its
affiliates have been made to borrowers that typically
have limited access to traditional mortgage financing
for a variety of reasons, including, impaired past
credit experience, limited credit history,
insufficient home equity value, or a high level of
debt-to-income ratios. As a result of this approach
to underwriting, the home equity loans may experience
higher rates of delinquencies, defaults and
foreclosures than home equity loans underwritten in
accordance with Fannie Mae or Freddie Mac's
guidelines.
NEWLY ORIGINATED HOME EQUITY
LOANS MAY DEFAULT Approximately __% of the Group I home equity loans,
___% of the Group II home equity loans and _____% of
the Group III home equity loans were originated
within twelve months prior to the statistical
calculation date. The weighted average remaining term
to stated maturity of each of the Group I, Group II
and Group III home equity loans as of the statistical
calculation date is approximately_____ months, ____
months and _____ months, respectively. Although
little data is available, defaults on home equity
loans, including home equity loans similar to the
home equity loans in the trust, are generally
expected to occur with greater frequency in the early
years of the terms of home equity loans.
GEOGRAPHIC CONCENTRATION MAY
AFFECT PERFORMANCE OF THE Approximately _____%, _____% and _____% of the Group
HOME EQUITY LOANS I home equity loans are located in [Texas, Florida
and Tennessee], respectively, approximately _____% ,
_____% , _____% , _____% , _____% and _____% of the
Group II home equity loans are located in
[California, Washington, Ohio, New York, Texas and
North Carolina], respectively and approximately ___%
and ___% of the Group III home equity loans are
located in ______ and ______, respectively. To the
extent that the related regions have experienced or
may experience in the future weaker economic
conditions or greater rates of decline in real estate
values than the United States generally, a
concentration of the home equity loans may be
expected to have an unduly large impact on the
performance of the home equity loan pool as a whole.
The seller and the depositor can neither quantify the
impact of any recent property value declines on the
home equity loans nor predict whether, to
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what extent or for how long declines may continue.
BORROWERS UNDER BALLOON LOANS
MAY BE UNABLE TO MAKE Balloon loans require the borrower to make a large
FINAL PAYMENT OF lump sum payment of principal at the end of the loan
PRINCIPAL term. If the borrower is unable to pay this lump sum
or refinance this amount, you will suffer a loss if
the collateral for the loan and the other forms of
credit enhancement are insufficient to cover the
loss, and if the note insurer fails to perform its
obligations under the applicable note insurance
policy. Approximately __% of the Group I home equity
loans, __% of the Group II home equity loans and __%
of the Group III home equity loans, in each case as
of the statistical calculation date, are balloon
loans.
CREDIT ENHANCEMENT PROVIDES LIMITED
PROTECTION AGAINST LOSSES Although credit enhancement is intended to reduce the
impact of delinquent payments or losses on the
payment of the notes, the amount of credit
enhancement will be limited and will decline and
under certain circumstances could be depleted prior
to the payment in full of the notes. As a result, you
may suffer losses on your investment.
CERTAIN FACTORS MAY CAUSE PROPERTY
VALUES TO BE INSUFFICIENT TO COVER
HISTORICAL LOSSES ON THE HOME
EQUITY LOANS There are several factors that could adversely affect
the value of the mortgaged properties so that the
outstanding balance of the related home equity loan,
together with any senior financing on the mortgaged
properties, would equal or exceed the value of the
mortgaged properties. Among the factors that could
adversely affect the value of the mortgaged
properties are an overall decline in the residential
real estate market in the areas in which the
mortgaged properties are located or a decline in the
general condition of the mortgaged properties as a
result of failure of borrowers to maintain adequately
the mortgaged properties or of natural disasters that
are not necessarily covered by insurance, such as
earthquakes and floods. Any decline in value of the
mortgaged property could extinguish the value of a
junior interest in a mortgaged property before having
any effect on the related senior interest. If a
decline occurs, the actual rates of delinquencies,
foreclosure and losses on the junior home equity
loans could be higher than those currently
experienced in the mortgage and home improvement
lending industry in general.
HOME EQUITY LOANS TRANSFERRED TO THE
TRUST MAY HAVE CHARACTERISTICS THAT
DIFFER FROM THOSE OF THE
HOME EQUITY LOANS PRESENTED
IN THIS PROSPECTUS WHICH MAY
REDUCE YOUR YIELD TO
MATURITY Following the transfer of the home equity loans to
the trust on the closing date, the characteristics of
the home equity loans may differ from the information
presented in this prospectus supplement. The
characteristics that may differ include, among
others, the composition of the home equity loans and
of the borrowers of home equity loans, the credit
quality of the home equity loans, the distribution by
interest rate, the distribution by principal balance,
the distribution by loan-to-value ratio and the
distribution by
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remaining term to stated maturity. You should
consider potential variances when making your
investment decision concerning the notes.
EVENTS OF DEFAULT UNDER THE
INDENTURE MAY HAVE A
SIGNIFICANT IMPACT ON THE
WEIGHTED AVERAGE LIFE OF
THE NOTES So long as the note insurer is not in default with
respect to its obligations under the note insurance
policies, neither the indenture trustee nor the
noteholders may declare an event of default under the
indenture or accelerate the maturity of the notes
without the consent of the note insurer. Upon the
occurrence of an event of default under the indenture
(so long as the note insurer is not in default with
respect to its obligations under the note insurance
policies), the note insurer will have the right, but
not the obligation, to cause the liquidation, in
whole or in part, of the home equity loan pool, which
will result in redemption, in whole or in part, of
the notes. The note insurer's decisions with respect
to defaults under the indenture may have a
significant impact on the weighted average life of
your notes.
THE RATE OF RETURN OF PRINCIPAL IS
UNCERTAIN DUE TO PREPAYMENTS
ON HOME EQUITY LOANS OVERVIEW. Generally, if prevailing interest rates
fall significantly below the interest rates on the
home equity loans, the home equity loans are likely
to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest
rates on the home equity loans. Conversely, if
prevailing interest rates rise significantly above
the interest rates on the home equity loans, the rate
of prepayments is likely to decrease. The average
life of your notes and, if purchased at other than
par, the yields realized by you will be sensitive to
levels of payment (including prepayments relating to
the home equity loans) on the home equity loans.
In general, the yield on a note that is purchased at
a premium to the outstanding principal amount of the
note may be adversely affected by a higher than
anticipated level of prepayments of the home equity
loans. Conversely, the yield on a note that is
purchased at a discount to the outstanding principal
amount of the note may be adversely affected by a
lower than anticipated level of prepayments.
NO PREPAYMENT PENALTIES. Approximately _____% of the
Group I home equity loans, ___% of the Group II home
equity loans and _____% of the Group III home equity
loans, in each case as of the statistical calculation
date, may be prepaid in whole or in part at any time
without penalty. Home equity loans may not be viewed
by borrowers as permanent financing. Accordingly, the
home equity loans in the trust may experience a
higher rate of prepayment than traditional home
equity loans. The trust's prepayment experience may
be affected by a wide variety of factors, including
general economic conditions, interest rates, the
availability of alternative financing and homeowner
mobility.
DUE-ON-SALE CLAUSES. All of the home equity loans
will contain due-on-sale provisions and the servicer
is required by the sale and servicing agreement to
enforce these provisions unless the enforcement is
not permitted by applicable law or the servicer, in a
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manner consistent with reasonable commercial
practice, permits the purchaser of the related
mortgaged property to assume the home equity loan. To
the extent permitted by applicable law, any
assumption will not release the original borrower
from its obligation under any home equity loan.
2/28 ADJUSTABLE RATE LOANS. Approximately _____% of
the Group III home equity loans as of the statistical
calculation date, have a two year fixed rate term
followed by a 28 year adjustable rate term. As with
all home equity loans, the rate of prepayments on
these 2/28 adjustable rate loans which are in the
initial fixed rate period is sensitive to prevailing
interest rates. The prepayment behavior of the 2/28
adjustable rate loans may differ from that of the
other home equity loans. As a 2/28 adjustable rate
loan approaches its initial adjustment date, the
borrower may become more likely to refinance the loan
to avoid an increase in the coupon rate, even if
fixed rate loans are only available at rates that are
slightly lower or higher than the coupon rate before
adjustment. The existence of the applicable periodic
rate cap, lifetime cap and lifetime floor also may
affect the likelihood of prepayments resulting from
refinancings.
DIFFERENT SOURCES OF PAYMENT
ON EACH CLASS OF NOTES MAY
RESULT IN A DIFFERENT RATE
OF RETURN OF PRINCIPAL ON
EACH CLASS OF NOTES The rate of prepayment, including loss experience, on
a home equity loan pool is affected by the individual
characteristics of the home equity loans. Because
payment of principal and interest on each class of
notes is made from the cash generated by a different
group of home equity loans, the rate of prepayment
of each class of notes will differ.
THE RATE OF RETURN OF PRINCIPAL
MAY BE AFFECTED BY CERTAIN
STRUCTURAL FEATURES OPTIONAL TERMINATION OF THE TRUST. The yield to
maturity on your notes may be affected by the
exercise by the servicer of its right to terminate
the trust prior to the date that the home equity
loans have fully amortized.
PAYMENT ON EACH CLASS OF NOTES OUT OF A DIFFERENT
POOL OF HOME EQUITY LOANS. The rate of prepayments
may be affected by the characteristics of the home
equity loans. As a result, the yield to maturity of
each class of notes may differ because their source
of payment is derived from separate home equity loan
groups, which may perform in a different manner from
other groups.
REPURCHASE OF HOME EQUITY LOANS DUE TO BREACH OF
REPRESENTATIONS AND WARRANTIES. Prepayments of the
home equity loans may also result from repurchase of
home equity loans due to material breaches of the
seller's representations and warranties.
EFFECT OF HOME EQUITY
LOAN YIELD ON NOTE RATE OF
CLASS A-3 NOTES;
BASIS RISK Approximately _____% of the Group III home equity
loans as of the
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statistical calculation date, adjust semi-annually
based upon six-month LIBOR. We refer to these loans
in this prospectus supplement as the six-month
adjustable rate loans. Approximately _____% of the
Group III home equity loans as of the statistical
calculation date, are 2/28 adjustable rate loans.
These home equity loans provide for a fixed interest
rate for a period of approximately two years
following origination and after that time provide for
interest rate and payment adjustments in a manner
similar to the six-month adjustable rate loans.
The interest rate for the Class A-3 notes is
determined in accordance with and adjusts monthly
based upon one-month LIBOR, and is subject to the
Class A-3 available funds caps. One-month LIBOR and
six-month LIBOR may respond to different economic and
market factors, and there is not necessarily a
correlation between them. Thus, it is possible, for
example, that one-month LIBOR may rise during periods
in which six-month LIBOR is stable or is falling or
that, even if both one-month LIBOR and six-month
LIBOR rise during the same period, one-month LIBOR
may rise more rapidly than six-month LIBOR.
Furthermore, even if one-month LIBOR and six-month
LIBOR were at the same level, the Class A-3 available
funds caps may still limit the amount of interest
that would otherwise be distributable on the Class
A-3 notes. The operation of the Class A-3 available
funds caps may cause the note rate of the Class A-3
notes to be reduced for extended periods in a rising
interest rate environment. Although we intend that we
will pay to you on future distribution dates the
amount by which, because of the applicable available
funds cap, we reduce a A-3 noteholder's interest
payment, we cannot assure you that excess funds will
be available to make these payments.
In addition, Group III home equity loans are subject
to periodic adjustment caps and maximum rate caps,
and the weighted average margin is subject to change
based upon prepayment experience, which also may
result in the Class A-3 available funds cap limiting
increases in the note rate for the class. Finally,
the Group III home equity loans accrue interest on
the basis of a 360-day year assumed to consist of
twelve 30-day months, while calculations of interest
on the Class A-3 notes will be made on the basis of
the actual number of days elapsed in the related
interest period and a year of 360 days. This may
result in the Class A-3 available funds cap limiting
the note rate for the Class A-3 notes in interest
periods that have more than 30 days related to the
loan group. Consequently, the interest that becomes
due on the Group III home equity loans (net of the
sum of the amounts payable to each of the servicer,
the owner trustee, the indenture trustee and the note
insurer) may not equal the amount of interest that
would accrue at one-month LIBOR plus the applicable
margin on the Class A-3 notes with respect to any
distribution date.
If you are a holder of a Class A-3 notes and the note
rate is capped in any period by the applicable
available funds cap you may suffer a temporary or
permanent decline in the market value of your notes.
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YIELD CONSIDERATIONS RELATING
TO EXCESS CASH If the notes related to a home equity loan group are
overcollateralized by the home equity loan group
below the required amount, excess interest, if any,
generated by the home equity loan group will be
distributable on the related notes as a payment of
principal. If purchased at a premium or a discount,
the yield to maturity on your note will be affected
by the rate at which excess interest is distributed
as a payment of principal. If the actual rate of
excess interest distribution is slower than the rate
anticipated by an investor who purchases a related
note at a discount, the actual yield to the investor
will be lower than the investor's anticipated yield.
If the actual rate of excess interest distribution is
faster than the rate anticipated by an investor who
purchases a related note at a premium, the actual
yield to the investor will be lower than the
investor's anticipated yield. The amount of excess
interest available for distribution with respect to a
home equity loan group on any distribution date will
be affected by:
- the actual amount of interest received, collected
or recovered with respect to the home equity loans
in the related home equity loan group during the
calendar month prior to the related distribution
date;
- changes in the weighted average of the coupon rates
of the home equity loans in the related home equity
loan group resulting from prepayments and
liquidations of home equity loans; and
- in the case of Group III home equity loans,
adjustments in the interest rates on these loans
and adjustments in the note rates on the Class A-3
notes.
The amount of excess interest distributed as
principal on the notes related to a home equity loan
group will be based on the required amount of
overcollateralization. The required level of
overcollateralization may increase or decrease during
the period that the related class of notes remain
outstanding. Any increase in the
overcollateralization for the notes related to a home
equity loan group may result in an accelerated rate
of amortization of the related notes until the
overcollateralization for the notes equals the
required amount of overcollateralization. Any
decrease in the required amount of
overcollateralization will result in a decelerated
rate of amortization of the related notes until the
overcollateralization for the notes is reduced to the
required amount of overcollateralization for the
notes.
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LIQUIDATION OF HOME EQUITY
LOANS COULD CAUSE PAYMENT
DELAYS AND/OR LOSSES OVERVIEW. Even assuming that the mortgaged properties
provide adequate security for the related home equity
loans, substantial delays in receiving proceeds could
be encountered by the trust in connection with the
liquidation of defaulted home equity loans. As a
result, shortfalls in distributions on the notes
could occur if the note insurer were unable to
perform its obligations under the note insurance
policies. Further, liquidation expenses (including
legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds
payable on the notes and consequently reduce the
security for the home equity loans. In the event any
of the mortgaged properties fail to provide adequate
security for the related home equity loans,
noteholders could experience a loss if the note
insurer were unable to perform its obligations under
the note insurance policies.
SECOND LIENS. As of the statistical calculation date,
approximately _____% of the aggregate principal
balance of the Group I home equity loans, ___% with
respect to the Group II home equity loans and ___%
with respect to the Group III home equity loans are
secured by first liens on the related properties, and
approximately _____% of the aggregate principal
balance of the Group I home equity loans, ___% with
respect to the Group II home equity loans and ___%
with respect to the Group III home equity loans are
secured by second liens on the related properties.
With respect to home equity loans that are junior in
priority to liens having a first priority with
respect to the related mortgaged property, the
servicer has the power, in some cases, to consent to
a new mortgage lien on the mortgaged property having
priority over the home equity loan in connection with
the refinancing of the first lien. Home equity loans
secured by second mortgages are entitled to proceeds
that remain from the sale of the related mortgaged
property after any related senior home equity loan
and prior statutory liens have been satisfied. In the
event that the proceeds are insufficient to satisfy
the loans and prior liens in the aggregate and the
note insurer is unable to perform its obligations
under the note insurance policy, the trust and,
accordingly, you, bear (1) the risk of delay in
distributions while a deficiency judgment, if any,
against the borrower is sought and (2) the risk of
loss if the deficiency judgment cannot be obtained or
is not realized upon.
THERE COULD BE DELAYS IN DISTRIBUTIONS
ON YOUR NOTES IF THE TRANSFER OF
HOME EQUITY LOANS TO THE TRUST
IS NOT CONSIDERED A SALE IN
THE EVENT OF BANKRUPTCY The sale of the home equity loans from the seller or
an affiliate of the seller to the depositor and the
depositor to the trust will be treated by the seller,
the seller's affiliate, the depositor and the trust
as a sale of the home equity loans. In the event of
an insolvency of the seller, its affiliate or the
depositor, it is possible that a receiver or
conservator for, or a creditor of, the seller, the
seller's affiliate or depositor, may argue that the
transaction between the seller, the seller's
affiliate, the depositor and the trust, with respect
to the home equity loans was a pledge of the home
equity loans in connection
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with a borrowing rather than a true sale. This
attempt, even if unsuccessful, could result in delays
in distributions on the notes.
PREPAYMENT INTEREST SHORTFALLS
MAY RESULT IN LOSS OF
INTEREST When a full principal prepayment is made on a home
equity loan or a prepayment of at least six times a
mortgagor's monthly payment, the mortgagor is charged
interest only up to the date of the prepayment,
instead of for a full month which may result in a
prepayment interest shortfall. The servicer is
obligated to pay those shortfalls in interest
collections payable on the notes that are
attributable to prepayment interest shortfalls, but
only to the extent of the aggregate servicing fee due
on the related distribution date. Neither the
servicing fee nor the note insurance policy will be
available to cover any shortfalls in interest
collections on the home equity loans that are
attributable to the Soldiers' and Sailors' Civil
Relief Act of 1940. Prepayment interest shortfalls,
after application of the servicing fee as described
above, will be covered by the related note insurance
policy.
THE INTEREST PERIOD ON THE CLASS A-1
AND CLASS A-2 NOTES WILL REDUCE
EFFECTIVE YIELD ON THE CLASS
A-1 AND CLASS A-2 NOTES Interest payable on the Class A-1 and Class A-2 notes
on a distribution date will include all interest
accrued during the prior calendar month. As a result,
the effective yield to holders will be reduced from
the yield that would otherwise be obtainable if
interest payable on the Class A-1 and Class A-2 notes
were to accrue through the day immediately preceding
each distribution date, and the effective yield (at
par) to holders will be less than the indicated
coupon rate.
VIOLATIONS OF CONSUMER PROTECTION
AND OTHER LAWS MAY RESULT IN
LOSSES ON THE HOME EQUITY
LOANS Applicable state laws generally regulate interest
rates and other charges and require certain
disclosures. In addition, other state laws, public
policy and general principles of equity relating to
the protection of consumers, unfair and deceptive
practices and debt collection practices may apply to
the origination, servicing and collection of the home
equity loans. Depending on the provisions of the
applicable law and the specific facts and
circumstances involved, violations of these laws,
policies and principles may limit the ability of the
servicer to collect all or part of the principal of
or interest on the home equity loans, may entitle the
borrower to a refund of amounts previously paid and,
in addition, could subject the owner of the home
equity loan to damages and administrative
enforcement.
The home equity loans are also subject to federal
laws, including:
(1) the federal Truth in Lending Act and
Regulation Z under the act, which require certain
disclosures to the borrowers regarding the terms of
the home equity loans;
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(2) the Equal Credit Opportunity Act and
Regulation B under the act, which prohibit
discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of
public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension
of credit;
(3) the Americans with Disabilities Act, which,
among other things, prohibits discrimination on the
basis of disability in the full and equal enjoyment
of the goods, services, facilities, privileges,
advantages or accommodations of any place of public
accommodation; and
(4) the Fair Credit Reporting Act, which
regulates the use and reporting of information
related to the borrower's credit experience.
Violations of certain provisions of these federal
laws may limit the ability of the servicer to collect
all or part of the principal of or interest on the
home equity loans and in addition could subject the
trust fund to damages and administrative enforcement.
Approximately __% of the aggregate principal balance
of the home equity loans are subject to the Home
Ownership and Equity Protection Act of 1994, which
amended the Truth in Lending Act as it applies to
mortgages subject to the act. The act requires
certain additional disclosures, specifies the timing
of these disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject
to the act. The act also provides that any purchaser
or assignee of a mortgage covered by the act is
subject to all of the claims and defenses which the
borrower could assert against the original lender.
The maximum damages that may be recovered under the
act from an assignee is the remaining amount of
indebtedness plus the total amount paid by the
borrower in connection with the home equity loan. If
the trust fund includes home equity loans subject to
the act, it will be subject to all of the claims and
defenses which the borrower could assert against the
seller. Any violation of the act which would result
in this liability would be a breach of the seller's
representations and warranties and the seller would
be obligated to cure, repurchase or, if permitted by
the agreement, substitute for the home equity loan in
question.
Numerous other federal and state statutory
provisions, including the federal bankruptcy laws,
the Soldiers' and Sailors' Civil Relief Act of 1940
and state debtor relief laws, may also adversely
affect the servicer's ability to collect the
principal of or interest on the home equity loans and
also would affect your interests in the home equity
loans if any of these laws result in the home equity
loans being uncollectible.
POTENTIAL LIABILITY FOR ENVIRONMENTAL
CONDITIONS COULD RESULT IN A
LOSS ON YOUR INVESTMENT IN THE
NOTES Real property pledged as security to a lender may be
subject to certain environmental risks. Under the
laws of certain states, contamination of a property
may give rise to a lien on the property
S-20
<PAGE>
to assure the costs of clean-up. In several states, a
lien of this type has priority over the lien of an
existing mortgage or owner's interest against the
property. In addition, under the laws of some states
and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, a
lender may be liable, as an "owner" or "operator,"
for costs of addressing releases or threatened
releases of hazardous substances that require remedy
at a property, if agents or employees of the lender
have become sufficiently involved in the operations
of the borrower, regardless of whether or not the
environmental damage or threat was caused by a prior
owner. A lender also risks this liability on
foreclosure of the mortgaged property. If any of
these laws results in a lien or other charge against
the mortgaged properties of a sufficiently large
percentage of the home equity loans, you may suffer a
loss on your investment.
REDUCTION IN THE RATINGS ON THE
NOTES COULD HAVE AN ADVERSE
EFFECT ON THE VALUE OF
YOUR NOTES The rating of the notes will depend primarily on an
assessment of the claims-paying ability of the note
insurer and on an assessment by the rating agencies
of the home equity loans. Any reduction in a rating
assigned to the claims-paying ability of the note
insurer below the rating initially given to the notes
may result in a reduction in the rating of the notes.
The rating by the rating agencies of the notes is not
a recommendation for you to purchase, hold or sell
the notes, since the rating does not comment as to
the market price or suitability of an investment in
the notes for a particular investor. There is no
assurance that the ratings will remain in place for
any given period of time or that the ratings will not
be lowered or withdrawn by the rating agencies. In
general, the ratings address credit risk and do not
address the likelihood of prepayments on home equity
loans, the likelihood of the payment of any interest
payable to you on a subordinated basis due to the
application of any available funds cap described
under the section "DESCRIPTION OF THE NOTES--Note
Rate" or the possibility that you might realize a
lower than anticipated yield. The ratings of the
notes also do not address the possibility of the
imposition of United States withholding tax with
respect to non-U.S. persons.
None of the seller, the servicer or depositor is
required to maintain the rating of the notes. Any
downgrade in the ratings assigned to your notes will
result in a decline in the market value of your
notes.
S-21
<PAGE>
LACK OF SECONDARY MARKET LIMITS
LIQUIDITY WITH RESPECT TO YOUR
INVESTMENT There will be no market for the notes prior to
issuance, and there can be no assurance that a
secondary market will develop or, if it does develop,
that it will provide you with liquidity with respect
to your investment or will continue for the life of
the notes. Further, if the notes are not listed on an
exchange or quoted in the automated quotation system
of a registered securities association, you may
experience limited liquidity with regard to your
notes.
BOOK-ENTRY REGISTRATION MAY LIMIT
LIQUIDITY IN THE SECONDARY
MARKET AND DELAY RECEIPT OF
PAYMENT ON YOUR NOTES Because transfers and pledges of the notes may be
effected only through book entries at a clearing
agency through clearing agency participants, the
liquidity of the secondary market for notes may be
reduced and the ability to pledge notes may be
limited due to lack of a physical note. In certain
cases, you may experience delay in the receipt of
payments of principal and interest because these
payments will be forwarded by the trustee to the
clearing agency who will then forward payment to the
clearing agency participants who will then forward
payment to you. In the event of the insolvency of the
clearing agency or of a clearing agency participant
in whose name securities are recorded, your ability
to obtain timely payment and ultimate payment of
principal and interest on the notes may be impaired.
COMPUTER PROBLEMS IN THE YEAR
2000 MAY RESULT IN LOSSES As is the case with most companies using computers in
their operations, the servicer is faced with the task
of completing its compliance goals in connection with
the year 2000 issue during the next year. The year
2000 issue is the result of prior computer programs
being written using two digits, rather than four
digits, to define the applicable year. Any of the
servicer's computer programs that have time-sensitive
software may recognize a date using "00" as the year
1900 rather than the year 2000. Any occurrence could
result in a major computer system failure or
miscalculations. The servicer is presently engaged in
various procedures to ensure that their computer
systems and software will be year 2000 compliant.
With regard to the servicing systems used by the
servicer, the servicer has received written
verification from its software provider that the
software systems used by the servicer are year 2000
compliant. The software provider indicated that it
has obtained statements from its third party
hardware, software and service providers confirming
that the goods and services they provide the software
provider are year 2000 compliant. In addition, the
servicer's software provider has provided the
servicer with a written assurance that the provider
has put into place contingency plans to address all
of its internal business critical areas, including
any non-conformity with respect to year 2000 of the
provider's systems.
However, in the event that the servicer, or any of
its suppliers, customers, brokers or agents do not
successfully and timely achieve year 2000 compliance,
the performance of obligations of the servicer under
the sale and servicing agreement could be materially
adversely affected.
S-22
<PAGE>
THE NOTE INSURER
[To be inserted.]
DESCRIPTION OF THE HOME EQUITY LOANS
OVERVIEW
This subsection describes characteristics of the home equity loans.
Unless otherwise noted, all statistical percentages in this prospectus
supplement are measured by the aggregate principal balance of the related home
equity loans as of the statistical calculation date. Prior to the closing date,
additional home equity loans will be added to each home equity loan group and
other home equity loans may be removed from a home equity loan group, subject to
the consent of the note insurer. As a result, the characteristics of the home
equity loans in each home equity loan group as of the cut-off date will differ
from the characteristics presented in this prospectus supplement as of the
statistical calculation date. The depositor does not expect any material change
in the aggregate characteristics of any home equity loan group.
Each home equity loan in the trust will be assigned to one of three
home equity loan groups, labeled Group I, Group II and Group III, respectively .
[Each home equity loan group will constitute a separate sub-trust.] The Group I
home equity loans and the Group II home equity loans will bear interest at fixed
interest rates. The Group III home equity loans will bear interest at adjustable
rates. Distributions on the Group I notes will be based primarily on amounts
available for distribution in respect of the Group I home equity loans.
Distributions on the Group II notes will be based primarily on amounts available
for distribution in respect of the Group II home equity loans. Distributions on
the Group III notes will be based primarily on amounts available for
distribution in respect of the Group III home equity loans.
The home equity loans to be transferred by the seller and one or more
of its affiliates to the depositor and from the depositor to the trust on the
closing date will consist of __home equity loans, of which __ are fixed rate
home equity loans and ___ are adjustable rate home equity loans, evidenced by
promissory notes secured by mortgaged properties subject to first and second
lien deeds of trust, security deeds or mortgages on properties which are located
in __ states and the District of Columbia. The mortgaged properties consist
primarily of one-to-four family residential properties and manufactured housing
treated as real property under applicable state law. They may be owner-occupied
and non-owner occupied investment properties, which include second and vacation
homes. All of the home equity loans were originated no earlier than
____________, ____.
The aggregate outstanding statistical calculation date loan balance of
the Group I home equity loans is $________ or approximately __% of the
statistical calculation date loan balance of the home equity loans. The
aggregate outstanding statistical calculation date loan balance of the Group II
home equity loans is $________ or approximately __% of the statistical
calculation date loan balance of the home equity loans. The aggregate
outstanding statistical calculation date loan balance of the Group III home
equity loans is $________ or approximately __% of the statistical calculation
date loan balance of the home equity loans.
Home equity loans representing approximately __% of the statistical
calculation date loan balance of the Group I home equity loans are secured by
mortgaged properties consisting of first liens on the related properties, and
the remaining approximately __% of the statistical calculation date loan balance
of the Group I home equity loans are secured by mortgaged properties consisting
of second liens on the related properties. No Original Combined Loan-to-Value
Ratio (as defined below) relating to any Group I home equity loans exceeded
___%. Home equity loans representing approximately __% of the statistical
calculation date loan balance of the Group II home equity loans are secured by
mortgaged properties consisting of first liens on the related properties, and
the remaining approximately __% of the statistical calculation date loan balance
of the Group II home equity loans are secured by mortgaged properties consisting
of second liens on the related properties. No Original Combined Loan-to-Value
Ratio relating to any Group II home equity loans exceeded ___%. Home equity
loans representing approximately __% of the statistical calculation date loan
balance of the Group III home equity loans are secured by mortgaged properties
consisting of first liens on the related properties, and the
S-23
<PAGE>
remaining approximately __% of the statistical calculation date loan
balance of the Group III home equity loans are secured by mortgaged properties
consisting of second liens on the related properties. No Original Combined
Loan-to-Value Ratio relating to any Group III home equity loans exceeded ___%.
None of the home equity loans are insured by pool mortgage insurance policies or
primary mortgage insurance policies.
All of the home equity loans in the trust have been or will be
originated by the seller, an affiliate of the seller or a broker for
simultaneous assignment to the seller.
The Original Loan-to-Value Ratios and Original Combined Loan-to-Value
Ratios shown below were calculated based upon the lesser of the appraised values
of the mortgaged properties at the time of origination or the sales price of the
related mortgaged property if the mortgaged property was sold within the 12
month period preceding the time of loan origination. In a limited number of
circumstances, and within the seller's underwriting guidelines, the seller may
discount the appraised value (or, if applicable, the sales price) of mortgaged
properties (when calculating maximum Loan-to-Value Ratios) where the mortgaged
properties are unique, have a high value or where the comparables are not within
Freddie Mac or Fannie Mae guidelines. The purpose for making these reductions is
to value the mortgaged properties more conservatively than would otherwise be
the case if the appraisal were accepted as written.
The "Original Combined Loan-to-Value Ratio" of a home equity loan is
the ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien mortgage balance plus the original balance of the home equity loan divided
by the lesser of the appraised value of the mortgaged property at the time of
origination or the sales price of the mortgaged property if the mortgaged
property was sold within the 12 month period preceding the time of loan
origination. In the instance where more than one appraisal was performed on the
subject property, the lesser of the two values was used to determine the
Original Loan-to-Value Ratio and the Original Combined Loan-to-Value Ratio.
WE REFER YOU TO "RISK FACTORS--THE BORROWERS HAVE LESS THAN PERFECT
CREDIT" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related home equity loans. If the residential real estate market has experienced
or should experience an overall decline in property values, causing the
outstanding balances of the home equity loans, together with the outstanding
balances of any first mortgage, to become equal to or greater than the value of
the mortgaged properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry.
GROUP I HOME EQUITY LOANS
The average statistical calculation date loan balance of the Group I
home equity loans was $___________. The minimum and maximum statistical
calculation date loan balances of the Group I home equity loans were $__________
and $___________, respectively. As of the statistical calculation date, the
weighted average coupon rate of the Group I home equity loans was approximately
______%; the coupon rates of the Group I home equity loans ranged from _____% to
_____%; the weighted average Original Combined Loan-to-Value Ratio of the Group
I home equity loans was approximately ____%; the weighted average remaining term
to maturity of the Group I home equity loans was approximately ____ months; the
original terms to maturity of the Group I home equity loans ranged from ___
months to ____ months; and the remaining terms to maturity of the Group I home
equity loans ranged from ___ months to ____ months. Approximately _____% of the
statistical calculation date loan balance of the Group I home equity loans was
secured by first liens on the related mortgage properties and approximately
____% of the statistical calculation date loan balance of the Group I home
equity loans was secured by second liens on the related mortgage properties.
With respect to each Group I home equity loan secured by a first lien, the
original principal balance was no more than $________ for single-family
properties and $__________ for two-to-four family properties. No Group I home
equity loan secured by a second lien on the related mortgage property had an
original principal balance of more than
S-24
<PAGE>
$________. With respect to each Group I home equity loan secured by a
second lien as of its origination date, the sum of the principal balance of the
second lien loan and the related senior lien principal balance is not more than
$___________ for single-family properties and $__________ for two-to-four family
properties (unless the related senior lien loan, at the time of origination of
the second lien loan, had a principal balance greater than $_________ for
single-family properties and $____________ for two- to four-family properties).
Group I home equity loans containing "balloon" payments represented
approximately ____% of the statistical calculation date loan balance of the
Group I home equity loans. No Group I home equity loan will mature later than
____________. As of the statistical calculation date, approximately _____% of
the Group I home equity loans were 30-59 days past due. However, investors in
the notes should be aware that approximately ____% of the Group I home equity
loans by statistical calculation date loan balance had a first monthly payment
due on or after ____________, ____ and it was not possible for the Group I home
equity loans to be more than ___ days past due as of the statistical calculation
date. As of the statistical calculation date, no Group I home equity loan was
___ or more days past due.
Set forth below is approximate statistical information as of the
statistical calculation date regarding the Group I home equity loans. The sum of
the percentage columns in the following tables may not equal 100% due to
rounding.
S-25
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP I HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION DATE
STATE HOME EQUITY LOANS DATE LOAN BALANCE LOAN BALANCE
- ----- ----------------- ----------------- ------------
<S> <C> <C> <C>
Arizona...................... $ %
Arkansas.....................
California...................
Colorado.....................
Connecticut..................
Delaware.....................
District of Columbia.........
Florida......................
Georgia......................
Idaho........................
Illinois.....................
Indiana......................
Iowa.........................
Kansas.......................
Kentucky.....................
Louisiana....................
Maine........................
Maryland.....................
Massachusetts................
Michigan.....................
Minnesota....................
Mississippi..................
Missouri.....................
Montana......................
Nebraska.....................
Nevada.......................
New Hampshire................
New Jersey...................
New Mexico...................
New York.....................
North Carolina...............
North Dakota.................
Ohio.........................
Oklahoma.....................
Oregon.......................
Pennsylvania.................
Rhode Island.................
South Carolina...............
South Dakota.................
Tennessee....................
Texas........................
Utah.........................
Vermont......................
Virginia.....................
Washington...................
West Virginia................
Wisconsin....................
Wyoming......................
------------- ------------- --------------------
Total..................... $ %
============= ============== ====================
</TABLE>
- --------------------
(1) Determined by property address designated as such in the related mortgage.
S-26
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIO
OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE LOAN CALCULATION DATE
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE RATIONS (%) HOME EQUITY LOANS BALANCE LOAN BALANCE
- ---------------------------------------------------- ----------------- ------- ------------
<S> <C> <C> <C>
Less than or equal to 50.00......................... $ %
50.01 - 55.00.......................................
55.01 - 60.00.......................................
60.01 - 65.00.......................................
65.01 - 70.00.......................................
70.01 - 75.00.......................................
75.01 - 80.00.......................................
80.01 - 85.00.......................................
85.01 - 90.00.......................................
90.01 - 95.00.......................................
95.01 - 100.00......................................
------------- ------------- ---------
Total.................................... $ %
============= ============= =========
</TABLE>
S-27
<PAGE>
COUPON RATES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
RANGE OF ORIGINAL COUPON RATES (%) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
7.001 - 7.500....................................... $ %
7.501 - 8.000.......................................
8.001 - 8.500.......................................
8.501 - 9.000.......................................
9.001 - 9.500.......................................
9.501 - 10.000......................................
10.001 - 10.500.....................................
10.501 - 11.000.....................................
11.001 - 11.500.....................................
11.501 - 12.000.....................................
12.001 - 12.500.....................................
12.501 - 13.000.....................................
13.001 - 13.500.....................................
13.501 - 14.000.....................................
14.001 - 14.500.....................................
14.501 - 15.000.....................................
15.001 - 15.500.....................................
15.501 - 16.000.....................................
16.001 - 16.500.....................................
16.501 - 17.000.....................................
17.001 - 17.500.....................................
17.501 - 18.000.....................................
------------- -------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
STATISTICAL CALCULATION DATE LOAN BALANCES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
RANGE OF STATISTICAL CALCULATION DATE LOAN BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- --------------------------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
$ 0.01 - 50,000.00........................ $ %
50,000.01 - 100,000.00.........................
100,000.01 - 150,000.00.........................
150,000.01 - 200,000.00.........................
200,000.01 - 250,000.00.........................
------------- ------------- ---------------
Total.................................... $ %
============= ============== ===============
</TABLE>
TYPES OF MORTGAGED PROPERTIES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
PROPERTY TYPE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Single Family....................................... $ %
PUD.................................................
2-4 Family..........................................
Townhouses..........................................
Manufactured Housing................................
Condominiums........................................
------------- ------------- ---------------
Total.................................... $ %
============= ============== ===============
</TABLE>
S-28
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
ORIGINAL TERM TO MATURITY (MONTHS) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
60 - 119............................................ $ %
120 - 179...........................................
180 - 239...........................................
240 - 299...........................................
300 - 360...........................................
------------- -------------- -------------
Total.................................... $ %
============= ============== =============
</TABLE>
REMAINING TERM TO MATURITY OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
REMAINING TERM TO MATURITY (MONTHS) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Less than or equal to 60............................ $ %
61 - 120............................................
121 - 180...........................................
181 - 240...........................................
240 - 300...........................................
301 - 360...........................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
SEASONING OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
SEASONING (MONTHS) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
0.................................................. $ %
1 - 6..............................................
7 - 2
------------- ------------- -------------
Total................................... $ %
============= ============== =============
</TABLE>
OCCUPANCY STATUS OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied (Primary)............................ $ %
Investment Property.................................
Second Home.........................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
LIEN POSITION OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
LIEN POSITION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
First.............................................. $ %
Second.............................................
------------- ------------- --------------
Total................................... $ %
============= ============== ==============
</TABLE>
S-29
<PAGE>
DOCUMENTATION TYPE OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF INITIAL DATE CALCULATION DATE
DOCUMENTATION TYPE(1) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
--------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Full Documentation............................... $ %
Stated Income....................................
Limited Documentation............................
------------- ------------- --------------
Total................................. $ %
============= ============== ==============
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the prospectus for a description of the
seller's documentation programs.
CREDIT GRADE OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF INITIAL CALCULATION DATE CALCULATION DATE
CREDIT GRADE BALANCE(1) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
A1.................................................. $ %
A2..................................................
A+..................................................
B...................................................
C1..................................................
C2..................................................
D...................................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the prospectus for a description of the seller's credit grades
and underwriting criteria.
SECOND MORTGAGE RATIO OF GROUP I HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF INITIAL CALCULATION DATE CALCULATION DATE
RANGE OF SECOND MORTGAGE RATIOS (%) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
0.01 - 10.00........................................ $ %
10.01 - 20.00.......................................
20.01 - 30.00.......................................
30.01 - 40.00.......................................
40.01 - 50.00.......................................
50.01 - 60.00.......................................
60.01 - 70.00.......................................
70.01 - 80.00.......................................
80.01 - 90.00.......................................
90.01 - 100.00......................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
- ------------------
(1) Applies only to home equity loans in the second lien position. The Second
Mortgage Ratios shown above are equal to, with respect to each home equity
loan in the second lien position, the original principal balance of the
home equity loan at the date of origination divided by the sum of (a) the
original principal balance of the home equity loan at the date of
origination and (b) the remaining principal balance of the senior lien on
the related mortgaged property at the date of origination of the home
equity loan.
S-30
<PAGE>
GROUP II HOME EQUITY LOANS
The average statistical calculation date loan balance of the Group II
home equity loans was $___________. The minimum and maximum statistical
calculation date loan balances of the Group II home equity loans were
$__________ and $___________, respectively. As of the statistical calculation
date, the weighted average coupon rate of the Group II home equity loans was
approximately ______%; the coupon rates of the Group II home equity loans ranged
from _____% to _____%; the weighted average Original Combined Loan-to-Value
Ratio of the Group II home equity loans was approximately ____%; the weighted
average remaining term to maturity of the Group II home equity loans was
approximately ____ months; the original terms to maturity of the Group II home
equity loans ranged from ___ months to ____ months; and the remaining terms to
maturity of the Group II home equity loans ranged from ___ months to ____
months. Approximately _____% of the statistical calculation date loan balance of
the Group II home equity loans was secured by first liens on the related
mortgage properties and approximately ____% of the statistical calculation date
loan balance of the Group II home equity loans was secured by second liens on
the related mortgage properties. With respect to each Group II home equity loan
secured by a first lien, the original principal balance was no more than
$________ for single-family properties and $__________ for two-to-four family
properties. No Group II home equity loan secured by a second lien on the related
mortgage property had an original principal balance of more than $________. With
respect to each Group II home equity loan secured by a second lien as of its
origination date, the sum of the principal balance of the second lien loan and
the related senior lien principal balance is not more than $___________ for
single-family properties and $__________ for two-to-four family properties
(unless the related senior lien loan, at the time of origination of the second
lien loan, had a principal balance greater than $_________ for single-family
properties and $____________ for two- to four-family properties). Group II home
equity loans containing "balloon" payments represented approximately ____% of
the statistical calculation date loan balance of the Group II home equity loans.
No Group II home equity loan will mature later than ____________. As of the
statistical calculation date, approximately _____% of the Group II home equity
loans were 30-59 days past due. However, investors in the notes should be aware
that approximately ____% of the Group II home equity loans by statistical
calculation date loan balance had a first monthly payment due on or after
____________, ____ and it was not possible for the Group II home equity loans to
be more than ___ days past due as of the statistical calculation date. As of the
statistical calculation date, no Group II home equity loan was ___ or more days
past due.
Set forth below is approximate statistical information as of the
statistical calculation date regarding the Group II home equity loans. The sum
of the percentage columns in the following tables may not equal 100% due to
rounding.
S-31
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP II HOME EQUITY LOANS(2)
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION DATE
STATE HOME EQUITY LOANS DATE LOAN BALANCE LOAN BALANCE
- ----- ----------------- ----------------- ------------
<S> <C> <C> <C>
Arizona...................... $ %
Arkansas.....................
California...................
Colorado.....................
Connecticut..................
Delaware.....................
District of Columbia.........
Florida......................
Georgia......................
Idaho........................
Illinois.....................
Indiana......................
Iowa.........................
Kansas.......................
Kentucky.....................
Louisiana....................
Maine........................
Maryland.....................
Massachusetts................
Michigan.....................
Minnesota....................
Mississippi..................
Missouri.....................
Montana......................
Nebraska.....................
Nevada.......................
New Hampshire................
New Jersey...................
New Mexico...................
New York.....................
North Carolina...............
North Dakota.................
Ohio.........................
Oklahoma.....................
Oregon.......................
Pennsylvania.................
Rhode Island.................
South Carolina...............
South Dakota.................
Tennessee....................
Texas........................
Utah.........................
Vermont......................
Virginia.....................
Washington...................
West Virginia................
Wisconsin....................
Wyoming......................
------------- ------------- --------------------
Total..................... $ %
============= ============== ====================
</TABLE>
- --------------------
(2) Determined by property address designated as such in the related mortgage.
S-32
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIO
OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE LOAN CALCULATION DATE
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE RATIONS (%) HOME EQUITY LOANS BALANCE LOAN BALANCE
- ---------------------------------------------------- ----------------- ------- ------------
<S> <C> <C> <C>
Less than or equal to 50.00......................... $ %
50.01 - 55.00.......................................
55.01 - 60.00.......................................
60.01 - 65.00.......................................
65.01 - 70.00.......................................
70.01 - 75.00.......................................
75.01 - 80.00.......................................
80.01 - 85.00.......................................
85.01 - 90.00.......................................
90.01 - 95.00.......................................
95.01 - 100.00......................................
------------- ------------- ---------
Total.................................... $ %
============= ============= =========
</TABLE>
S-33
<PAGE>
COUPON RATES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
RANGE OF ORIGINAL COUPON RATES (%) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
7.001 - 7.500....................................... $ %
7.501 - 8.000.......................................
8.001 - 8.500.......................................
8.501 - 9.000.......................................
9.001 - 9.500.......................................
9.501 - 10.000......................................
10.001 - 10.500.....................................
10.501 - 11.000.....................................
11.001 - 11.500.....................................
11.501 - 12.000.....................................
12.001 - 12.500.....................................
12.501 - 13.000.....................................
13.001 - 13.500.....................................
13.501 - 14.000.....................................
14.001 - 14.500.....................................
14.501 - 15.000.....................................
15.001 - 15.500.....................................
15.501 - 16.000.....................................
16.001 - 16.500.....................................
16.501 - 17.000.....................................
17.001 - 17.500.....................................
17.501 - 18.000.....................................
------------- -------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
STATISTICAL CALCULATION DATE LOAN BALANCES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
RANGE OF STATISTICAL CALCULATION DATE LOAN BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- --------------------------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
$ 0.01 - 50,000.00........................ $ %
50,000.01 - 100,000.00.........................
100,000.01 - 150,000.00.........................
150,000.01 - 200,000.00.........................
200,000.01 - 250,000.00.........................
------------- ------------- ---------------
Total.................................... $ %
============= ============== ===============
</TABLE>
TYPES OF MORTGAGED PROPERTIES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
PROPERTY TYPE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ----------------- ------------ -----------------
<S> <C> <C> <C>
Single Family....................................... $ %
PUD.................................................
2-4 Family..........................................
Townhouses..........................................
Manufactured Housing................................
Condominiums........................................
------------- ------------- ---------------
Total.................................... $ %
============= ============== ===============
</TABLE>
S-34
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
ORIGINAL TERM TO MATURITY (MONTHS) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
60 - 119............................................ $ %
120 - 179...........................................
180 - 239...........................................
240 - 299...........................................
300 - 360...........................................
------------- ------------- -------------
Total.................................... $ %
============= ============== =============
</TABLE>
REMAINING TERM TO MATURITY OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
REMAINING TERM TO MATURITY (MONTHS) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Less than or equal to 60............................ $ %
61 - 120............................................
121 - 180...........................................
181 - 240...........................................
240 - 300...........................................
301 - 360...........................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
SEASONING OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
SEASONING (MONTHS) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
0.................................................. $ %
1 - 6..............................................
7 - 2
------------- ------------- -------------
Total................................... $ %
============= ============== =============
</TABLE>
OCCUPANCY STATUS OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied (Primary)............................ $ %
Investment Property.................................
Second Home.........................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
LIEN POSITION OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE CALCULATION DATE
LIEN POSITION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
First.............................................. $ %
Second.............................................
------------- ------------- -------------
Total................................... $ %
============= ============== ==============
</TABLE>
S-35
<PAGE>
DOCUMENTATION TYPE OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF INITIAL DATE CALCULATION DATE
DOCUMENTATION TYPE(1) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
--------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Full Documentation............................... $ %
Stated Income....................................
Limited Documentation............................
------------- ------------- --------------
Total................................. $ %
============= ============== ==============
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the prospectus for a description of the
seller's documentation programs.
CREDIT GRADE OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF INITIAL CALCULATION DATE CALCULATION DATE
CREDIT GRADE BALANCE(1) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
A1.................................................. $ %
A2..................................................
A+..................................................
B...................................................
C1..................................................
C2..................................................
D...................................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the prospectus for a description of the seller's credit grades
and underwriting criteria.
SECOND MORTGAGE RATIO OF GROUP II HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF INITIAL CALCULATION DATE CALCULATION DATE
RANGE OF SECOND MORTGAGE RATIOS (%) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
0.01 - 10.00........................................ $ %
10.01 - 20.00.......................................
20.01 - 30.00.......................................
30.01 - 40.00.......................................
40.01 - 50.00.......................................
50.01 - 60.00.......................................
60.01 - 70.00.......................................
70.01 - 80.00.......................................
80.01 - 90.00.......................................
90.01 - 100.00......................................
------------- ------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
- ------------------
(1) Applies only to home equity loans in the second lien position. The Second
Mortgage Ratios shown above are equal to, with respect to each home equity
loan in the second lien position, the original principal balance of the
home equity loan at the date of origination divided by the sum of (a) the
original principal balance of the home equity loan at the date of
origination and (b) the remaining principal balance of the senior lien on
the related mortgaged property at the date of origination of the home
equity loan.
S-36
<PAGE>
GROUP III HOME EQUITY LOANS
The average statistical calculation date loan balance of the Group III
home equity loans was approximately $___________. The minimum and maximum
statistical calculation date Loan Balance of the Group III home equity loans as
of the statistical calculation date were $___________ and $___________,
respectively. As of the statistical calculation date, the weighted average
Original Loan-to-Value Ratio of the Group III home equity loans was
approximately ____%; the weighted average remaining term to maturity of the
Group III home equity loans was approximately ____ months; the original terms to
maturity of the Group III home equity loans ranged from ____ months to ____
months; and the remaining terms to maturity of the Group III home equity loans
ranged from ____ months to ____ months. As of the statistical calculation date,
all of the Group III home equity loans were secured by first liens on the
related properties. No Group III home equity loan will mature later than _______
__, ____. As of the statistical calculation date, approximately ____% of the
Group III home equity loans were __ -__9 days past due. However, investors in
the notes should be aware that approximately ____% of the Group III home equity
loans by statistical calculation date loan balance had a first monthly payment
due on or after ____ __, ____ and it was not possible for the Group III home
equity loans to be more than __ days past due as of the statistical calculation
date. As of the statistical calculation date, no Group III home equity loan was
__ or more days past due.
As of the statistical calculation date, approximately ____% of the
Group III home equity loans the first adjustment date is six months after the
date of origination of the related home equity loan ("Six-Month Adjustable Rate
Loans") and approximately ____% of the statistical calculation date Loan Balance
of the Group III home equity loans the first adjustment date is two years after
the date of origination of the related home equity loan ("2/28 Adjustable Rate
Loan") and, in each case commencing on the first adjustment date the coupon rate
adjusts semiannually thereafter based upon six-month LIBOR subject to the
limitations described below. As of the statistical calculation date, the
weighted average remaining period to the next interest rate adjustment date for
the Six-Month Adjustable Rate Loans was approximately __ months; the weighted
average remaining period to the next interest rate adjustment date for the 2/28
Adjustable Rate Loans was approximately ___ months; each Six-Month Adjustable
Rate Loan will have an initial payment adjustment effective for the seventh
monthly payment period with respect to the loan, an initial interest rate
adjustment cap of ____%, a semi-annual interest rate adjustment cap of ____%, in
each case, above the then current interest rate for the Six-Month Adjustable
Rate Loan and a lifetime interest rate adjustment cap of ____% above the initial
rate of the loan; each 2/28 Adjustable Rate Loan will have an initial payment
adjustment effective for the 25th monthly payment period with respect to the
loan, an initial interest rate adjustment cap of ____%, a semi-annual interest
rate adjustment cap of ____%, in each case, above the then current interest rate
for the 2/28 Adjustable Rate Loan and a lifetime interest rate adjustment cap of
____% above the initial rate of the loan. As of the statistical calculation
date, the weighted average coupon rate of the Group III home equity loans was
approximately ____% per annum. The coupon rates borne by the Group III home
equity loans as of the statistical calculation date ranged from ____% per annum
to ____% per annum. The Group III home equity loans had a weighted average gross
margin as of the statistical calculation date of approximately ____%. As of the
statistical calculation date, the gross margins for the Group III home equity
loans ranged from ____% to ____%. As of the statistical calculation date, the
maximum rates at which interest may accrue on the Group III home equity loans
(the "Maximum Rates") ranged from ____% per annum to ____% per annum. The Group
III home equity loans had a weighted average Maximum Rate as of the statistical
calculation date of approximately ____% per annum. As of the statistical
calculation date, the minimum rates at which interest may accrue on the Group
III home equity loans (the "Minimum Rates") ranged from ____% per annum to ____%
per annum. As of the statistical calculation date, the weighted average Minimum
Rate on the Group III home equity loans was approximately ____% per annum.
Set forth below is approximate statistical information as of the
statistical calculation date regarding the Group III home equity loans. The sum
of the percentage columns in the following tables may not equal 100% due to
rounding.
S-37
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP III HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION DATE CALCULATION DATE
STATE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----- ----------------- ------------ ------------
<S> <C> <C> <C>
Arizona........................................ $ %
Arkansas.......................................
California.....................................
Colorado.......................................
Connecticut....................................
Delaware.......................................
Florida........................................
Georgia........................................
Idaho..........................................
Illinois.......................................
Indiana........................................
Iowa...........................................
Kansas.........................................
Kentucky.......................................
Louisiana......................................
Maine..........................................
Maryland.......................................
Massachusetts..................................
Michigan.......................................
Minnesota......................................
Mississippi....................................
Missouri.......................................
Montana........................................
Nebraska.......................................
Nevada.........................................
New Hampshire..................................
New Jersey.....................................
New Mexico.....................................
New York.......................................
North Carolina.................................
Ohio...........................................
Oklahoma.......................................
Oregon.........................................
Pennsylvania...................................
Rhode Island...................................
South Carolina.................................
Tennessee......................................
Texas..........................................
Utah...........................................
Vermont........................................
Virginia.......................................
Washington.....................................
West Virginia..................................
Wisconsin......................................
Wyoming........................................
------------- ------------- -------
Total.......................................... $ 100.00%
============= ============== =======
</TABLE>
- ------------------
(1) Determined by property address designated in the related mortgage.
S-38
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS (%) HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------------------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
Less than or equal to 50.00.................... $ %
50.01 - 55.00..................................
55.01 - 60.00..................................
60.01 - 65.00..................................
65.01 - 70.00..................................
70.01 - 75.00..................................
75.01 - 80.00..................................
80.01 - 85.00..................................
85.01 - 90.00..................................
90.01 - 95.00..................................
95.01 - 100.00.................................
------------- -------------- -------
Total.......................................... $ 100.00%
============= ============== =======
</TABLE>
STATISTICAL CALCULATION DATE LOAN BALANCES OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
RANGE OF STATISTICAL CALCULATION DATE LOAN NUMBER OF STATISTICAL STATISTICAL
- ------------------------------------------ HOME EQUITY CALCULATION DATE CALCULATION DATE
BALANCES LOAN BALANCES LOAN BALANCE LOAN BALANCE
- -------- ------------- ------------ ------------
<S> <C> <C> <C>
$ 0.01 - 50,000.00.......................... $ %
50,000.01 - 100,000.00.........................
100,000.01 - 150,000.00........................
150,000.01 - 200,000.00........................
200,000.01 - 250,000.00........................
250,000.01 - 300,000.00........................
300,000.01 - 350,000.00........................
350,000.01 - 400,000.00........................
------------- ------------- -------
Total.......................................... $ 100.00%
============= ============== =======
</TABLE>
TYPES OF MORTGAGED PROPERTIES OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF STATISTICAL
NUMBER OF HOME CALCULATION DATE CALCULATION DATE
PROPERTY TYPE EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ------------ ------------ ------------
<S> <C> <C> <C>
Single Family.................................. $ %
PUD............................................
2-4 Family.....................................
Townhouses.....................................
Condominiums...................................
Manufactured Housing...........................
------------- -------------- -------
Total.......................................... $ 100.00%
============= ============== =======
</TABLE>
S-39
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
ORIGINAL TERM TO NUMBER OF HOME CALCULATION DATE DATE
DATE MATURITY (MONTHS) EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------- ------------ ------------ ------------
<S> <C> <C> <C>
120............................................. $ %
180.............................................
240.............................................
360.............................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
SEASONING OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
SEASONING (MONTHS) EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------ ------------ ------------ ------------
<S> <C> <C> <C>
0............................................... $ %
1 - 6...........................................
7 - 12..........................................
13 and over.....................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
REMAINING TERM TO MATURITY OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
REMAINING TERM TO MATURITY (MONTHS) EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
61 - 120........................................ $ %
121 - 180.......................................
181 - 240.......................................
301 - 360.......................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
OCCUPANCY STATUS OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
OCCUPANCY STATUS EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ------------ ------------ ------------
<S> <C> <C> <C>
Owner Occupied (Primary)........................ $ %
Investment Property.............................
Second Home.....................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
S-40
<PAGE>
DOCUMENTATION TYPE OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
DOCUMENTATION TYPE (1) EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Full Documentation............................. $ %
Stated Income..................................
Limited Documentation..........................
------------- -------------- -------
Total.......................................... $ 100.00%
============= ============== =======
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the prospectus for a description of
the seller's documentation programs.
CREDIT GRADE OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
CREDIT GRADE (1) EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ------------ ------------ ------------
<S> <C> <C> <C>
A+.............................................. $ %
A1..............................................
A2.............................................
B..............................................
C1.............................................
C2.............................................
D..............................................
------------- -------------- -------
Total.......................................... $ 100.00%
============= ============== =======
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the prospectus for a description of the seller's credit grades
and underwriting criteria.
S-41
<PAGE>
CURRENT COUPON RATES OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
NUMBER OF STATISTICAL CALCULATION
HOME EQUITY CALCULATION DATE DATE
RANGE OF CURRENT COUPON RATES (%) LOAN BALANCES LOAN BALANCE LOAN BALANCE
- --------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
6.501 - 7.000................................... $ %
7.501 - 8.000...................................
8.001 - 8.500...................................
8.501 - 9.000...................................
9.001 - 9.500...................................
9.501 - 10.000..................................
10.001 - 10.500.................................
10.501 - 11.000.................................
11.001 - 11.500.................................
11.501 - 12.000.................................
12.001 - 12.500.................................
12.501 - 13.000.................................
13.001 - 13.500.................................
13.501 - 14.000.................................
14.001 - 14.500.................................
14.501 - 15.000.................................
15.001 - 15.500.................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
GROSS MARGINS OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
RANGE OF GROSS COUPON RATES (%) EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
2.001 - 4.000................................... $ %
4.001 - 6.000...................................
6.001 - 8.000...................................
8.001 - 10.000..................................
10.001 - 12.000.................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
S-42
<PAGE>
MAXIMUM RATES OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
RANGE OF MAXIMUM RATES (%) EQUITY LOANS LOAN BALANCES LOAN BALANCE
- -------------------------- ------------ ------------- ------------
<S> <C> <C> <C>
13.501 - 14.000................................. $ %
14.501 - 15.000.................................
15.001 - 15.500.................................
15.501 - 16.000.................................
16.001 - 16.500.................................
16.501 - 17.000.................................
17.001 - 17.500.................................
17.501 - 18.000.................................
18.001 - 18.500.................................
18.501 - 19.000.................................
19.001 - 19.500.................................
19.501 - 20.000.................................
20.001 - 20.500.................................
20.501 - 21.000.................................
21.001 - 21.500.................................
21.501 - 22.000.................................
22.001 - 22.500.................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
NEXT INTEREST ADJUSTMENT DATE OF GROUP III HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF HOME CALCULATION DATE DATE
NEXT INTEREST ADJUSTMENT DATE EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
October 1999.................................... $ %
November 1999...................................
December 1999...................................
January 2000....................................
February 2000...................................
June 2000 ......................................
July 2000.......................................
February 2001...................................
April 2001......................................
May 2001........................................
June 2001.......................................
July 2001.......................................
August 2001.....................................
------------- -------------- -------
Total........................................... $ 100.00%
============= ============== =======
</TABLE>
S-43
<PAGE>
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth the seller's delinquency experience with
respect to home equity loans as of the last day of each of the months indicated.
No home equity loan is considered delinquent for purposes of the table until a
payment is one calendar month past due on a contractual basis. It should be
noted that the seller commenced its servicing activities of home equity loans in
October 1997. Accordingly, the seller does not have significant historical
delinquency, bankruptcy, foreclosure or default experience that may be referred
to for examining the delinquency experience of home equity loans. The
delinquency and loss percentages may be affected by the size and relative lack
of seasoning of the servicing portfolio which increased from approximately
$___________ at ______ __, ____ to approximately $___________ at ________ __,
____. The seller believes that as the existing loan portfolio becomes more
seasoned, the rate of delinquencies, loan losses, foreclosures and REO
Properties will increase. Accordingly, the information in the table below is for
illustrative purposes only and is not intended to indicate or predict the
expected delinquency experience on past, current or future pools of home equity
loans for which the seller is the servicer.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF _______ ___, ____ AS OF _____ ___, ____
-------------------------- ----------------------------
NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT ($) OF LOANS AMOUNT ($)
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Portfolio(1)...............................
Delinquency Percentage
30-59 days.......................... % % % %
60-89 days..........................
90 days and over....................
Total delinquency(2)....................... ____ ____ ____ ____
Percentage of REO Properties............... % % % %
</TABLE>
- ------------------
(1) Portfolio includes all loans originated after October 1997 other than
some home equity loan products originated for whole loan sales or
retention by the seller or one of its affiliates.
(2) Excludes REO Properties.
S-44
<PAGE>
The following table sets forth the seller's loss experience with respect to home
equity loans for the periods indicated.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDING
JUNE 30, 1999 MARCH 31, 1999
------------- -------------------
DOLLAR DOLLAR
AMOUNT ($) AMOUNT ($)
---------- ----------
<S> <C> <C>
Average Portfolio(1)..........................................
Gross Losses(2)...............................................
Recoveries(3).................................................
Net Losses(4).................................................
Net Losses as a Percentage of Average Portfolio(5)............ % %
</TABLE>
- ------------------
(1) "Average Portfolio" during the period is the arithmetic average of the
principal balances of the loans outstanding on the last day of each month
during the period. Portfolio includes all loans originated after October
1997 other than some home equity loan products originated for whole loan
sales or retention by the seller or one of its affiliates.
(2) "Gross Losses" for each respective period are actual losses incurred on
liquidated properties or losses from the write-off of loans where the
properties were not liquidated. Losses include all principal, foreclosure
costs and all accrued interest.
(3) "Recoveries" are recoveries from deficiency judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries".
(5) For the 3 months ending _____ __, ____, "Net Losses as a Percentage of
Average Portfolio" was annualized by multiplying "Net Losses" by 4 before
calculating the percentage of "Average Portfolio".
S-45
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on each class of notes, the aggregate
amount of distributions on the notes and the yield to maturity of the notes will
be related to the rate and timing of payments of principal on the notes. The
rate of principal payments on the home equity loans will in turn be affected by
the amortization schedules of the home equity loans, by the rate of principal
prepayments, including prepayments resulting from refinancing, liquidation of
the home equity loans due to defaults, casualties, or condemnations, optional
purchases by the servicer of delinquent home equity loans or of all remaining
home equity loans in connection with the termination of the trust, and realized
losses on the home equity loans. Certain of the home equity loans may be prepaid
by the mortgagors at any time without penalty, while certain of the home equity
loans are subject to penalties for prepayments.
PREPAYMENTS
Prepayments will result in distributions on the notes of principal
amounts which would otherwise be distributed over the remaining terms of the
home equity loans. Since the rate of payment of principal of the home equity
loans will depend on future events and a variety of factors, no assurance can be
given as to the rate or the rate of principal prepayments. The extent to which
the yield to maturity of a note may vary from the anticipated yield will depend
upon the degree to which a note is purchased at a discount or premium, and the
degree to which the timing of payments on the notes is sensitive to prepayments,
liquidations and purchases of the home equity loans.
The rate of prepayment on the home equity loans cannot be predicted.
Approximately ____% of the Group I home equity loans, approximately ___% of the
Group II home equity loans and approximately ____% of the Group III home equity
loans may be prepaid in whole or in part at any time without penalty. Generally,
home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the home equity loans may experience a higher rate of prepayment
than traditional home equity loans. The prepayment experience of the trust with
respect to the home equity loans may be affected by a wide variety of factors,
including economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and changes affecting the
deductibility for Federal income tax purposes of interest payments on home
equity loans. All of the home equity loans will contain "due-on-sale"
provisions, and the servicer is required by the sale and servicing agreement
either to enforce the provisions to the extent permitted by applicable law or in
a manner consistent with reasonable commercial practice, to permit the purchaser
of the related mortgaged property to assume the home equity loan. The
enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related home equity loan. The rate of prepayment of the home
equity loans may also be affected by the extent to which the home equity loans
provide for the payment of a penalty in connection with a prepayment as well as
the amount of the penalty.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE HOME EQUITY
LOANS--DUE-ON-SALE CLAUSES IN HOME EQUITY LOANS" IN THe PROSPECTUS FOR MORE
DETAIL.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates such as the Group I and Group II home
equity loans is affected by prevailing market rates for home equity loans of a
comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
home equity loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. As is the case
with conventional fixed-rate home equity loans, adjustable-rate home equity
loans such as the Group III home equity loans may be subject to a greater rate
of principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable-rate home equity
loans could be subject to higher prepayment rates than if prevailing interest
rates remain constant because the availability of fixed-rate home equity loans
at competitive rates may encourage
S-46
<PAGE>
mortgagors to refinance their adjustable-rate home equity loans to
"lock in" a lower fixed interest rate. The prepayment behavior of the 2/28
Adjustable Rate Loans may differ from that of the other home equity loans. As a
2/28 Adjustable Rate Loan approaches its initial adjustment date, the borrower
may become more likely to refinance the loan to avoid an increase in the coupon
rate, even if fixed-rate loans are only available at rates that are slightly
lower or higher than the coupon rate before adjustment. The existence of an
applicable periodic rate cap, lifetime cap and lifetime floor also may affect
the likelihood of prepayments resulting from refinancings. However, no assurance
can be given as to the level of prepayments that the home equity loans will
experience.
Distribution of excess spread for the home equity loans in the
applicable home equity loan group will be distributed in reduction of the
outstanding principal balance of the related class of notes on each distribution
date to the extent that the then required overcollateralization amount for the
home equity loans in that home equity loan group exceeds the actual
overcollateralization amount for that home equity loan group. If purchased at a
premium or a discount, the yield to maturity on a note will be affected by the
rate at which excess spread for the home equity loans in the related home equity
loan group is distributed in reduction of the related note principal balance. If
the actual rate of distribution of excess spread is slower than the rate
anticipated by an investor who purchases a note at a discount, the actual yield
to the investor will be lower than the investor's anticipated yield. If the
actual rate of distribution of excess spread is faster than the rate anticipated
by an investor who purchases a note at a premium, the actual yield to the
investor will be lower than the investor's anticipated yield. The amount of
excess spread available for distribution on any distribution date will be
affected by the actual amount of interest received, advanced, collected or
recovered in respect of the home equity loans during the related Remittance
Period and the amount will be influenced by changes in the weighted average of
the coupon rates of the home equity loans resulting from prepayments and
liquidations. The amount of excess spread distributions applied in reduction of
the outstanding principal balance of the applicable notes on each distribution
date will be based on the then required overcollateralization amount for the
related home equity loan group, which may increase or decrease during the period
any class of notes remains outstanding. Any increase in the required
overcollateralization amount for a home equity loan group may result in an
accelerated rate of amortization of the related class of notes until the
overcollateralization amount for the related home equity loan group equals the
required overcollateralization amount for the related home equity loan group.
Similarly, any decrease in the required overcollateralization amount for the
related home equity loan group will result in a decelerated rate of amortization
of the related class of notes until the overcollateralization amount for the
related home equity loan group is reduced to the required overcollateralization
amount.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--CREDIT ENHANCEMENT" IN THIS
PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
PAYMENT DELAY FEATURE OF THE FIXED RATE NOTES
The effective yield to the Class A-1 and Class A-2 noteholders will be
lower than the yield otherwise produced by the applicable note rate and the
purchase price of the notes because distributions will not be payable to the
noteholders until the distribution date following the interest period for the
fixed rate notes, which is the calendar month preceding the distribution date.
No additional distribution of interest or earnings are payable with respect to
the payment delay.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will
increase the yield on notes purchased at a price less than par and will decrease
the yield on notes purchased at a price greater than par. The effect on an
investor's yield due to principal prepayments on the home equity loans in the
related home equity loan group occurring at a rate that is faster (or slower)
than the rate anticipated by the investor in the period immediately following
the issuance of the notes will not be entirely offset by a subsequent like
reduction (or increase) in the rate of principal payments. The weighted average
life of the notes will also be affected by the amount and timing of
delinquencies and defaults on the home equity loans in the related home equity
loan group and the recoveries, if any, on defaulted home equity loans in the
related home equity loan group and foreclosed properties.
S-47
<PAGE>
The "weighted average life" of a note refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of the note is repaid. The weighted average life of any
class of the notes will be influenced by, among other factors, the rate at which
principal payments are made on the home equity loans including home equity loans
that are balloon loans, for which principal amortization over the life of the
loan is slower (requiring a large lump sum principal payment at maturity.)
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Group I and
Group II notes is the prepayment assumption (the "Prepayment Assumption"). A
100% Prepayment Assumption assumes constant prepayment rates ("CPR") of 4% per
annum of the then outstanding principal balance of the Group I and Group II home
equity loans in the first month of the life of the home equity loans and an
additional 1.455% (precisely 16/11%) per annum in each month thereafter until
the twelfth month. Beginning in the twelfth month and in each month thereafter
during the life of the home equity loans, a 100% Prepayment Assumption assumes a
CPR of 20% per annum of the outstanding principal balance of the Group I and
Group II home equity loans each month. The model used with respect to the Group
III notes is CPR, which is a prepayment assumption that represents a constant
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans for the life of the home equity loans.
Neither model purports to be a historical description of prepayment experience
or a prediction of the anticipated rate of prepayment of any pool of home equity
loans, including the home equity loans to be included in the trust.
Since the following tables were prepared on the basis of the
assumptions in the following paragraph, there are discrepancies between
characteristics of the actual home equity loans and the characteristics of the
home equity loans assumed in preparing the tables. Any discrepancy may have an
effect upon the percentages of the class principal balances outstanding and
weighted average lives of the notes set forth in the tables. In addition, since
the actual home equity loans in the trust have characteristics which differ from
those assumed in preparing the tables set forth below, the distributions of
principal on the notes may be made earlier or later than as indicated in the
tables.
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the home equity loans and the
following additional assumptions (collectively, the "Structuring Assumptions"):
- the home equity loans consist of pools of loans with the amortization
characteristics set forth below,
- the closing date for issuance of the notes is ________ ___, _____,
- distributions on the notes are made on the ___ day of each month
regardless of the day on which the distribution date actually occurs,
commencing in _________ ___, ____ and are made in accordance with the
priorities described in this prospectus supplement,
- the scheduled monthly payments of principal and interest on the home
equity loans will be timely delivered on the first day of each month
(with no defaults, delinquencies, modifications, waivers or
amendments),
- the home equity loans prepay at the specified percentages of the
Prepayment Assumption in the case of the Group I and Group II home
equity loans, or at the specified percentages of CPR, in the case of
the Group III home equity loans,
- all prepayments are prepayments in full received on the last day of
each month and include 30 days' interest,
- the optional termination is not exercised (except as noted in footnote
2 on the following tables),
- the notes of each Class have the note rates and initial outstanding
principal balances set forth in this prospectus supplement,
- the overcollateralization levels are set initially as specified in the
sale and servicing agreement, and thereafter decrease in accordance
with the provisions of the sale and servicing agreement,
- the coupon rate for each Group III home equity loan is adjusted on its
next adjustment date and on subsequent adjustment dates which occur on
six month intervals following the initial
S-48
<PAGE>
adjustment date to equal the sum of the applicable gross margin
and six-month LIBOR (the sum being subject to the applicable
periodic rate adjustment caps and floors and lifetime rate caps
and floors), and
- six-month LIBOR remains constant at ____% per annum and one-month
LIBOR remains constant at ____% per annum.
S-49
<PAGE>
GROUP I
<TABLE>
<CAPTION>
REMAINING ORIGINAL
TERM TO TERM TO
POOL LOAN COUPON MATURITY MATURITY
NUMBER BALANCE RATE (%) (MONTHS) (MONTHS)
- ------ ------- -------- -------- --------
<S> <C> <C> <C> <C>
1......................................... $
2.........................................
3.........................................
4.........................................
====================
$
====================
</TABLE>
GROUP II
<TABLE>
<CAPTION>
REMAINING ORIGINAL
TERM TO TERM TO
POOL LOAN COUPON MATURITY MATURITY
NUMBER BALANCE RATE (%) (MONTHS) (MONTHS)
- ------ ------- -------- -------- --------
<S> <C> <C> <C> <C>
1......................................... $
2.........................................
3.........................................
4.........................................
====================
$
====================
</TABLE>
GROUP III
HOME EQUITY LOANS
- -----------------
<TABLE>
<CAPTION>
NUMBER
OF
MONTHS INITIAL
TO NEXT INTEREST INTEREST REMAINING ORIGINAL
COUPON RATE RATE TERM TO TERM TO
POOL LOAN COUPON CHANGE GROSS ADJUSTMENT ADJUSTMENT MAXIMUM MINIMUM MATURITY MATURITY
NUMBER BALANCE RATE (%) DATE MARGIN(%) CAP (%) CAP (%) RATE (%) RATE (%) (MONTHS) (MONTHS)
- -------- --------- --------- --------- --------- ----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $
2
3
4
5
6
7
8
===========
$
===========
</TABLE>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions,
the percentages of the initial outstanding principal balance of the notes that
would be outstanding after each of the dates shown, based on the indicated
percentages of the Prepayment Assumption, in the case of the Group I notes and
the Group II notes and at the indicated percentages of CPR, in the case of the
Group III notes, and the corresponding weighted average lives of the Classes. It
is not likely that each of
- all of the home equity loans will have the characteristics assumed,
S-50
<PAGE>
- the home equity loans will prepay at the specified percentages of the
Prepayment Assumption or CPR or at any other constant percentage or
- the level of one-month LIBOR will remain constant at the level assumed
or at any other level.
Moreover, the diverse remaining terms to maturity of the home equity loans could
produce slower or faster principal distributions than indicated in the tables at
the specified percentages of the Prepayment Assumption or CPR even if the
weighted average remaining term to maturity of the home equity loans is
consistent with the remaining terms to maturity of the home equity loans
specified in the Structuring Assumptions.
S-51
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
GROUP I PREPAYMENT
ASSUMPTION
- ---------------------- Class A-1
DISTRIBUTION DATE % % % % % % %
- ---------------------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...............................
[November25, 2000]...............................
[November 25, 2001]..............................
[November 25, 2002]..............................
[November 25, 2003]..............................
[November 25, 2004]..............................
[November 25, 2005]..............................
[November 25, 2006]..............................
[November 25, 2007]..............................
[November 25, 2008]..............................
[November 25, 2009]..............................
[November 25, 2010]..............................
[November 25, 2011]..............................
[November 25, 2012]..............................
[November 25, 2013]..............................
[November 25, 2014]..............................
[November 25, 2015]..............................
[November 25, 2016]..............................
[November 25, 2017]..............................
[November 25, 2018]..............................
[November 25, 2019]..............................
[November 25, 2020]..............................
[November 25, 2021]..............................
[November 25, 2022]..............................
[November 25, 2023]..............................
[November 25, 2024]..............................
[November 25, 2025]..............................
[November 25, 2026]..............................
[November 25, 2027]..............................
[November 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- -------------------
* The weighted average life of a note is determined by (1) multiplying the
amount of each distribution in reduction of the outstanding principal
balance of the applicable class of notes by the number of years from the
date of issuance of the note to the related distribution date, (2) adding
the results, and (3) dividing the sum by the original principal balance of
the applicable class of notes.
(1) To maturity.
(2) To optional termination. The optional termination of the trust is
dependent on the aggregate principal balance of the home equity loans in the
trust being reduced to less than 10% of the principal balance of the home equity
loans on the cut-off date. These tables have been prepared based on the
assumptions described above (including the assumptions regarding the
characteristics and performance of the home equity loans, which differ from the
actual characteristics and performance of these loans) and should be read in
conjunction with these assumptions.
S-52
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
GROUP II PREPAYMENT
ASSUMPTION
- ---------------------- Class A-2
DISTRIBUTION DATE % % % % % % %
- ---------------------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...............................
[November 25, 2000]..............................
[November 25, 2001]..............................
[November 25, 2002]..............................
[November 25, 2003]..............................
[November 25, 2004]..............................
[November 25, 2005]..............................
[November 25, 2006]..............................
[November 25, 2007]..............................
[November 25, 2008]..............................
[November 25, 2009]..............................
[November 25, 2010]..............................
[November 25, 2011]..............................
[November 25, 2012]..............................
[November 25, 2013]..............................
[November 25, 2014]..............................
[November 25, 2015]..............................
[November 25, 2016]..............................
[November 25, 2017]..............................
[November 25, 2018]..............................
[November 25, 2019]..............................
[November 25, 2020]..............................
[November 25, 2021]..............................
[November 25, 2022]..............................
[November 25, 2023]..............................
[November 25, 2024]..............................
[November 25, 2025]..............................
[November 25, 2026]..............................
[November 25, 2027]..............................
[November 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- -------------------
* The weighted average life of a note is determined by (1) multiplying the
amount of each distribution in reduction of the outstanding principal
balance of the applicable class of notes by the number of years from the
date of issuance of the note to the related distribution date, (2) adding
the results, and (3) dividing the sum by the original principal balance of
the applicable class of notes.
(1) To maturity.
(2) To optional termination. The optional termination of the trust is
dependent on the aggregate principal balance of the home equity loans in the
trust being reduced to less than 10% of the principal balance of the home equity
loans on the cut-off date. These tables have been prepared based on the
assumptions described above (including the assumptions regarding the
characteristics and performance of the home equity loans, which differ from the
actual characteristics and performance of these loans) and should be read in
conjunction with these assumptions.
S-53
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
GROUP III % OF CPR Class A-3
- ------------------ --------------------------------------------------------------------------------------
PAYMENT DATE % % % % % % % % % % % % %
- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........
[November 25, 2000].......
[November 25, 2001].......
[November 25, 2002].......
[November 25, 2003].......
[November 25, 2004].......
[November 25, 2005].......
[November 25, 2006].......
[November 25, 2007].......
[November 25, 2008].......
[November 25, 2009].......
[November 25, 2010].......
[November 25, 2011].......
[November 25, 2012].......
[November 25, 2013].......
[November 25, 2014].......
[November 25, 2015].......
[November 25, 2016].......
[November 25, 2017].......
[November 25, 2018].......
[November 25, 2019].......
[November 25, 2020].......
[November 25, 2021].......
[November 25, 2022].......
[November 25, 2023].......
[November 25, 2024].......
[November 25, 2025].......
[November 25, 2026].......
[November 25, 2027].......
[November 25, 2028].......
Weighted Average Life *(1)
Weighted Average Life *(2)
</TABLE>
- ------------------
* The weighted average life of a note is determined by (1) multiplying the
amount of each distribution in reduction of the related outstanding
principal balance of the applicable class of notes by the number of years
from the date of issuance of the note to the related distribution date, (2)
adding the results, and (3) dividing the sum by the original principal
balance of the applicable class of notes.
(1) To maturity.
(2) To optional termination. The optional termination of the trust is
dependent on the aggregate principal balance of the home equity loans in the
trust being reduced to less than 10% of the principal balance of the home equity
loans on the cut-off date.
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
home equity loans, which differ from the actual characteristics and performance
of these loans) and should be read in conjunction with these assumptions.
S-54
<PAGE>
THE TRUST
GENERAL
The trust is a business trust to be formed under the laws of the State
of Delaware pursuant to a trust agreement for the purpose of the transactions
described in this prospectus supplement. Prior to formation, the trust will have
no assets or obligations or any operating history. The trust will not acquire
any assets other than the home equity loans and related rights and proceeds to
the home equity loans, and it is not anticipated that the trust will have any
need for additional capital resources. Because the trust will have no operating
history upon its establishment and will not engage in any business other than
the duties discussed below, no historical or pro forma financial statements, or
ratios of earnings to fixed charges with respect to the trust have been included
in this prospectus supplement. The trust will not engage in any activities other
than:
- acquiring, holding and collecting payments on the home equity loans;
- issuing the notes and the transferor interest;
- making payments on the notes and the transferor interest; and
- engaging in other activities to accomplish these activities.
The assets of the trust will consist primarily of three groups of home
equity loans. The Group I home equity loans are closed-end, fixed-rate home
equity loans with principal balances that conform to the limits of Fannie Mae
and Freddie Mac, the Group II home equity loans are closed-end, fixed-rate home
equity loans with principal balances that may not conform to these limits and
the Group III home equity loans are closed-end, adjustable-rate home equity
loans with principal balances that may or may not conform to these limits. All
of the home equity loans will be secured by first- or second-lien mortgages on
primarily one- to four-family residential properties and manufactured housing
treated as real property under applicable law.
WE REFER YOU TO "DESCRIPTION OF THE HOME EQUITY LOANS" IN THIS
PROSPECTUS SUPPLEMENT FOR GREATER DETAIL.
The assets of the trust include all:
- the home equity loans described above, together with the related home
equity loan documents and the seller's interest in any mortgaged
property securing a home equity loan, and all payments on the home
equity loans and proceeds of the voluntary or involuntary conversion
of the foregoing;
- amounts as may be held by the indenture trustee in the distribution
account and any other accounts held by the indenture trustee for the
benefit of the noteholders, together with investment earnings on these
amounts;
- amounts that may be held by the servicer in the Principal and Interest
Account (as defined in the prospectus), if any, including investment
earnings on these amounts, whether in the form of cash, instruments,
securities or properties; and
- proceeds of all of the above, including proceeds of any mortgage
insurance, hazard insurance, or title insurance policy relating to the
home equity loans, cash proceeds, accounts, accounts receivable,
notes, drafts, acceptances, chattel paper, checks, deposit accounts,
rights to payment of any kind, and other forms of obligations and
receivables which at the time constitute any part of or are including
in the proceeds of any of the above.
S-55
<PAGE>
On the closing date, the seller and certain of its affiliates will sell
home equity loans to the depositor, who in turn will transfer the home equity
loans to the trust.
The assets of the trust will be pledged to the indenture trustee
pursuant to the indenture. The servicer is obligated to service the home equity
loans pursuant to the sale and servicing agreement.
Pursuant to the sale and servicing agreement the indenture trustee will
receive specified investment earnings on amounts on deposit in the distribution
account as additional compensation and the servicer will receive any investment
earnings on amounts on deposit in the Principal and Interest Account.
The depositor will cause the note insurer to deliver three irrevocable
and unconditional note insurance policies, each with respect to one of the three
classes of notes to the indenture trustee for the benefit of the noteholders.
WE REFER YOU TO "THE SELLER AND SERVICER" AND "THE AGREEMENTS" IN
THE PROSPECTUS AND "DESCRIPTION OF THE AGREEMENTS--SERVICING FEE" AND
"--RIGHTS UPON A SERVICING TERMINATION EVENT" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION ON THE SERVICER AND SERVICING COMPENSATION.
The trust's principal offices are located in _____________, in care of
______________________, as owner trustee, at the address set forth in the
following section.
THE OWNER TRUSTEE
_____________________ will act as the owner trustee under the trust
agreement. ___________________ is a [_______ banking corporation] and its
principal offices are located at ____________________________.
WE REFER YOU TO "DESCRIPTION OF THE AGREEMENTS--CERTAIN
MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE" AND "--DUTIES OF
THE OWNER TRUSTEE AND INDENTURE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION ON THE OWNER TRUSTEE.
DESCRIPTION OF THE NOTES
The trust will issue the notes pursuant to an indenture. The trust will
also issue a transferor interest pursuant to the trust agreement; however, they
are not being offered by us under this prospectus supplement. The indenture, the
trust agreement and the sale and servicing agreement are collectively referred
to as the "Agreements" in this prospectus supplement. The forms of the
Agreements have been filed as exhibits to the registration statement of which
this prospectus supplement and the prospectus are a part. The following
summaries describe the material provisions of the Agreements. Wherever
particular sections or defined terms of the Agreements are referred to, these
sections or defined terms are incorporated into this prospectus supplement by
reference.
GENERAL
The notes will be issued in denominations of $1,000 and multiples of $1
in excess of $1,000 and will evidence specified undivided interests in the
trust. Definitive notes will be transferable and exchangeable at the corporate
trust office of the indenture trustee, which will initially act as note
registrar. No service charge will be made for any registration of exchange or
transfer of notes, but the indenture trustee may require payment of a sum
sufficient to cover any tax or other governmental charge.
S-56
<PAGE>
As of the closing date, each class of notes will have the original note
balance set forth on the cover page of this prospectus supplement. The principal
amount of each class of notes on any distribution date is equal to the
applicable class principal balance on the closing date minus the aggregate of
amounts actually distributed as principal to noteholders. Only the notes are
being offered under this prospectus supplement. The transferor interest is not
being offered and will be held by the transferor. Initially the transferor will
be the depositor.
The Class A-1, or Group I notes, will receive distributions primarily
based upon collections on the Group I home equity loans. The Class A-2, or Group
II notes, will receive distributions primarily based on collections on the Group
II home equity loans. The Class A-3, or Group III notes, will receive
distributions primarily based on the Group III home equity loans. Some limited
cross-collateralization for realized losses exists with respect to excess
collections between the three home equity loan groups.
WE REFER YOU TO "--PRIORITY OF DISTRIBUTIONS" AND "--CREDIT
ENHANCEMENT; CROSSCOLLATERALIZATION" IN THE PROSPECTUS SUPPLEMENT FOR
ADDITIONAL DETAIL.
Each class of the notes represents the right to receive payments of
interest at the applicable note rate for the applicable class, and payments of
principal as described below.
The person in whose name a note is registered is referred to in this
prospectus supplement as a "noteholder."
BOOK-ENTRY NOTES
The notes initially will be in book-entry form. Persons acquiring
beneficial ownership interests in the notes, will hold the notes through the
DTCC in the United States, or Cedelbank or Euroclear in Europe, if they are
participants of the systems, or indirectly through organizations that are
participants in the systems. The book-entry notes will be issued in one or more
notes per class, representing the aggregate principal balance of each class of
notes, and will initially be registered in the name of Cede & Co. the nominee of
DTCC. Cedelbank and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold positions in customers' securities accounts in the depositaries names
on the books of DTCC. The European depositories will be Citibank N.A., who will
act as depositary for Cedelbank and Morgan Guaranty Trust Company of New York,
who will act as depositary for Euroclear. Investors may hold beneficial
interests in the book-entry notes in minimum denominations representing
principal balances of $1,000 and in integral multiples of $1 in excess of
$1,000. Except as described below, no person acquiring book-entry notes will be
entitled to receive a physical, definitive note. Unless and until definitive
notes are issued, it is anticipated that the only noteholder of the notes will
be Cede & Co. as nominee of DTCC. Beneficial owners will not be noteholders as
that term is used in the sale and servicing agreement. Beneficial owners are
permitted to exercise their rights only indirectly through DTCC and its
participants (including Cedelbank and Euroclear).
Under a book-entry format, beneficial owners of the book entry notes
may experience some delay in their receipt of payments, since the payments will
be forwarded by the indenture trustee to Cede & Co. Distributions with respect
to notes held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank participants or Euroclear participants in accordance with
the relevant system's rules and procedures, to the extent received by the
relevant depositary. Because DTCC can only act on behalf of financial
intermediaries, the ability of a beneficial owner to pledge book-entry notes to
persons or entities that do not participate in the depositary system, or
otherwise take actions in respect of the book-entry notes, may be limited due to
the lack of physical notes for the book-entry notes.
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DTCC has advised the indenture trustee that, unless and until
definitive notes are issued, DTCC will take any action permitted to be taken by
the holders of the book-entry notes under the sale and servicing agreement only
at the direction of one or more financial intermediaries to whose DTCC accounts
the book-entry notes are credited, to the extent that actions are taken on
behalf of financial intermediaries whose holdings include those book-entry
notes. Cedelbank or the Euroclear operator, as the case may be, will take any
other action permitted to be taken by a noteholder under the sale and servicing
agreement on behalf of a Cedelbank participant or Euroclear participant only in
accordance with its relevant rules and procedures and subject to the ability of
the relevant European depository to effect actions on its behalf through DTCC.
DTCC may take actions, at the direction of the related participants, with
respect to some notes which conflict with actions taken with respect to other
notes.
Definitive notes will be issued to beneficial owners of the book-entry
notes, or their nominees, rather than to DTCC, only if:
- DTCC or the issuer advises the indenture trustee in writing that DTCC
is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the
book-entry notes and DTCC or the issuer is unable to locate a
qualified successor,
- the issuer, at its sole option, elects to terminate a book-entry
system through DTCC or
- after the occurrence of an Event of Default (as defined in the
indenture), beneficial owners having percentage interests aggregating
at least a majority of the aggregate outstanding principal balance of
the book-entry notes advise DTCC in writing that the continuation of a
book-entry system through DTCC (or its successor) is no longer in the
best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding sentence, DTCC will be required to notify the indenture trustee and
all beneficial owners of the occurrence of that event and the availability
through DTCC of definitive notes. Upon surrender by DTCC of the global note or
notes representing the book-entry notes and instructions for re-registration,
the issuer will execute and the indenture trustee will authenticate the
definitive notes, and thereafter the indenture trustee will recognize the
holders of the definitive notes as noteholders under the indenture.
DTCC management is aware that some computer applications, systems, and
the like for processing data that are dependent upon calendar dates, including
dates before, on, and after January 1, 2000, may encounter Year 2000 problems.
DTCC has informed its participants and other members of the financial community
that it has developed and is implementing a program so that its systems, as the
same relate to the timely payment of distributions to securityholders,
book-entry deliveries, and settlement of trades within DTCC, continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTCC's plan includes
a testing phase, which is expected to be completed within appropriate time
frames.
However, DTCC'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 whom DTCC licenses software and
hardware, and third party vendors on whom DTCC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTCC has informed the financial community that
it is contacting, and will continue to contact, third party vendors from whom
DTCC acquires services to impress upon them the importance of these services
being Year 2000 compliant and to determine the extent of their efforts for Year
2000 remediation (and, as appropriate, testing) of their services. In addition,
DTCC is in the process of developing contingency plans as it deems appropriate.
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According to DTCC, the foregoing information with respect to DTCC has
been provided to the financial community for informational purposes only and is
not intended to serve as a representation, warranty, or contract modification of
any kind.
PAYMENTS ON THE NOTES
Beginning with the first distribution date (which will occur on
__________, ____), payments on the notes will be remitted by the indenture
trustee to the persons in whose names the notes are registered on the record
date, based solely upon the information provided to the indenture trustee by the
servicer on the business day immediately preceding each distribution date.
Payments will be made by check mailed to the address of the noteholder as it
appears on the note register maintained by the indenture trustee as note
registrar in amounts calculated as described below. If a noteholder owning a
note having an aggregate original principal balance of not less than $1,000,000
notifies the indenture trustee at least one business day prior to the record
date, distributions will be made in immediately available funds by wire transfer
or otherwise, to the account of the noteholder at an appropriate institution.
Beneficial owners of the notes may experience some delay in receipt of their
payments due to the operations of DTCC. However, the final distribution with
respect to the notes will be made upon presentation and surrender of the note by
the noteholder at the office or the agency of the indenture trustee specified in
the notice to noteholders of the final distribution.
Each noteholder of record of a class of notes will be entitled to
receive the noteholder's percentage interest in the amounts due the class on
each distribution date. The percentage interest of a note as of any date of
determination will be equal to the percentage obtained by dividing the principal
balance of the note as of the closing date by the class principal balance for
the related class of notes as of the closing date.
GLOSSARY
The following terms are defined below to help facilitate a better
understanding of the priority and amount of distributions payable to you on a
distribution date.
"AVAILABLE FUNDS CAP" means, with respect to any Interest Period and
the related distribution date, a rate per annum equal to the fraction, expressed
as a percentage, the numerator of which is the product of (a) the weighted
average of the Net Coupon Rates (minus the Minimum Spread) on the applicable
group of home equity loans as of the beginning of the related Remittance Period
and (b) the aggregate outstanding principal balance of the applicable group of
home equity loans as of the beginning of the related Remittance Period, and the
denominator of which is the aggregate outstanding principal balance of the
relevant class of notes (before giving effect to payments of principal on the
distribution date) (adjusted to an effective rate reflecting accrued interest
calculated on the basis of a 360-day year and the actual number of days
elapsed).
"CROSSCOLLATERALIZATION PAYMENT" means, on any distribution date, a
payment of available funds with respect to one group to cover shortfalls in
available funds with respect to another group needed to pay the following
amounts, in the following order:
- first, concurrently, to the indenture trustee, any unpaid indenture
trustee fee, to the owner trustee any unpaid owner trustee fee, to the
indenture trustee, any unpaid Transition Expenses and, so long as no
payment default under the note insurance policy has occurred and is
continuing, to the note insurer, any amount owed as premium under the
note insurer agreement;
- second, to the related class of notes any unpaid Interest
Distribution;
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- third, to the note insurer, any unpaid amounts owed for reimbursement
of draws under the applicable note insurance policy, plus interest on
the unpaid amounts; and
- fourth, to the related class of notes, any amount by which realized
losses with respect to the home equity loan group exceed Excess Spread
plus overcollateralization with respect to the related class of notes.
"DISTRIBUTABLE EXCESS SPREAD" means the amount, if any, required to be
distributed on any distribution date to satisfy the required level of
overcollateralization for the home equity loan group for the related
distribution date.
"EXCESS OVERCOLLATERALIZATION AMOUNT" means, for any distribution date
and class of notes, the amount, if any, by which the overcollateralization
amount for a home equity loan group exceeds the related required
overcollateralization amount for the distribution date, after giving effect to
all payments with respect to the related Monthly Principal Distributable Amount
on the related distribution date.
"EXCESS SPREAD" means, as of any distribution date with respect to a
group of home equity loans, the excess, if any, of (x) related available funds
for the distribution date over (y) the portion of available funds required to be
distributed on the related distribution date pursuant to subclauses (1) through
(4) as set forth under the heading "-Priority of Distributions" below.
"FIXED INTEREST RATE CAP" means, as of any distribution date, a rate
per annum equal to the weighted average of the Net Coupon Rates of the
applicable group of home equity loans as of the beginning of the related
Remittance Period.
"INTEREST CARRYOVER SHORTFALL" means, as of any distribution date, for
any class of notes, the sum of (a) the excess of the sum of (A) the related
Monthly Interest Distributable Amount for the class of notes for the preceding
distribution date and (B) any outstanding Interest Carryover Shortfall with
respect to the notes on the preceding distribution date, over the amount in
respect of interest that is actually distributed to these notes on the preceding
distribution date plus (b) interest on the excess, to the extent permitted by
law, at the related note rate for the related Interest Period.
"INTEREST DISTRIBUTION" means, as of any distribution date, for any
class of notes the sum of (a) the Monthly Interest Distributable Amount for a
class of notes and (b) any applicable Interest Carryover Shortfall for the class
of notes.
"INTEREST INDEX CARRYOVER" means, as of any distribution date for any
Class A-3 notes, the sum of (A) the excess of (1) the amount of interest the
applicable class of notes would otherwise be entitled to receive on the
distribution date had the rate not been limited by the Available Funds Cap over
(2) the amount of interest payable on the applicable class of notes at the
Available Funds Cap for the distribution date and (B) the Interest Index
Carryover for all previous distribution dates not previously paid to the
applicable class of noteholders (including any interest accrued at the
applicable note rate).
"INTEREST PERIOD" as of any distribution date, means:
- for each of the Class A-1 notes and the Class A-2 notes, the calendar
month preceding the month of the distribution date; and
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- for the Class A-3 notes, the period from and including the
previous distribution date (or the closing date in the case of
the first distribution date) to and including the day preceding
the relevant distribution date.
"LIBOR BUSINESS DAY" means any day other than (1) a Saturday or a
Sunday or (2) a day on which banking institutions in the State of New York or in
the city of London, England are required or authorized by law to be closed.
"MINIMUM SPREAD" means a percentage per annum equal to 0% for
distribution dates which occur prior to _________ and 0.50% for distribution
dates which occur from ______ on.
"MONTHLY INTEREST DISTRIBUTABLE AMOUNT" means, as of any distribution
date, interest at the related note rate that accrued during the related Interest
Period on the related note balance, immediately prior to the distribution date.
"MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT" means, as of any distribution
date with respect to a class of notes and to the extent of available funds, an
amount equal to the sum of the following amounts (without duplication) with
respect to the immediately preceding Remittance Period:
- all collections allocable to principal with respect to the
applicable group of home equity loans, whether through prepayment
or liquidation of mortgage properties, repurchased home equity
loans, or otherwise; and
- the Distributable Excess Spread.
"NET COUPON RATE" means, as of any distribution date with respect to a
home equity loan, the rate per annum equal to the Coupon Rate for that home
equity loan minus the sum of all amounts payable prior to the Interest
Distribution related to that home equity loan on the related distribution date,
expressed as a percentage of the aggregate principal balance of the applicable
group of home equity loans, as of the beginning of the related Remittance
Period.
"ONE-MONTH LIBOR" means, with respect any Interest Period, an amount
established by the indenture trustee equal to the rate for United States dollar
deposits for one month which appears on the display designated as page 3750 on
the Telerate Service or a successor page as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to the first day of the related Interest Period.
If the rate does not appear on that page, the rate will be determined on the
basis of the rates at which deposits in U.S. Dollars are offered by three major
banks in the London interbank market, selected by the servicer, as of 11:00
A.M., London time, on the determination date to prime banks in the London
interbank market for a period of one month in amounts approximately equal to the
principal amount of the notes then outstanding. The indenture trustee will
request the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two quotations are provided, the rate will be
the arithmetic mean of the quotations. If on the related date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by two or more major banks in New York City, selected by the
servicer after consultation with the indenture trustee, as of 11:00 A.M., New
York City time, on the date for loans in U.S. Dollars to leading European banks
for a period of one month in amounts approximately equal to the principal amount
of the notes then outstanding. If no quotations can be obtained, the rate will
be one-month LIBOR for the prior distribution date.
"OVERCOLLATERALIZATION REDUCTION AMOUNT" means, as of any distribution
date, the lesser of the Monthly Principal Distributable Amount and the Excess
Overcollateralization Amount.
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"PRINCIPAL DISTRIBUTION" means, as of any distribution date with
respect to a class of notes, the related Monthly Principal Distributable Amount
for the distribution date minus the related Overcollateralization Reduction
Amount for the distribution date.
"REMITTANCE PERIOD" means, for purposes of calculating amounts payable
on any distribution date, the applicable Remittance Period is the calendar month
immediately preceding the calendar month in which the distribution date occurs.
"TRANSITION EXPENSES" means expenses incurred by the indenture trustee
in connection with the transfer of servicing upon the termination of the
servicer on the occurrence of an [Event of Servicing Termination]; provided that
the amount shall not exceed $________ in any one calendar year, and no more than
$_______ in the aggregate.
PRIORITY OF DISTRIBUTIONS
On each distribution date, the indenture trustee or the payment agent
will withdraw from the distribution account amounts with respect to each home
equity loan group for distribution to the related group of notes.
The Class A-1 notes will be entitled to distributions only to the
extent of amounts deposited in the distribution account with respect to the
Group I home equity loans; the Class A-2 notes will be entitled to distributions
only to the extent of amounts deposited in the distribution account with respect
to the Group II home equity loans; and the Class A-3 notes will be entitled to
distributions only to the extent of amounts deposited in the distribution
account with resect to the Group III home equity loans. Amounts paid under the
note insurance policies will only be available for distribution to noteholders.
These amounts shall be paid in the following order of priority, in each case to
the extent of funds remaining:
(1) concurrently, to the indenture trustee, the indenture trustee fee
plus Transition Expenses, to the owner trustee, the owner trustee
fee, and to the note insurer, so long as no payment default under
the note insurance policy has occurred or is continuing, the
premium owed to the note insurer under the note insurance
agreement, in each case with respect to the related group;
(2) concurrently, to the holders of the related notes, an amount equal
to the related Interest Distribution for these notes for the
distribution date;
(3) to the holders of the related notes, the Principal Distribution
for the distribution date, other than the portion constituting
Distributable Excess Spread;
(4) to the note insurer, the amount owing to the note insurer under
the insurance agreement for reimbursement for prior draws made on
the note insurance policy for the group, including interest on
that amount;
(5) to the holders of the related notes the Distributable Excess
Spread for the group for the distribution date;
(6) to the note insurer, so long as no payment default under the note
insurance agreement has occurred and is continuing, any other
amounts owed to the note insurer with respect to the group under
the note insurance agreement;
(7) to the noteholders of the other groups, any
Crosscollateralization Payment;
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(8) to holders of Class A-3 notes, the Interest Index Carryover;
(9) to the indenture trustee, reimbursement for all reimbursable
expenses incurred in connection with its duties and obligations,
under the sale and servicing agreement, to the extent not
reimbursed as Transition Expenses pursuant to clause (1) above;
(10) to the servicer, any unreimbursed Delinquency Advances (as defined
in the prospectus), unreimbursed Servicing Advances (as defined in
the prospectus) and unreimbursed Compensating Interest (as defined
in the prospectus); and
(11) to the transferor interest, the balance.
If only one group is eligible for a Crosscollateralization Payment, and
the cash available from the other two groups equals or exceeds the amount of the
shortfall with respect to the eligible group, the two groups shall contribute
pro rata, based on the ratio of the amount of cash available from each group
after payment of items (1) through (6) to total cash available from both groups.
If the amount of the shortfall with respect to the eligible group exceeds the
available cash from both contributing groups, then the two contributing groups
shall contribute all available cash after payment of items (1) through (6) under
"Priority of Distributions" above. If two groups are eligible for a
Crosscollateralization Payment then the two eligible groups shall share pro rata
based on the ratio of the shortfall with respect to each group to the aggregate
shortfall for both groups.
INTEREST
The note rate for the Class A-1 notes will equal the lesser of ____%
per annum for any distribution date on or prior to the first distribution date
that the aggregate outstanding principal balance of the home equity loans in all
groups is equal to or less than 10% of the aggregate outstanding principal
balance of the home equity loans on the cut-off date, or ____% per annum for any
distribution date after the related distribution date, subject to the Fixed
Interest Rate Cap.
The note rate for the Class A-2 notes will equal the lesser of ____%
per annum for any distribution date on or prior to the first distribution date
that the aggregate outstanding principal balance of the home equity loans in all
groups is equal to or less than 10% of the aggregate outstanding principal
balance of the home equity loans on the cut-off date, or ____% per annum for any
distribution date after the related distribution date, subject to the Fixed
Interest Rate Cap.
The note rate for the Class A-3 notes, will equal the lesser of (a) the
sum of (1) One-Month LIBOR, as of the second LIBOR Business Day prior to the
immediately preceding distribution date (or as of two LIBOR Business Days prior
to the closing date, in the case of the first distribution date) plus (2) the
related note margin, and (b) the Available Funds Cap. The note margin with
respect to:
The Class A-3 notes is equal to ____% per annum for any distribution
date on or prior to the first distribution date that the aggregate
outstanding principal balance of the home equity loans in all
groups is equal to or less than 10% of the aggregate outstanding
principal balance of the home equity loans on the cut-off date, or
____% per annum for any distribution date after the related
distribution date.
Interest on the Class A-1 notes and the Class A-2 notes will accrue
during the relevant Interest Period on the basis of a 360-day year consisting of
twelve 30-day months. Interest on the Class A-3 notes will accrue during the
related Interest Period on the basis of a 360-day year and the actual number of
days elapsed.
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Interest on the Class A-1 notes and Class A-2 Notes are subject to the
Fixed Interest Rate Cap. If the Class A-1 note rate or Class A-2 note rate on a
particular distribution date is limited by the Fixed Interest Rate Cap, the
Class A-1 or Class A-2 noteholders, as applicable, will not be entitled to
receive any interest carryover on subsequent distribution dates.
Interest on the Class A-3 notes is subject to the Available Funds Cap.
To the extent that an Interest Distribution on any distribution date is limited
by the Available Funds Cap, the Class A-3 noteholders will be entitled to
receive Interest Index Carryover payments on subsequent distribution dates on a
subordinated basis.
The note insurance policies will not cover any Interest Index
Carryover, and the ratings on the applicable class of notes by the rating
agencies will not address the likelihood of receipt by noteholders of any
amounts in respect of Interest Index Carryovers. Payment of the Interest Index
Carryover will be subject to availability of funds in accordance with the
priority of payments set forth above.
PRINCIPAL
On each distribution date, to the extent of available funds, in
accordance with the priorities described above under "--Priority of
Distributions," principal will be distributed to the noteholders of each class
in an amount equal to the lesser of (A) the related note principal balance and
(B) the related Principal Distribution (net of Distributable Excess Spread paid
to the note insurer) for the distribution date.
Overcollateralization on any distribution date and for a home equity
loan group must meet a specified required overcollateralization amount for that
home equity loan group. Excess overcollateralization above the amount specified
with respect to a class of notes may occur on a distribution date either because
amortization of the notes exceeds that of the home equity loans of the related
group or because the required overcollateralization amount has been reduced. If
this occurs, the Principal Distribution payable will be reduced by the amount
necessary to ensure that overcollateralization is reduced to the required
amount.
On the final scheduled distribution date for a class of notes, the
unpaid principal balance will be due and payable. If available funds on the
final scheduled distribution date are not sufficient to pay the unpaid principal
balance of the related class of notes in full, the trustee will make a draw on
the note insurance policy for that amount.
CREDIT ENHANCEMENT
THE NOTE INSURANCE POLICIES. The note insurer has issued three note
insurance policies, each of which guaranties payments on one class of notes.
This section describes the terms of each note insurance policy. The following
information has been supplied by the note insurer for inclusion in this
prospectus supplement. Accordingly, no representation is made by the depositor,
the underwriters, the seller, or any of their affiliates, as to the accuracy or
completeness of this information.
The note insurer, in consideration of the payment of the premium and
subject to the terms of the note insurance policy, unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the indenture trustee, or its
successor, as trustee for the Owners, on behalf of the Owners from the note
insurer, for distribution by the indenture trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The note insurer's obligations under
the note insurance policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the indenture trustee, whether or not these funds are properly
applied by the indenture trustee. Insured Payments shall be made only at the
time set forth in the note insurance
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policy and no accelerated Insured Payments shall be made regardless of any
acceleration of the notes, unless the accelerated Insured Payments are made at
the sole option of the note insurer.
Notwithstanding the foregoing paragraph, the note insurance policy does
not cover shortfalls, if ( any, attributable to the liability of the trust or
the indenture trustee for withholding taxes, if any, including interest and
penalties in respect of any liability so attributable.
The note insurer will pay any Insured Payment that is a Preference
Amount on the day following receipt on a business day by the fiscal agent of:
(1) a certified copy of requiring the return of a preference payment,
(2) an opinion of counsel satisfactory to the note insurer that the
order is final and not subject to appeal,
(3) an assignment in any form as is reasonably required by the note
insurer all rights and claims of the Owner relating to or arising
under the notes against the debtor that made the preference payment or
otherwise with respect to the preference payment, and
(4) appropriate instruments to effect the appointment of the note
insurer as agent for the Owner in any legal proceeding related to the
preference payment, these instruments being in a form satisfactory to
the note insurer,
provided that if these documents are received after 12:00 noon, New York City
time, on the applicable business day, they will be deemed to be received on the
following business day. These payments shall be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless the
Owner has returned principal or interest paid on the notes to the receiver or
trustee in bankruptcy, in which case the payment shall be disbursed to the
applicable Owner. Subject to the terms of the sale and servicing agreement, the
note insurer shall be subrogated to the rights of each Owner to receive payments
under the notes to the extent of any payment by the note insurer under the note
insurance policy.
As used in this prospectus supplement, the following terms shall have
the following meanings:
"Deficiency Amount" means for any distribution date the sum of:
(A) the excess, if any, of
(1) accrued and unpaid interest due on the notes over
(2) the amount of available funds, including any
cros-collateralization payment and excluding any payments
under the note insurance policy available to be distributed
therefor on the applicable distribution date and
(B) the Guaranteed Principal Amount.
However, the Deficiency Amount does not include any shortfalls in interest with
respect to the applicable home equity group resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940, any Interest Index Carryover,
or any reduction in interest paid to any owner resulting from application of the
Fixed Interest Cap or the Available Funds Cap.
"Final Payment Date" means the distribution date in ______________.
"Guaranteed Principal Amount" means (a) for any distribution date,
other than the Final Payment date, and each class of notes the amount, if any,
by which the related note principal balance exceeds the related group
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balance at the end of the related Remittance Period, after giving effect to
all payments of principal on the applicable notes on the related distribution
date, including the related Distributable Excess Spread and any
Crosscollateralization Payment, and (b) on the Final Payment date, the related
outstanding note principal balance, after giving effect to all other payments of
principal on the applicable notes on the related distribution date, including
the related Distributable Excess Spread and any Crosscollateralization Payment.
"Insured Payment" means (1) as of any distribution date, any Deficiency
Amount and (2) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy, substantially in the form of Exhibit A attached to the
note insurance policy, the original of which is subsequently delivered by
registered or certified mail, from the indenture trustee specifying the Insured
Payment which shall be due and owing on the applicable distribution date.
"Owner" means each securityholder who, on the applicable distribution
date, is entitled under the terms of the notes to payment under those notes.
"Preference Amount" means any amount previously distributed to an Owner
on the notes that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy with respect to the seller, the depositor
or the trust pursuant to the United States Bankruptcy Code (11 U.S.C.), as
amended from time to time in accordance with a final nonappealable order of a
court having competent jurisdiction.
So long as no insurer default is continuing, the note insurer will be
entitled to exercise the rights of the noteholders. An insurer default will
occur in the event the note insurer fails to make a payment required under the
note insurance policy or if certain events of bankruptcy or insolvency occur
with respect to the note insurer.
Capitalized terms used in the note insurance policy and not otherwise
defined in the note insurance policy shall have the respective meanings set
forth in the sale and servicing agreement as of the date of execution of the
note insurance policy, without giving effect to any subsequent amendment or
modification to the sale and servicing agreement unless the amendment or
modification has been approved in writing by the note insurer.
Any notice under the note insurance policy or service of process on the
fiscal agent or the note insurer may be made at the address listed below for the
fiscal agent or the note insurer or any other address as the note insurer shall
specify in writing to the indenture trustee.
The notice address of the fiscal agent is
____________________________________, Attention: ____________________, or any
other address as the fiscal agent shall specify to the indenture trustee in
writing.
The note insurance policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles of the State of New York.
The insurance provided by the note insurance policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The note insurance policy is not cancelable for any reason. The premium
on the note insurance policy is not refundable for any reason including payment,
or provision being made for payment, prior to the maturity of the notes.
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OVERCOLLATERALIZATION PROVISIONS.. The sale and servicing agreement
provides for the maintenance of overcollateralization at a specified required
level for each home equity loan group. To the extent that overcollateralization
with respect to a class of notes on any distribution date exceeds this level,
the amount distributable as principal will be adjusted to slow the amortization
of the notes relative to that of the home equity loans, freeing up cash to make
other payments, including crosscollateralization payments with respect to other
home equity loan groups. See "Principal" above and "Crosscollateralization"
below.
To the extent that overcollateralization on a distribution date falls
below the required level for a home equity loan group, either because the
required level of overcollateralization has increased or because of losses
realized with respect to the related group of home equity loans, available
excess spread with respect to the home equity loans will be applied to
accelerate the amortization of the related notes so as to increase the level of
overcollateralization. Crosscollateralization payments will not be available for
this purpose.
To the extent that aggregate outstanding principal with respect to a
class of notes falls below the outstanding principal balance of the related home
equity loan group, amounts may be available in the form of a
Crosscollateralization Payment. See "Crosscollateralization" below. In addition,
draws on the related note insurance policy will be available, to the extent that
a class of notes remains undercollateralized after all excess spread has been
applied and all available crosscollateralization payments have been made.
CROSSCOLLATERALIZATION PROVISIONS. Excess cash with respect to a group
of home equity loans will be available to cover certain shortfalls with respect
to the notes relating to the other groups. The crosscollateralization payments
are available to make payments to other parties as well as to the noteholders.
Available crosscollateralization payments will be applied in the following
order:
- first, concurrently, to the indenture trustee, any unpaid
indenture trustee fee, to the owner trustee, any unpaid owner
trustee fee, to the indenture trustee, any unpaid Transition
Expenses and, so long as no payment default under the note
insurance agreement has occurred and is continuing, to the note
insurer, any amount owed as premium under the note insurance
agreement;
- second, to the related class of notes, any unpaid Interest
Distribution;
- third, to the note insurer, any unpaid amounts owed for
reimbursement of draws under the applicable note insurance
policy, plus interest on these unpaid amounts; and
- fourth, to the related class of notes, any amount by which
realized losses with respect to the home equity loan group exceed
excess spread plus overcollateralization with respect to the
related class of notes.
If only one group is eligible for a Crosscollateralization Payment, and
the cash available from the other two groups equals or exceeds the amount of the
shortfall with respect to the eligible group, the two groups shall contribute
pro rata, based on the ratio of the amount of cash available from each group
after payment of items (1) through (8) to total cash available from both groups.
If the amount of the shortfall with respect to the eligible group exceeds the
available cash from both contributing groups, then the two contributing groups
shall contribute all available cash after payment of items (1) through (8). If
two groups are eligible for a Crosscollateralization Payment then the two
eligible groups shall share pro rata based on the ratio of the shortfall with
respect to each group to the aggregate shortfall for both groups.
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FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date or final payment date for each
class of notes is the distribution date in _________, ____, which is the
distribution date in the month immediately following the last scheduled due date
for the home equity loan in the related home equity loan group with the latest
stated maturity date. It is expected that the actual last distribution date for
the notes will occur significantly earlier than the final scheduled distribution
date specified above. See "PREPAYMENT AND YIELD CONSIDERATIONS" above.
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DESCRIPTION OF THE AGREEMENTS
The following summary describes the material terms of the sale and
servicing agreement, the trust agreement and the indenture. Whenever particular
defined terms in the indenture are referred to, these defined terms are
incorporated by reference into this prospectus supplement. See "THE AGREEMENTS"
in the prospectus.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to the noteholders, the servicer will
forward to the indenture trustee for mailing to each noteholder and the note
insurer a statement setting forth among other items with respect to each
distribution date and each class of notes:
(1) the aggregate amount of the distribution to the noteholders on the
related distribution date;
(2) the amount of distribution set forth in paragraph (1) above in
respect of interest and the amount thereof in respect of any related Interest
Carryover Shortfall, and the amount of any related Interest Carryover Shortfall
remaining;
(3) the aggregate amount of any related Interest Carryover Shortfall,
and the amount of any related Interest Carryover Shortfall remaining;
(4) the amount of the distribution set forth in paragraph (1) above in
respect of principal and the amount thereof in respect of the Principal
Shortfall Amount (as defined in the indenture), and any remaining Principal
Shortfall Amount;
(5) the amount of Excess Spread for each group and the amount applied
as a distribution of Distributable Excess Spread on the notes;
(6) the Guaranteed Principal Amount for each group for the distribution
date;
(7) the amount paid under the note insurance policy for the
distribution date in respect of the Interest Distribution to each class of
notes;
(8) the servicing fee;
(9) the home equity loan pool balance and each home equity loan group
balance as of the close of business on the last day of the preceding Remittance
Period;
(10) the note principal balance for each class of notes after giving
effect payments allocated to principal above;
(11) the amount of overcollateralization for each group as of the close
of business on the distribution date, after giving effect to distributions of
principal on the distribution date;
(12) the number and aggregate principal balances of the home equity
loans in each group as to which the minimum monthly payment is delinquent for 30
to 59 days, 60 to 89 days and 90 or more days, respectively, as of the end of
the preceding Remittance Period;
(13) the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure;
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(14) the aggregate amount of prepayments received on the home equity
loans during the previous Remittance Period and specifying the amount for each
group;
(15) the weighted average loan rate on the home equity loans as of the
first day of the month prior to the distribution date and specifying this rate
for each group;
(16) the note rate for each class of notes for the distribution date;
and
(17) the required overcollateralization for each group for the
distribution date.
In the case of information furnished pursuant to clauses (2), (3) and
(4) above, the amounts shall be expressed as a dollar amount per note with a
$1,000 denomination.
Within sixty days after the end of each calendar year, the servicer
will be required to forward to the indenture trustee a statement containing the
information set forth in clauses (2), (3) and (4) above aggregated for the
applicable calendar year.
SERVICING FEE
As to each home equity loan, the servicer will retain a servicing fee
equal to [0.50%] per annum, payable monthly at one-twelfth of the annual rate of
the then outstanding principal balance of the home equity loan serviced as of
the first day of each Remittance Period. If a successor servicer is appointed in
accordance with the sale and servicing agreement, the servicing fee shall be an
amount agreed upon by the indenture trustee, the note insurer and the successor
servicer but in no event in an amount greater than the amount paid to the
predecessor servicer. The servicer will also be able to retain late fees,
prepayment charges, assumption fees, release fees, bad check charges and any
other servicing related charges.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
Notwithstanding the provisions of the prospectus, so long as an Event
of Servicing Termination remains unremedied, at the direction of the note
insurer or at the direction of noteholders representing at least 51% of the
aggregate note principal balance with the consent of the note insurer, the
indenture trustee must terminate all of the rights and obligations of the
servicer under the sale and servicing agreement, at which point the indenture
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the sale and servicing agreement and will be entitled to similar
compensation arrangements. In the event that the indenture trustee would be
obligated to succeed to the duties and obligations of the servicer but is
unwilling or unable do so, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a housing and home finance institution or
other home equity loan or home equity loan servicer with all licenses and
permits required to perform its obligations under the sale and servicing
agreement and having a net worth of at least $50,000,000 and acceptable to the
note insurer to act as successor to the servicer under the sale and servicing
agreement. Pending an appointment, the indenture trustee will be obligated to
act in this capacity unless prohibited by law.
EVENTS OF DEFAULT UNDER THE INDENTURE
Notwithstanding the provisions of the prospectus, "Events of Default"
under the indenture include:
- a default in the payment of any interest with respect to any
class of notes when the same becomes due and continuance of this
default for a period of five days or a default in the
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payment in full of the note principal balance with respect to
any class of notes at the final scheduled distribution date;
- failure on the part of the trust to perform in any material
respect any other covenant or agreement under the indenture, or
the breach of a representation or warranty by the trust, which
continues for a period of thirty days after notice of the breach
is given; and
- certain events of bankruptcy, insolvency, receivership or
liquidation of the trust.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
Notwithstanding the provisions of the prospectus, if an Event of
Default under the indenture has occurred and is continuing, the indenture
trustee must at the direction of the note insurer or upon the direction of
noteholders representing at least a majority of the aggregate outstanding note
principal balance of the notes with the prior written consent of the note
insurer, declare the principal amount of the notes due and payable immediately.
This declaration may be rescinded by the note insurer or noteholders
representing at least a majority of the aggregate outstanding note principal
balance of the notes with the written consent of the note insurer.
Upon acceleration of payment of the notes described above, the
indenture trustee will, at the direction of the note insurer or upon the
direction of noteholders representing at least a majority of the aggregate
outstanding note principal balance of the notes with the prior written consent
of the note insurer, elect not to liquidate the assets of the trust provided
that the assets are generating sufficient cash to pay scheduled interest and
principal as it becomes due and payable to the noteholders.
However, the indenture trustee may not sell or otherwise liquidate the
assets of the trust following an Event of Default unless:
- 100% of the noteholders and the note insurer consent to a sale,
- the proceeds of the sale or liquidation are sufficient to pay all
amounts due to the noteholders, and the note insurer, or
- the indenture trustee determines that the assets of the trust
would not be sufficient on an ongoing basis to make all scheduled
payments on the notes and obtains the consent of the note insurer
and the holders of 66 and 2/3% of the aggregate outstanding
principal balance of the notes to sell or liquidate the trust's
assets.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE
Neither the indenture trustee nor any director, officer or employee of
the indenture trustee will be under any liability to the trust or the
noteholders for taking any action or for refraining from the taking of any
action in good faith pursuant to the indenture, or for errors in judgment;
provided, that neither the indenture trustee nor any director, officer or
employee of the indenture trustee will be protected against any liability that
would otherwise be imposed on it by reason of willful malfeasance, bad faith or
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under the indenture. Subject to certain
limitations set forth in the indenture, the indenture trustee and any director,
officer, employee or agent of the indenture trustee will be indemnified by the
servicer and held harmless against any loss, liability or expense incurred in
connection with any of its duties under the Agreements other than any loss,
liability or expense incurred by reason of its own willful malfeasance, bad
faith or negligence in the performance of its duties under the indenture, or by
reason of its reckless disregard of its obligations and duties under
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the indenture. All persons into which the indenture trustee may be merged
or with which it may be consolidated, or any person resulting from a merger or
consolidation, will be the successor to the indenture trustee under the
indenture.
The owner trustee, the indenture trustee and any of their respective
affiliates may hold notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the owner trustee and
the indenture trustee acting jointly, or in some instances, the owner trustee or
the indenture trustee acting alone, with the consent of the note insurer (which
consent will not be unreasonably withheld), will have the power to appoint
co-trustees or separate trustees of all or any part of the trust. In the event
of an appointment, all rights, powers, duties and obligations conferred or
imposed upon the owner trustee by the sale and servicing agreement and the trust
agreement and the indenture trustee by the indenture will be conferred or
imposed upon the owner trustee and the indenture trustee, respectively, and in
each case a separate trustee or co-trustee jointly, or, in any jurisdiction in
which the owner trustee or indenture trustee will be incompetent or unqualified
to perform certain acts, singly upon the separate trustee or co-trustee who will
exercise and perform the rights, powers, duties and obligations solely at the
direction of the owner trustee or the indenture trustee, respectively.
The owner trustee may resign at any time, in which event the indenture
trustee will be obligated to appoint a successor to the owner trustee acceptable
to the note insurer. The indenture trustee may also remove the owner trustee if
it ceases to be eligible to continue as owner trustee under the trust agreement
or becomes legally unable to act or becomes insolvent. Any resignation or
removal of the owner trustee and appointment of a successor to the owner trustee
will not become effective until acceptance of the appointment by the successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the trust agreement, the notes, or of any home equity loans or
related documents, and will not be accountable for the use or application by the
seller or the servicer or any of its affiliates of any funds paid to any of them
with respect to the notes, or the home equity loans, or the investment of any
monies by the servicer before the monies are deposited into the collection
account or the distribution account. The owner trustee will be required to
perform only those duties specifically required of it under the trust agreement.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the owner
trustee under the trust agreement, in which case it will only be required to
examine them to determine whether they conform to the requirements of the trust
agreement.
The indenture trustee will make no representations as to the validity
or sufficiency of the indenture or the notes, other than their execution and
authentication, or of any home equity loans or related documents, and will not
be accountable for the use or application by the seller, the servicer or any of
its affiliates of any funds paid to any of them with respect to the notes or the
home equity loans, or the use or investment of any monies by the servicer before
the monies are deposited into the collection account or the distribution
account. So long as no Event of Default or [Event of Servicing Termination] has
occurred and is continuing, the indenture trustee will be required to perform
only those duties specifically required of it under the indenture. Generally,
those duties will be limited to the receipt of the various certificates, reports
or other instruments required to be furnished to the indenture trustee under the
indenture, in which case it will only be required to examine them to determine
whether they conform to the requirements of the indenture. The indenture trustee
will not be charged with knowledge of a failure by the servicer to perform its
duties under the trust agreement or sale and servicing agreement which
constitutes an [Event of Servicing Termination] unless the indenture trustee
obtains actual knowledge of the failure as specified in the indenture.
AMENDMENT
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The sale and servicing agreement may be amended by the parties to that
agreement with the consent of the note insurer, but without the consent of the
noteholders, to cure any ambiguity, correct or supplement any provisions which
may be inconsistent with any other provisions of the sale and servicing
agreement, add to the duties of the seller or the servicer, add or amend any
provisions of the sale and servicing agreement required by the rating agencies
in order to maintain or improve any rating on the notes (it being understood
that, after obtaining the ratings in effect on the closing date, none of the
seller, the depositor, the indenture trustee, the owner trustee or the servicer
is obligated to obtain, maintain, or improve any rating) or add any other
provisions with respect to matters or questions arising under the sale and
servicing agreement that are not inconsistent with the provisions of' the sale
and servicing agreement However, the sale and servicing agreement may only be
amended in this manner if either an opinion of counsel is delivered that states
that this action will not materially and adversely affect the interests of any
noteholder or the note insurer or the person requesting the amendment obtains a
letter from the rating agencies stating that the amendment would not result in a
downgrade of the then current rating of the notes, without regard to the note
insurance policy. The sale and servicing agreement may also be amended by the
seller, the depositor, the servicer, the owner trustee and the indenture
trustee, with the consent of the note insurer and noteholders holding at least
51% of the related aggregate note principal balance of the affected notes in
order to add any provisions, change or eliminate any of the provisions of the
sale and servicing agreement or modify the rights of the noteholders. No
amendment, however, may reduce the amount or delay the timing of collections of
payments on the notes or under the note insurance policy without the consent of
the holder of the applicable note and the note insurer or reduce percentage of
noteholders required to consent to the amendment, without the consent of the
holders of all notes then outstanding.
The indenture provides that, with the consent of the note insurer and
prior notice to the rating agencies and at the request of the trust pursuant to
the indenture, the trust and the indenture trustee may, without noteholder
consent, enter into one or more supplemental indentures which will conform to
the provisions of the Trust Indenture Act of 1939, as amended (the "TIA"), for
any of the following purposes:
(a) to correct or amplify the description of any property at any time
subject to the lien of the indenture, or better to assure, convey and
confirm unto the indenture trustee any property subject or required to
be subjected to the lien of the indenture, or to subject to the lien of
the indenture additional property;
(b) to evidence the succession, in compliance with the applicable
provisions of the indenture, of another entity to the trust, and
assumption by any successor of the covenants of the trust contained in
the notes or the indenture;
(c) to add to the covenants of the trust for the benefit of the holders
of the notes, or to surrender any right or power conferred upon the
trust in the indenture;
(d) to convey, transfer, assign, mortgage or pledge any property to or
with the indenture trustee;
(e) to cure any ambiguity, to correct or supplement any provision in
the indenture or in any supplemental indenture that may be inconsistent
with any other provision in the indenture or in any supplemental
indenture;
(f) to evidence and provide for the acceptance of the appointment under
the indenture by a successor trustee with respect to the notes and to
add to or change any of the provisions of the indenture as will be
necessary to facilitate the administration of the trusts under the
indenture by more than one trustee, pursuant to the requirements of the
indenture; or
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(g) to modify, eliminate or add to the provisions of the indenture to
any extent as will be necessary to effect the qualification of the
indenture under the TIA or under any similar federal statute enacted
after the date of the indenture and to add to the indenture any other
provisions as may be expressly required by the TIA.
No supplemental indentures will, however, be entered into unless the
indenture trustee has received an opinion of counsel to the effect that entering
into the supplemental indenture will not have any material adverse tax
consequences to the trust or the noteholders.
In addition, the indenture provides that, with the consent of the
rating agencies and the note insurer, and at the request of the trust pursuant
to the indenture, the trust and indenture trustee may, without noteholder
consent, enter into one or more supplemental indentures that conform to the TIA
to add provisions to, change or eliminate provisions of the indenture, or modify
the rights of the noteholders, if an opinion of counsel states that the action
will not have a material adverse tax consequence to the trust or the
noteholders. The opinion must also state that this action will not materially
and adversely affect the interests of the noteholders or the note insurer,
unless the person requesting the amendment obtains a letter from the rating
agencies stating that the amendment would not result in a downgrading of the
then current rating of the notes, without regard to the note insurance policy.
The indenture also provides that the trust and the indenture trustee,
when authorized by a written request of the trust, also may, with prior notice
to the note insurer and each rating agency and with the consent of the note
insurer and the holders of at least a majority of the aggregate principal
balance of the notes affected enter into a supplemental indenture to add, change
or eliminate any provisions of the indenture or modify the rights of the
noteholders. However, without the consent of the holder of each affected
noteholder and an opinion of counsel that the contemplated action will not cause
the trust to be subject to any entity level tax, no supplemental indenture may:
(a) change the date of payment, reduce the amount of or the interest
rate on any installment of interest or principal, change the provisions
of the indenture relating to the application of collections on, or the
proceeds of the sale of, the corpus of the trust to payment of
principal of or interest on the notes, change any place, coin or
currency of any payment on any note, or impair the right to institute
suit for the enforcement of the provisions of the indenture requiring
the application of funds to the payment of any amount due on the notes
on or after the due date;
(b) reduce the percentage of the note principal balances of the notes,
the consent of the holders required for any supplemental indenture, or
the consent of the holders required for any waiver of compliance with
certain provisions of the indenture or certain defaults and their
consequences under the indenture;
(c) modify or alter the provisions of the proviso to the definition of
the term "Outstanding" in the indenture or modify or alter the
exception in the definition of the term "Holder";
(d) reduce the percentage of the aggregate outstanding principal
balance of the notes required to direct the indenture trustee to direct
the trust to sell or liquidate the corpus of the trust pursuant to the
indenture;
(e) modify any of the amendment provisions of the indenture other than
to increase any percentage specified in the indenture or to provide
that certain additional provisions of the indenture or the other
Agreements cannot be modified or waived without the consent of the
holder of each affected note;
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(f) modify any of the provisions of the indenture in so as to affect
the calculation of the amount of any payment of interest or principal
due on any note on any distribution date (including the calculation of
any of the individual components of the calculation); or
(g) permit the creation of any lien ranking prior to or on a parity
with the lien of the indenture with respect to any part of the trust
estate or, except as otherwise permitted or contemplated in the
indenture, terminate the lien of the indenture on any pledged property
or deprive the holder of any note of the security provided by the lien
of the indenture.
TERMINATION; RETIREMENT OF THE NOTES
The trust will terminate on the distribution date following the later of
(A) payment in full of all amounts owing to the note insurer, unless the note
insurer shall otherwise consent and (B) the earliest of (1) the final payment
(or other liquidation) of the last home equity loan in the trust or the
disposition of all property acquired upon foreclosure or by deed in lieu of
foreclosure of any home equity loan, (2) the optional transfer to the servicer
of all of the home equity loans, as described below and (3) the stated final
maturity date.
The servicer may, at its option, terminate the trust on the first
distribution date on which the aggregate outstanding principal balance of the
home equity loans in all groups is equal to or less than 10% of the aggregate
outstanding principal balance of the home equity loans on the cut-off date. In
order to terminate the trust, the servicer must pay an amount equal to the sum
of the aggregate outstanding principal balance of the home equity loans plus
accrued and unpaid interest at the weighted average Coupon Rate with respect to
the home equity loans as of the end of the related Remittance Period, together
with all amounts due to the note insurer.
In no event will the trust created by the trust agreement continue for
more than 21 years after the death of certain individuals named in the sale and
servicing agreement. Written notice of termination of the trust will be given to
each noteholder, and the final payment will be made only upon surrender and
cancellation of the notes at an office or agency appointed by the indenture
trustee which will be specified in the notice of termination.
NO PETITION
The indenture trustee and the noteholders by their acceptance of a note
will covenant that they will not institute or join in instituting against the
trust, the seller, the servicer or the depositor, any bankruptcy,
reorganization, insolvency, liquidation or similar proceeding in connection with
any obligations regarding the notes, the indenture or the transactions
contemplated by the Agreements.
THE INDENTURE TRUSTEE
____________, a banking corporation organized under the laws of the State
of __________, will be named indenture trustee pursuant to the sale and
servicing agreement and the indenture.
The indenture trustee may own notes and have normal banking relationships
with the servicer, the seller and the note insurer and/or their affiliates.
The indenture trustee may resign at any time, in which event the trust
will be obligated to appoint a successor indenture trustee, subject to the
consent of the note insurer. The note insurer may remove the indenture trustee
if the indenture trustee ceases to be eligible under the indenture or if the
indenture trustee becomes insolvent. Upon becoming aware of the insolvency of
the indenture trustee, the trust will be obligated to appoint a successor
indenture trustee approved by the note insurer. Any resignation or removal of
the
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indenture trustee and appointment of a successor indenture trustee will not
become effective until acceptance of the appointment by the successor indenture
trustee.
No noteholder will have the right under the indenture to institute any
proceeding with respect to the indenture unless the note insurer has consented
in writing to the institution of the proceeding, the noteholder previously has
given to the indenture trustee written notice of default under the indenture and
noteholders representing at least 51% of the aggregate outstanding principal
balance of the notes have made written requests to the indenture trustee to
institute the proceeding in its own name as indenture trustee and have offered
to the indenture trustee reasonable indemnity, but the indenture trustee has
neglected or refused to institute any proceeding for sixty days. The indenture
trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the indenture or to make any investigation of matters arising
under the indenture or to institute, conduct or defend any litigation under or
related to the indenture at the request, order or direction of any of the
noteholders, unless the noteholders have offered the indenture trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred and the note insurer has consented to the action.
THE PAYING AGENT
The paying agent shall initially be the indenture trustee or together
with any successor indenture trustee. The paying agent shall have the revocable
power to withdraw funds from the distribution account to make payments to the
holders of the notes and the senior interest participations.
THE PURCHASE AGREEMENT
On the closing date, the home equity loans will be purchased by the
depositor from the seller and certain of its affiliates pursuant to the purchase
agreement. Pursuant to the sale and servicing agreement, the home equity loans
will be immediately transferred by the depositor to the trust, and the depositor
will assign its rights in, to and under the purchase agreement to the trust.
In the purchase agreement, the seller and certain of its affiliates will
make representations and warranties similar to those made by it in the sale and
servicing agreement. In the event of a breach of any representations and
warranties that has a material adverse effect on the interests of the
noteholders or the note insurer, the seller or the appropriate affiliate will be
required to repurchase or substitute the home equity loans as described in the
prospectus under "THE AGREEMENTS."
The seller and affiliates have also agreed to indemnify the depositor and
the trust from and against certain losses, liabilities and expenses including
reasonable attorneys' fees suffered or sustained pursuant to the purchase
agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the notes will be applied
by the depositor towards the purchase of home equity loans from the seller and
certain of its affiliates.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following section in conjunction with the section in the prospectus
captioned "FEDERAL INCOME TAX CONSEQUENCES" discusses the material federal
income tax consequences of the purchase, ownership and disposition of the notes.
This section must be considered only in connection with "FEDERAL INCOME TAX
CONSEQUENCES" in the prospectus. The discussion in this prospectus supplement
and in the prospectus is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to
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change. The discussion below and in the prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors should consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the notes. No
portion of this section of the prospectus supplement or "FEDERAL INCOME TAX
CONSEQUENCES" in the prospectus constitutes an opinion of counsel, other than
the opinion set forth in the second paragraph of this section and in clause (1)
of "FEDERAL INCOME TAX CONSEQUENCES--Opinions" in the prospectus.
Stroock & Stroock & Lavan LLP, special tax counsel to the seller and
the issuer, is of the opinion that, for federal income tax purposes, assuming
that all of the provisions of the Agreements are complied with, the notes will
be considered indebtedness and the Trust Fund (as defined in the prospectus)
will not be an association, publicly traded partnership, or taxable mortgage
taxable as a corporation. This opinion is an expression of opinion only, is not
a guarantee of a particular tax result and is not binding on the Internal
Revenue Service ("IRS") or any third party.
The Trust Fund will agree, and the noteholders will agree by their
purchase of the notes, to treat the notes as debt for federal income tax
purposes. Consequently, unless the IRS were to successfully assert that the
notes did not represent debt for federal income tax purposes, the noteholders
will be subject to taxation as described in "FEDERAL INCOME TAX CONSEQUENCES
Taxation of Debt Securities (Including Regular Interest Securities)" in the
prospectus.
The Class A-3 notes provide for stated interest at a floating rate
based upon one-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 (because of the imposition
of an interest rate cap) the tax treatment of interest on the notes is not
entirely clear under the regulations, the trust intends to treat the stated
interest as a "qualified floating rate" for OID purposes and thus the stated
interest should not be taxable to the Class A-3 noteholders as OID (assuming
that the Class A-3 notes are not issued with OID which is greater than de
minimis) or as contingent interest.
If the trust has a single owner for tax purposes it will be treated as
division of its owner and as division of its owner will be disregarded as an
entity separate from its owner for federal tax purposes. However, in the event
that contrary to the opinion of special tax counsel, the IRS successfully
asserts that one or more classes of notes did not represent debt for federal tax
purposes and instead were treated as equity, this could have certain adverse tax
consequences to foreign holders as descried in "FEDERAL INCOME TAX CONSEQUENCES
- - Tax Consequences to Holders of the Notes Issued By A Partnership Or Division -
Possible Alternative Treatment of the Notes" in the prospectus. If the trust has
more than one owner for tax purposes, the seller intends to treat the trust as a
partnership for federal income tax purposes and will not take any actions with
respect to federal income tax reporting requirements that are inconsistent with
the trust and the noteholders' agreement to treat the notes as debt for tax
purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE PROSPECTUS FOR
MORE DETAIL.
S-77
<PAGE>
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to
predict the income tax consequences to the noteholders in all of the state
taxing jurisdictions in which they are subject to tax. Noteholders are urged to
consult their own tax advisors with respect to state and local income and
franchise taxes.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan or other retirement arrangement
subject to Title I of ERISA should consider the fiduciary standards under ERISA
in the context of the plan's particular circumstances before authorizing an
investment of a portion of the plan's assets in the notes. Accordingly, among
other factors, the fiduciary should consider
(1) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries;
(2) whether the investment satisfies the diversification requirements
of Section 404 of ERISA;
(3) whether the investment is in accordance with the documents and
instruments governing the plan;
(4) whether the investment is prudent, considering the nature of the
investment; and
(5) whether the investment constitutes an unauthorized delegation of
fiduciary authority.
Fiduciaries of employee benefit plans and certain other
retirement plans and arrangements that are subject to Title I of ERISA and/or
Section 4975 of the Code (defined in the prospectus), including individual
retirement accounts and annuities, Keogh plans and entities in which these
plans, accounts, annuities or arrangements are invested (including insurance
company general accounts) (any of the foregoing, a "Plan"), persons acting on
behalf of a Plan, or persons using the assets of a Plan, should review carefully
with their legal advisors whether the purchase or holding of the notes could
either give rise to a transaction that is prohibited under ERISA or the Code or
cause the Trust Fund to be treated as plan assets for purposes of regulations of
the Department of Labor set forth in 29 C.F.R. ss.2510.3-101 (the "Plan Asset
Regulations"). Prospective investors should be aware that, although certain
exceptions from the application of the prohibited transaction rules and the Plan
Asset Regulations exist, it is not anticipated that any exception will apply
with respect to the acquisition of a note.
Under the Plan Asset Regulations, if the notes are treated as
having substantial equity features, the purchaser of a note of could be treated
as having acquired a direct interest in the assets securing the notes. In that
event, the purchase, holding, or resale of the applicable notes and the
operation and management of the Trust Fund could result in transactions that are
prohibited under ERISA or the Code. Consequently, if a Plan investor purchases
the notes, the Trust Fund could be deemed assets of the Plan for purposes of the
fiduciary responsibility provisions of ERISA and the Code. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of that
Plan. Therefore, the owner trustee could be deemed an ERISA fiduciary of Plans
that invest in the notes and could be subject to the general fiduciary
requirements of ERISA in exercising its authority with respect to the management
of the Trust Fund. Regardless whether the notes are treated as debt or equity
for purposes of ERISA, the acquisition or holding of notes by or on behalf of a
Plan could still be considered to give rise to a prohibited transaction if the
trust, the owner trustee, or any of their respective affiliates is or becomes a
party in interest or a disqualified person with respect to the Plan or in the
event that a subsequent transfer of a note is between a Plan and a "party in
interest" (as defined in Section 3(14) of ERISA) or "disqualified person" (as
defined in Section 4975 of the Code) with respect to the Plan.
S-78
<PAGE>
Regardless whether the notes are treated as debt or equity for
purposes of ERISA, the acquisition or holding of notes by or on behalf of a Plan
could still be considered to give rise to a prohibited transaction if the trust,
the owner trustee, the indenture trustee or any of their respective affiliates
is or becomes a party in interest or a disqualified person with respect to the
Plan or in the event that a subsequent transfer of a note is between a Plan and
a party in interest or disqualified person with respect to the Plan. However,
one or more exemptions may be available with respect to certain prohibited
transaction rules of ERISA that might apply in connection with the initial
purchase, holding and resale of the notes, depending in part upon the type of
Plan fiduciary making the decision to acquire notes and the circumstances under
which the decision is made. These exemptions include, but are not limited to,
(1) PTCE 96-23, regarding investments determined by in-house asset
managers,
(2) PTCE 95-60, regarding investments by insurance company general
accounts,
(3) PTCE 91-38, regarding investments by bank collective investment
funds,
(4) PTCE 90-1, regarding investments by insurance company pooled
separate accounts; or
(5) PTCE 84-14, regarding transactions negotiated by qualified
professional asset managers.
Before purchasing any notes, a Plan subject to the fiduciary responsibility
provisions of ERISA or described in Section 4975(e)(1) of the Code (and not
exempt under Section 4975(g) of the Code) should consult with its counsel to
determine whether the conditions of any exemption would be met. A purchaser of a
note should be aware, however, that even if the conditions specified in one or
more exemptions are met, the scope of the relief provided by an exemption might
not cover all acts that might be construed as prohibited transactions. A
purchaser of a note will be required to represent that either: (1) it is not,
and is not purchasing a note for, on behalf of or with the assets of, an
employee benefit plan or other retirement arrangement which is subject to Title
I of ERISA and/or Section 4975 of the Code, or (2) PTCE 95-60, PTCE 96-23, PTCE
91-38, PTCE 90-1, PTCE 84-14 or some other prohibited transaction exemption is
applicable to the purchase and holding of a note by the acquirer.
ANY PLAN FIDUCIARY CONSIDERING THE PURCHASE OF ANY NOTES SHOULD CONSULT WITH ITS
COUNSEL WITH RESPECT TO THE POTENTIAL APPLICABILITY OF THE FIDUCIARY
RESPONSIBILITY AND PROHIBITED TRANSACTION PROVISION OF THE CODE TO THE
INVESTMENT.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the notes will be rated [in
the highest rating category of] the rating agencies, the notes will not
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"). Accordingly, many institutions with
legal authority to invest in comparably rated securities may not be legally
authorized to invest in the notes.
WE REFER YOU TO "LEGAL INVESTMENT" IN THE PROSPECTUS FOR MORE DETAIL.
S-79
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ___________ __, ____ (the "Underwriting Agreement"), among the
underwriter and the underwriters named below the underwriter has agreed to sell
to the underwriters and the underwriters have agreed to purchase from the
underwriter the principal amount of the notes set forth opposite their
respective names. The notes will be offered by the underwriters when as and if
issued and sold by the underwriter to the underwriters, subject to the
underwriters' right to reject any subscription, in whole or in part.
<TABLE>
<CAPTION>
Principal Amount Principal Amount Principal Amount
of Class A-1 of Class A-2 of Class A-3
Underwriter NOTES NOTES NOTES
---------------- ---------------- ----------------
<S> <C> <C> <C>
[----------- $ $ $
------------ $ $ $
-----------] $ $ $
</TABLE>
The underwriters have informed the underwriter that they propose to
offer the notes for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The underwriters may effect the transactions by
selling the notes to or through dealers, and the dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the underwriters. In connection with the sale of the notes, the
underwriters may be deemed to have received compensation from the underwriter in
the form of underwriting compensation. The underwriters and any dealers that
participate with the underwriters in the distribution of the notes may be deemed
to be underwriters and any commissions received by them and any profit on the
resale of the notes by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Securities Act").
No note will have an established trading market when issued. The
underwriters may, from time to time, act as a broker or purchase and sell notes
in the secondary market, but the underwriters are under no obligation to do so
and there can be no assurance that there will be a secondary market for the
notes or liquidity in the secondary market if one does develop.
From time to time the underwriters or their affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, affiliates of the underwriter.
The Underwriting Agreement provides that the underwriter will indemnify
the underwriters against described civil liabilities, including liabilities
under the Act.
EXPERTS
The consolidated balance sheets of __________________ and _____________
as of _____________ and ________________ and the related consolidated statements
of income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended _______________, incorporated by reference in this
prospectus supplement have been incorporated in this prospectus supplement in
reliance on the report of _____________________, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
S-80
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the notes will be passed upon for
the underwriter by _________ and for the seller and the issuer by Stroock &
Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition to the issuance of the notes that they receive
ratings of "AAA" by S&P and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by
noteholders of distributions on the home equity loans. The rating takes into
consideration the characteristics of the home equity loans and the structural,
legal and tax aspects associated with the notes. The ratings on the notes do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the home equity loans, the likelihood of payment of any Interest
Index Carryover or the possibility that noteholders might realize a lower than
anticipated yield.
The ratings assigned to the notes will depend primarily upon the
creditworthiness of the note insurer. Any reduction in a rating assigned to the
claims-paying ability of the note insurer below the ratings initially assigned
to the notes may result in a reduction of one or more of the ratings assigned to
the notes.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-81
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
2/28 Adjustable Rate Loan.................................................................................S-37
Available Funds Cap.......................................................................................S-59
Crosscollateralization Payment............................................................................S-59
Deficiency Amount.........................................................................................S-65
Distributable Excess Spread...............................................................................S-60
Events of Default.........................................................................................S-70
Excess Overcollateralization Amount.......................................................................S-60
Excess Spread.............................................................................................S-60
Final Payment Date........................................................................................S-65
Fixed Interest Rate Cap...................................................................................S-60
Guaranteed Principal Amount...............................................................................S-65
Insured Payment...........................................................................................S-66
Interest Carryover Shortfall..............................................................................S-60
Interest Distribution.....................................................................................S-60
Interest Index Carryover..................................................................................S-60
Interest Period...........................................................................................S-60
LIBOR Business Day........................................................................................S-61
Minimum Rates.............................................................................................S-37
Minimum Spread............................................................................................S-61
Monthly Interest Distributable Amount.....................................................................S-61
Monthly Principal Distributable Amount....................................................................S-61
Net Coupon Rate...........................................................................................S-61
noteholder................................................................................................S-57
Notice....................................................................................................S-66
OID.......................................................................................................S-77
One-Month LIBOR...........................................................................................S-61
Original Combined Loan-to-Value Ratio.....................................................................S-24
Overcollateralization Reduction Amount....................................................................S-61
Owner.....................................................................................................S-66
Plan......................................................................................................S-78
Plan Asset Regulations....................................................................................S-78
Preference Amount.........................................................................................S-66
Prepayment Assumption.....................................................................................S-48
Principal Distribution....................................................................................S-62
Remittance Period.........................................................................................S-62
Securities Act............................................................................................S-81
Structuring Assumptions...................................................................................S-48
TIA.......................................................................................................S-73
Transition Expenses.......................................................................................S-62
weighted average life.....................................................................................S-48
</TABLE>
S-82
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except under limited circumstances, the global notes will be available
only in book-entry form. Investors in the global notes may hold the global notes
through any of DTCC, Cedelbank or Euroclear. The global notes will be tradable
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding global notes through
Cedelbank 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 notes through
DTCC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior home equity loan asset-backed notes issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTCC
participants holding notes will be effected on a delivery-against-payment basis
through the respective depositaries of Cedelbank and Euroclear and as DTCC
participants.
Non-U.S. holders (as described below) of global notes will be subject
to U.S. withholding taxes unless the holders meet established requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All global notes will be held in book-entry form by DTCC in the name of
Cede & Co. as nominee of DTCC. Investors' interests in the global notes will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTCC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their respective depositaries,
which in turn will hold the positions in accounts as DTCC participants.
Investors electing to hold their global notes through DTCC will follow
the settlement practices applicable to prior home equity loan asset-backed notes
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their global notes through Cedelbank 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 notes will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
S-83
<PAGE>
TRADING BETWEEN DTCC PARTICIPANTS Secondary market trading between DTCC
participants will be settled using the procedures applicable to prior home
equity loan asset-backed notes issues in same-day funds.
TRADING BETWEEN CEDELBANK AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Cedelbank participants or Euroclear participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTCC SELLER AND CEDELBANK OR EUROCLEAR PURCHASER. When
global notes are to be transferred from the account of a DTCC participant to the
account of a Cedelbank participant or a Euroclear participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct their depositary to receive the global
notes against payment. Payment will include interest accrued on the global notes
from and including the last coupon distribution date to and excluding the
settlement date, on the basis of either the actual number of days in the related
interest period and a year assumed to consist of 360 days or a 360-day year of
twelve 30-day months as applicable to the related class of global notes. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the respective depositary of the DTCC participant's account against
delivery of the global notes. After settlement has been completed, the global
notes will be credited to the respective clearing system and by the clearing
system, in accordance with its usual procedures, to the Cedelbank participant's
or Euroclear participant's account. The securities credit will appear the next
day (European time) and the cash debt will be back-valued to, and the interest
on the global notes 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 Cedelbank or
Euroclear cash debt will be valued instead as of the actual settlement date.
Cedelbank participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the global notes are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of
credit to them, Cedelbank participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedelbank participants or Euroclear
participants purchasing global notes would incur overdraft charges for one day,
assuming they cleared the overdraft when the global notes were credited to their
accounts. However, interest on the global notes would accrue from the value
date. Therefore, in many cases the investment income on the global notes earned
during that one-day period may substantially reduce or offset the amount of the
overdraft charges, although this result will depend on each Cedelbank
participant's or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTCC participants can employ their usual procedures for sending global notes to
the respective European depositary for the benefit of Cedelbank participants or
Euroclear participants. The sale proceeds will be available to the DTCC seller
on the settlement date. Thus, to the DTCC participants a cross-market
transaction will settle no differently than a trade between two DTCC
participants.
TRADING BETWEEN CEDELBANK OR EUROCLEAR SELLER AND DTCC PURCHASER. Due
to time zone differences in their favor, Cedelbank participants and Euroclear
participants may employ their customary procedures for transactions in which
global notes are to be transferred by the respective clearing system, through
the respective depositary, to a DTCC participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank participant or
Euroclear participant at least one business day prior to settlement. In these
cases
S-84
<PAGE>
Cedelbank or Euroclear will instruct the respective depositary, as
appropriate, to deliver the global notes to the DTCC participant's account
against payment. Payment will include interest accrued on the global notes from
and including the last coupon payment to and excluding the settlement date on
the basis of either the actual number of days in the related interest period and
a year assumed to consist of 360 days or a 360-day year of twelve 30-day months
as applicable to the related class of global notes. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Cedelbank participant or Euroclear participant the following day,
and receipt of the cash proceeds in the Cedelbank participant's or Euroclear
participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the Cedelbank
participant or Euroclear participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Cedelbank participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
global notes from DTCC participants for delivery to Cedelbank participants or
Euroclear participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Cedelbank or Euroclear accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing the global notes in the U.S. from a DTCC
participant no later than one day prior to settlement, which would give
the global notes sufficient time to be reflected in their Cedelbank or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTCC
participant is at least one day prior to the value date for the sale to
the Cedelbank participant or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global notes holding securities through Cedelbank
or Euroclear (or through DTCC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. persons (as defined below), unless (1) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (AS DEFINED BELOW) (FORM W-8).
Beneficial owners of global notes that are non-U.S. persons can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
S-85
<PAGE>
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. persons that are beneficial owners of global
notes 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 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
global note or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
Any of the following qualify as a U.S. person for purposes of this
section:
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws of the
United States, any state of the United States or the District of
Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations),
(3) an estate the income of which is includable in gross income for
United States tax purposes, regardless of its source, or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial
decisions of the trust.
Notwithstanding clause (4), to the extent provided in the regulations, some
trusts in existence on August 20, 1996, and treated as United States persons
prior to the date, that elect to continue to be treated as United States persons
shall also be a U.S. person. Entities not considered U.S. persons shall be
considered non-U.S. persons.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the global notes or with
the application of Treasury regulations relating to tax documentation
requirements that are generally effective with respect to payments made after
___________________. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the global notes.
S-86
<PAGE>
SUBJECT TO COMPLETION, DATED _______________, ____
PROSPECTUS SUPPLEMENT
(To Prospectus dated _______________, ____)
$___________
(APPROXIMATE)
CENTEX HOME EQUITY LOAN TRUST ____-_
Centex Home Equity Loan Asset-Backed Certificates, Series ____-_
CENTEX CREDIT CORPORATION
D/B/A CENTEX HOME EQUITY CORPORATION
Originator and Servicer
[CENTEX LOGO] CHEC FUNDING, LLC
Depositor
[BEGIN SIDEBAR]
Consider carefully the risk factors beginning on page S-__ in this prospectus
supplement and page __ in the prospectus.
The Class A certificates will represent interests in the trust only and will not
be guaranteed by or represent interests in or obligations of Centex Home Equity
Corporation or any of its affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
[END SIDEBAR]
The Trust will issue pursuant to this Prospectus Supplement and the accompanying
Prospectus:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FINAL
SCHEDULED
CLASS A PRINCIPAL DISTRIBUTION
CERTIFICATES BALANCE CERTIFICATE RATE DATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A-1
- --------------------------------------------------------------------------------
Class A-2
- --------------------------------------------------------------------------------
Class A-3
- --------------------------------------------------------------------------------
Class A-4
- --------------------------------------------------------------------------------
Class A-5
- --------------------------------------------------------------------------------
Class A-6
- --------------------------------------------------------------------------------
Class A-7
- --------------------------------------------------------------------------------
</TABLE>
- - Principal balances subject to variance of plus or minus _%.
THE CERTIFICATES
- - Interest and principal on the certificates are scheduled to be paid monthly
on the ____ day of the month or, if the ____ is not a business day, on the
next business day. The first scheduled distribution date is __________ __,
____.
- - Distributions on the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5
and Class A-6 certificates will be primarily based on a group of closed-end
fixed rate home equity loans. Distributions on the Class A-7 certificates
will be primarily based on a group of closed-end adjustable rate home
equity loans.
- - The Class A certificates currently have no trading market.
- - The Class A certificates will have the benefit of two irrevocable and
unconditional financial guaranty insurance policies issued by
________________, as certificate insurer, guaranteeing timely payment of
interest and ultimate payment of principal to the holders of the Class A
certificates.
[CERTIFICATE INSURER (LOGO)]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The underwriters listed below will offer the Class A certificates from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to the depositor with respect to the Class A
certificates are expected to be approximately $____________, excluding accrued
interest, and before deducting issuance expenses payable by the depositor,
estimated to be $___________ . We expect that delivery of the Class A
certificates will be made in book-entry form through the facilities of The
Depository Trust Company, Cedelbank and the Euroclear System on or about
_____________, _____.
[UNDERWRITER LOGO] [UNDERWRITER LOGO]
----------, -----
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates in two separate
documents that provide progressively more detail:
- - the accompanying Prospectus, which provides general information, some of
which may not apply to your certificates; and
- - this Prospectus Supplement, which describes the specific terms of your
certificates.
YOU SHOULD RELY PRIMARILY ON THE DESCRIPTION OF YOUR CERTIFICATES IN
THIS PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Class A certificates in any state where the offer is not
permitted.
Dealers will deliver a Prospectus Supplement and Prospectus when acting as
underwriters of the Class A certificates. In addition, all dealers selling the
Class A certificates will be required to deliver a Prospectus Supplement and
Prospectus until __________, _____.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
CAPTION PAGE
<S> <C>
Summary.........................................S-3
Risk Factors...................................S-11
Description of the Home Equity Loans...........S-20
Prepayment and Yield Considerations............S-39
Formation of the Trust and Trust Property......S-51
Description of the Certificates................S-51
The Policies and the Certificate Insurer.......S-64
Use of Proceeds................................S-67
Certain Federal Income Tax Considerations......S-67
Certain State Tax Considerations...............S-69
ERISA Considerations...........................S-69
Legal Investment Considerations................S-71
Underwriting...................................S-71
Experts........................................S-72
Legal Matters..................................S-72
Ratings........................................S-72
Index of Defined Terms.........................S-73
Annex I.........................................I-1
<CAPTION>
PROSPECTUS
CAPTION PAGE
<S> <C>
Prospectus Supplement...........................5
Reports to Holders..............................5
Available Information...........................6
Incorporation of Certain Documents
by Reference.................................6
Introduction....................................7
The Depositor...................................8
The Seller and the Servicer.....................8
Description of the Securities..................15
The Trust Funds................................23
Accounts.......................................26
Enhancement....................................28
The Agreements.................................30
Certain Matters Regarding the Servicer.........37
Certain Legal Aspects of the Home
Equity Loans................................45
Use of Proceeds................................52
Federal Income Tax Consequences................53
State Tax Consequences.........................78
ERISA Considerations...........................78
Legal Investment...............................81
Plan of Distribution...........................81
Legal Matters..................................82
Index of Defined Terms.........................83
</TABLE>
S-2
<PAGE>
SUMMARY
- - This summary highlights selected information from this Prospectus
Supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the Class A certificates, you should read carefully this
entire Prospectus Supplement and accompanying Prospectus.
- - This summary provides an overview to aid your understanding and is
qualified by the full description of this information in this Prospectus
Supplement and the accompanying Prospectus.
- - You can find a listing of the pages where capitalized terms used in this
Prospectus Supplement are defined under the caption "Index of Defined
Terms" beginning on page S-___ in this Prospectus Supplement.
ISSUER
- - Centex Home Equity Loan Trust ____-_.
DEPOSITOR
- - CHEC Funding, LLC, a Delaware limited liability company and wholly owned
subsidiary of Centex Credit Corporation d/b/a Centex Home Equity
Corporation.
ORIGINATOR
- - Centex Credit Corporation d/b/a Centex Home Equity Corporation.
SELLERS
- - Centex Credit Corporation d/b/a Centex Home Equity Corporation.
- - ____________________
SERVICER
- - ____________________
CERTIFICATE INSURER
- - ____________________
TRUSTEE
- - ____________________
STATISTICAL CALCULATION DATE
- - The close of business on _________ __, ____.
- - All statistical information relating to the home equity loans presented in
this Prospectus Supplement is given as of the statistical calculation date.
CUT-OFF DATE
- - The opening of business on __________ __, ____.
- - The cut-off date is the date on and after which the issuer will be entitled
to receive all collections and proceeds of the home equity loans.
CLOSING DATE
- ----------- --, ----.
DISTRIBUTION DATE
The __ day of each month, or if the __ day is not a business day, then the next
succeeding business day. The first distribution date will be __________ __,
____.
RECORD DATE
- - For any distribution date and each class of fixed rate certificates, the
last business day of the month immediately preceding the calendar month in
which the distribution date occurs.
- - With respect to any distribution date and the variable rate certificates,
the last business day immediately preceding the distribution date or, if
definitive certificates are issued, the last business day of the
S-3
<PAGE>
month immediately preceding the calendar month in which the distribution
date occurs.
THE CERTIFICATES
On the closing date, the trust will issue the Class A certificates, the Class
X-IO certificates and the Class R certificates. The Class A certificates are
senior certificates and the Class X-IO and the Class R certificates are
subordinate certificates.
CLASS A CERTIFICATES
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class
A-7 certificates.
CLASS R CERTIFICATES
The Class R-1 and Class R-2 certificates.
OFFERED CERTIFICATES
The Class A certificates.
NON-OFFERED CERTIFICATES
The Class X-IO certificates and Class R certificates are not being offered to
the public. We have included information with respect to the Class X-IO and
Class R certificates in this Prospectus Supplement solely to provide you a
better understanding of the Class A certificates.
GROUP I CERTIFICATES
The Group I certificates will be the Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 and Class A-6 certificates. Distributions on the Group I certificates
will be primarily derived from payments on the home equity loans in Group I.
GROUP II CERTIFICATES
The Group II certificates will be the Class A-7 certificates. Distributions on
the Group II certificates will be primarily derived from payments on the home
equity loans in Group II.
FIXED RATE CERTIFICATES
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
certificates.
VARIABLE RATE CERTIFICATES
The Class A-7 certificates.
DENOMINATIONS
The Class A certificates will be offered for purchase in denominations of $1,000
and multiples of $1 above $1,000.
BOOK-ENTRY REGISTRATION
We will issue the Class A certificates in book-entry form. You will hold your
interests either through a depository in the United States or through one of two
depositories in Europe. While the Class A certificates are book-entry they will
be registered in the name of the nominee of the depository in the United States.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date for each class of Class A certificates is
as set forth on the cover page of this Prospectus Supplement.
DISTRIBUTIONS TO CLASS A CERTIFICATEHOLDERS
You will be entitled to receive payments of interest on each distribution date.
We may reduce the amount of interest that you are entitled to receive on any
distribution date as a result of the application of the Soldiers' and Sailors'
Civil Relief Act of 1940.
- - The amount of principal you will be entitled to receive will vary depending
on a number of factors, including the payments received on the home equity
loans.
- - If you hold a Class A certificate on the applicable record date, you will
be entitled to receive payments on the related distribution date.
INTEREST
FIXED RATE CERTIFICATE INTEREST
The interest rate on any distribution date for a fixed rate certificate will be
the interest rate set forth on the cover page of this Prospectus Supplement.
S-4
<PAGE>
The interest period with respect to each distribution date and a fixed rate
certificate is the calendar month preceding the month of the distribution date.
For example, if the distribution date occurs on February 25, 2000, the interest
period would be the month of January 2000. Each calendar month will be deemed to
have 30 days and each year will be deemed to have 360 days. Therefore, if you
are a holder of a fixed rate certificate you would use the following formula to
calculate your interest payment on any distribution date:
30 x IR x PB = your interest payment
- ---
360
IR = the applicable per annum fixed interest rate, subject to (1) in the case
of the Class A-5 and Class A-6 Certificates, an interest rate cap and (2)
in the case of the Class A-5 certificates, an increase of ___% per annum if
the servicer does not exercise its option to terminate the trust by
purchasing all of the home equity loans.
PB = the principal balance of your fixed rate certificate immediately prior to
any distributions on the distribution date.
The interest rate cap is the weighted average coupon of the Group I home equity
loans related to the applicable distribution date.
If you are a holder of a fixed rate certificate, we will increase the interest
payment we owe to you for a distribution date by any unpaid amounts we owe to
you from prior distribution dates, plus accrued interest at the applicable
certificate rate.
If you are a holder of a Class A-5 or Class A-6 certificate, you will not
receive additional funds on future distribution dates to compensate you for any
reduction in the amount of interest paid to you on a prior distribution date
because of the effect of the interest rate cap.
VARIABLE RATE CERTIFICATE INTEREST
The interest rate on any distribution date with respect to the variable rate
certificates will be the interest rate set forth on the cover page of this
Prospectus Supplement.
The interest period with respect to each distribution date and the variable rate
certificates is the period from and including the previous distribution date (or
the closing date in the case of the first distribution date) to and including
the day preceding the related distribution date. Interest on the variable rate
certificates will accrue during the related interest period on the basis of the
actual number of days elapsed in the related interest period and a year
consisting of 360 days. Therefore if you are a holder of a variable rate
certificate, you would use the following formula to calculate your interest
payment on any distribution date:
N x IR x PB = your interest payment
- ---
360
N = number of days in the interest period
IR = the per annum floating interest rate for the interest period, subject to
both (1) an available funds cap and (2) a doubling of the applicable margin
if the servicer does not exercise its option to terminate the trust by
purchasing all of the home equity loans.
PB = the principal balance of your variable rate certificate immediately prior
to any distributions on the distribution date.
If you are a holder of a variable rate certificate, we will increase the
interest payment we owe to you for a distribution date by any unpaid amounts we
owe to you from prior distribution dates, plus accrued interest at the
applicable certificate rate.
Additionally, we will pay to you, on future distribution dates, the amount by
which we reduce the interest payment we owe to you because of the effect of the
available funds cap. Payment of these amounts will be made on a subordinated
basis, to the extent that money is available to make these payments.
PRINCIPAL
On each distribution date, the amount available for distributions of principal
for each home equity loan group will include principal collections, plus any
excess interest collections required to be distributed to satisfy the required
S-5
<PAGE>
level of overcollateralization less any decrease in the required level of
overcollateralization of the related home equity loan group.
GROUP I CERTIFICATES
On each distribution date principal will be distributed to the Group I
certificates in the following order of priority:
- - first, to the Class A-6 certificates, for each distribution date on or
after the distribution date in January, 2003 in an amount up to a specified
amount; and
- - second, to the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5
certificates, in that order, so that each class does not receive any
principal payments until the principal balance of the prior class has been
reduced to zero.
The Class A-6 certificate is a "lock-out" certificate. If you are a holder of a
Class A-6 certificate generally you will not be entitled to receive payments of
principal until the distribution date in _____________, ____. From that point
on, you will be entitled to receive an increasing percentage of your class'
proportionate share of principal payable to the Group I Certificates based on a
schedule.
GROUP II CERTIFICATES
On each distribution date we will distribute principal to the Group II
certificates as follows:
- - to the Class A-7 certificates, until the principal balance of the Class A-7
certificates has been reduced to zero.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders and the certificate insurer. The trust property includes:
- - a pool of closed-end fixed rate home equity loans secured by first and
second deeds of trust or mortgages on one-to-four family residential
properties transferred to the trust on the closing date; and
- - a pool of closed-end adjustable rate home equity loans secured by first
deeds of trust or mortgages on one-to four-family residential properties
transferred to the trust on the closing date;
- - payments on the home equity loans received on and after the cut-off date;
- - property that secured a home equity loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
- - amounts on deposit in the accounts specified in this Prospectus Supplement;
- - rights under any hazard insurance policies, if any, covering the mortgaged
properties; and
- - proceeds of the foregoing.
The Group I certificates and the Group II certificates will also each have the
benefit of a separate financial guaranty insurance policy issued by
________________________.
THE HOME EQUITY LOANS
We will divide the home equity loans into two groups. Each of the home equity
loan groups will constitute a separate sub-trust. The Group I home equity loan
group will contain home equity loans that bear interest at fixed rates. The
Group II home equity loan group will contain home equity loans that bear
interest at rates that adjust semi-annually based on six-month LIBOR and the
applicable gross margin (subject to the limitations described in this Prospectus
Supplement). The initial rate adjustment date for those home equity loans that
bear interest at an adjustable rate is either six months or two years after the
date of origination of the related home equity loan.
All of the home equity loans in the trust have been originated by CHEC, an
affiliate of CHEC or a broker for simultaneous assignment to CHEC.
The home equity loans are not and will not be guaranteed by the depositor, the
sellers, the servicer, the certificate insurer, the trustee or any of their
affiliates. None of the home equity
S-6
<PAGE>
loans is insured by a primary mortgage insurance policy.
The statistical information presented in this Prospectus Supplement is with
respect to _____ home equity loans, of which _____ are fixed-rate home equity
loans and ___ are adjustable-rate home equity loans, as of the statistical
calculation date. Prior to the closing date, additional home equity loans will
be added to each home equity loan group and some home equity loans may be
removed from each home equity loan group, subject to the consent of the
certificate insurer.
As a result, the characteristics of the home equity loans in each home equity
loan group as of the cut-off date will differ from the characteristics presented
in this Prospectus Supplement as of the statistical calculation date. The
depositor does not expect a material change in the weighted average
characteristics of either home equity loan group.
The home equity loans are secured by mortgaged properties located in __ states
and the District of Columbia.
GROUP I HOME EQUITY LOANS
The home equity loans in Group I will have the following characteristics as of
the statistical calculation date:
- - number of home equity loans: _____
- - aggregate principal balance: $_____________
- - average principal balance: $__________
- - maximum principal balance: $__________
- - minimum principal balance: $_______
- - last maturity date: __/__/__
- - interest rates range: ____% to _____%
- - weighted average interest rate: _____% (approximate)
- - weighted average remaining term to stated maturity, based on principal
balance: ___ months (approximate)
- - remaining term to stated maturity range: __ months to ___ months
- - weighted average combined loan-to-value ratio: _____% (approximate)
- - no original combined loan-to-value ratio exceeded _____%
- - balloon loans: ____% (approximate)
- - secured by first lien on the mortgaged property: _____%
- - secured by second lien on the mortgaged property: ____%
GROUP II HOME EQUITY LOANS
The home equity loans in Group II will have the following characteristics as of
the statistical calculation date:
- - number of home equity loans: ___
- - aggregate principal balance: $____________
- - average principal balance: $_________
- - maximum principal balance: $__________
- - minimum principal balance: $_________
- - last maturity date: __/__/__
- - weighted average interest rate: _____% (approximate)
- - interest rates range: ____% to _____%
- - weighted average remaining term to stated maturity, based on principal
balance: ___ months (approximate)
- - remaining term to stated maturity range: __ months to ___ months
- - weighted average loan-to-value ratio: _____% (approximate)
- - no original loan-to-value ratio exceeded _____%
- - weighted average gross margin: ____% (approximate)
- - gross margins range: ____% to _____%
- - weighted average maximum interest rate: _____% (approximate)
- - maximum interest rate range: _____% to _____%
- - weighted average minimum interest rate: _____% (approximate)
- - minimum interest rate range: ____% to _____%
- - Six-Month Adjustable Rate Loans:
- - number of home equity loans: ___
- - weighted average remaining period until interest rate adjustment:
approximately __ months (approximate)
- - initial payment adjustment: effective for the seventh monthly payment
period
S-7
<PAGE>
- - initial interest rate adjustment cap: ____%
- - semi-annual interest rate adjustment cap: ____%
- - lifetime interest rate cap: _____%
- - 2/28 Adjustable Rate Loans:
- - number of home equity loans: ___
- - weighted average remaining period until next interest rate adjustment
(approximate): ___ months
- - initial payment adjustment: effective for the 25th monthly payment period
- - initial interest rate adjustment cap: ____%
- - semi-annual interest rate adjustment cap: ____%
- - lifetime interest rate cap: _____%
DELINQUENCY ADVANCES AND COMPENSATING INTEREST
Each month the servicer will determine the amount of any unpaid interest due on
the home equity loans. If the servicer believes that unpaid interest can be
recovered, then the servicer will either:
- - advance the unpaid interest to the trust out of its own funds; or
- - advance the unpaid interest to the trust out of collections on the home
equity loans that are not required to be distributed on the related
distribution date.
The servicer will reimburse the trust for amounts advanced from trust
collections prior to the date on which these amounts are required to be a part
of any amounts distributable to you.
The servicer will provide to the trust the amount of any shortfall in the
anticipated collection of interest on a home equity loan that is caused by a
full prepayment of a home equity loan up to the amount of the aggregate
servicing fee for the related period.
The servicer is entitled to be reimbursed by the trust for any delinquency
advances from the related home equity loan and, if the delinquency advance is a
non-recoverable advance, from collections on all the home equity loans of the
related home equity loan group prior to any distributions to you. The servicer
is also entitled to be reimbursed by the trust for any delinquency advances, as
well as unreimbursed payments of compensating interest, from all the home equity
loans to the extent funds are available after making other required
distributions on the related distribution date.
SERVICING ADVANCES
Unless the servicer determines that any proposed advance is not recoverable from
the related home equity loan, the servicer will pay all "out of pocket" costs
and expenses incurred in the performance of its servicing obligations,
including, but not limited to:
- - expenditures in connection with a foreclosed home equity loan prior to the
liquidation of that home equity loan;
- - the cost of any enforcement or judicial proceedings, including
foreclosures; and
- - the cost of the management and liquidation of property acquired in
satisfaction of the related home equity loan.
The servicer is entitled to be reimbursed by the trust for any servicing
advances from the related home equity loan and also from all the home equity
loans to the extent funds are available after making other required
distributions on the related distribution date.
CREDIT ENHANCEMENT
CERTIFICATE INSURANCE POLICIES
___________________ will issue two certificate guaranty insurance policies for
the benefit of the related Class A certificates
The policies will unconditionally and irrevocably guarantee the timely payment
of interest on and the ultimate payment of the principal amount of each class of
Class A certificates.
On each distribution date, the trustee will calculate to what extent the funds
available to make the payments of principal and interest are insufficient to (1)
pay current interest on the
S-8
<PAGE>
Class A certificates or (2) reduce the principal balance of the related Class A
certificates to an amount equal to the principal balance of the home equity
loans in the related home equity loan group. If an insufficiency exists, then
the trustee will make a draw on the related policy. In addition, each policy
will guarantee the full payment of the principal balance of each class of Class
A certificates on the distribution date in ______________.
The policies do not guarantee:
- - any shortfalls related to the Soldiers' and Sailors Civil Relief Act of
1940, as amended.
- - amy shortfalls resulting from the application of any interest rate cap or
available funds cap.
- - that the principal balance of the Class A-1, Class A-2, Class A-3 or Class
A-4 certificates will be paid in full on their final scheduled distribution
dates.
If for any reason the certificate insurer does not make the payments required in
the related policy, you will have to rely on the home equity loans for your
payments of interest and principal and you may suffer a loss.
OVERCOLLATERALIZATION
Overcollateralization is calculated as the amount by which the aggregate
principal balance of the home equity loans in the related home equity loan group
exceeds the principal balance of the Class A certificates related to the home
equity loan group. The Group I certificates and the Group II certificates will
not have the benefit of any overcollateralization on the closing date. Following
the closing date, excess interest collections, if any, will be applied as
accelerated payments of principal to the class or classes of certificates then
entitled to receive distributions of principal until the overcollateralization
level for a home equity loan group equals a specified required
overcollateralization level.
If there are not sufficient excess interest collections, the required
overcollateralization level will not be reached or maintained. In addition,
realized losses on the home equity loans will reduce the amount of
overcollateralization. If realized losses on the home equity loans result in the
overcollateralization amount for a home equity loan group becoming negative, to
the extent that excess amounts are not available from the related home equity
loan group or the other home equity loan group, a draw will be made on the
related policy. The required overcollateralization level for each home equity
loan group may be increased, reduced or eliminated by the certificate insurer
without your consent.
CROSSCOLLATERALIZATION
Each home equity loan group provides for limited crosscollateralization of the
Class A certificates related to the other home equity loan group. Excess amounts
generated by one home equity loan group will be available to fund shortfalls in:
- - the payment of the trustee fee and the insurance premium owed to the
certificate insurer with respect to the other home equity loan group;
- - the payment of interest and principal on the Class A certificates related
to the other home equity loan group;
- - the reimbursement of the certificate insurer for amounts owed in respect of
the other home equity loan group; and
- - the required overcollateralization level of the other home equity loan
group.
OPTIONAL TERMINATION BY THE SERVICER
The servicer may, at its option, terminate the trust on any date on which the
aggregate outstanding principal balance of the Class A certificates is less than
10% of the initial aggregate principal balance of the Class A certificates on
the closing date.
S-9
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OPTIONAL PURCHASE OF DEFAULTED HOME EQUITY LOANS
The servicer has the option, but is not obligated, to purchase from the trust
any home equity loan that becomes delinquent for two consecutive monthly
installments, subject to the limitations described in the pooling and servicing
agreement.
CERTAIN FEDERAL TAX CONSIDERATIONS
In the opinion of Stroock & Stroock & Lavan LLP, counsel to the sellers and the
trust, for federal income tax purposes, the trust will include two real estate
mortgage investment conduits or "REMICs", subject to the considerations
discussed under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in this Prospectus
Supplement. The Class A certificates will constitute "regular interests" in a
REMIC and will be treated as debt instruments of the REMIC for federal income
tax purposes with payment terms equivalent to the terms of the certificates.
ERISA CONSIDERATIONS
Subject to the considerations and conditions described under "ERISA
CONSIDERATIONS" in this Prospectus Supplement, we expect that the Class A
certificates may be purchased by a pension or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended.
LEGAL INVESTMENT CONSIDERATIONS
The Class A certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. Accordingly,
many institutions with legal authority to invest in comparably rated securities
may not be legally authorized to invest in the Class A certificates.
CERTIFICATE RATING
It is a condition to the issuance of the Class A certificates that they receive
ratings of "AAA" by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. and "Aaa" by Moody's Investors Service, Inc.
S-10
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RISK FACTORS
You should consider the following risk factors together with all the
information contained in this Prospectus Supplement and the related Prospectus
in deciding whether to purchase any of the certificates.
PERFORMANCE MAY BE AFFECTED
BY THE SERVICER'S LIMITED Although CHEC began originating home equity
EXPERIENCE loans in 1994, prior to October 1997 CHEC sold
substantially all of its home equity loans in
whole loan transactions on a servicing released
basis. Consequently, the servicer has
approximately two years of historical loss data
relating to its home equity loan portfolio that
you may refer to for purposes of examining the
loss experience of home equity loans similar to
the home equity loans being sold to the trust.
Moreover, the servicing of home equity loans of
the type included in the trust (as compared to
the servicing of conforming or prime home equity
loans) requires special skill and diligence. The
servicing of these types of home equity loans
generally requires more attention to each
account, earlier and more frequent contact with
borrowers in default and commencing the
foreclosure process at an earlier stage of
default. The servicer has limited experience
servicing home equity loans similar to the home
equity loans being sold to the trust. The
servicer will directly service all of the home
equity loans in the trust. The servicer's
relative lack of experience in servicing home
equity loans may result in greater losses on the
home equity loans and result in accelerated
prepayments on your certificates. You will bear
any reinvestment risk resulting from any
accelerated prepayments.
THE BORROWERS HAVE LESS THAN
PERFECT CREDIT CHEC underwriting standards generally are less
stringent than those of Fannie Mae or Freddie
Mac with respect to a borrower's credit history,
collateral and in other respects. The home
equity loans originated or acquired by CHEC or
its affiliates have been made to borrowers that
typically have limited access to traditional
mortgage financing for a variety of reasons,
including impaired past credit experience,
limited credit history, insufficient home equity
value, or a high level of debt-to-income ratios.
As a result of this approach to underwriting,
the home equity loans may experience higher
rates of delinquencies, defaults and
foreclosures than home equity loans underwritten
in accordance with Fannie Mae or Freddie Mac's
guidelines.
NEWLY ORIGINATED HOME EQUITY
LOANS MAY DEFAULT Approximately ____% the Group I home equity
loans and approximately _____% of the Group II
home equity loans were originated within twelve
months prior to the statistical calculation
date. The weighted average remaining term to
stated maturity of the Group I and Group II home
equity loans as of the statistical calculation
date is approximately
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___ months and ___ months, respectively.
Although little data is available, defaults on
home equity loans, including home equity loans
similar to the home equity loans expected to be
included in the trust, are generally expected to
occur with greater frequency in the early years
of the terms of home equity loans.
THE RATE OF RETURN OF PRINCIPAL
IS UNCERTAIN DUE TO OVERVIEW. Generally, if prevailing interest
PREPAYMENTS rates fall significantly below the coupon rates
on the home equity loans, the home equity loans
are likely to be subject to higher prepayment
rates than if prevailing rates remain at or
above the coupon rates on the home equity loans.
Conversely, if prevailing interest rates rise
significantly above the coupon rates on the home
equity loans, the rate of prepayments is likely
to decrease. The average life of your
certificates and, if purchased at other than
par, the yields realized by you will be
sensitive to levels of payment (including
prepayments relating to the home equity loans)
on the home equity loans.
In general, if you purchase a Class A
certificate at a premium to the outstanding
principal amount of the certificate the yield on
your certificate may be adversely affected by a
higher than anticipated level of prepayments of
the home equity loans. Conversely, if you
purchase a Class A certificate at a discount to
the outstanding principal amount of the
certificate, the yield on your certificate may
be adversely affected by a lower than
anticipated level of prepayments.
MANY OF THE HOME EQUITY LOANS HAVE NO PREPAYMENT
PENALTIES. Approximately _____% of the Group I
home equity loans and approximately _____% of
the Group II home equity loans, in each case as
of the statistical calculation date, may be
prepaid in whole or in part at any time without
penalty. Home equity loans may not be viewed by
borrowers as permanent financing. Accordingly,
the home equity loans in the trust may
experience a higher rate of prepayment than
traditional mortgage loans. The trust's
prepayment experience may be affected by a wide
variety of factors, including general economic
conditions, interest rates, the availability of
alternative financing and homeowner mobility.
DUE-ON-SALE CLAUSES. All of the home equity
loans contain due-on-sale provisions and the
servicer is required by the pooling and
servicing agreement to enforce these provisions
unless the enforcement is not permitted by
applicable law or the servicer, in a manner
consistent with reasonable commercial practice,
permits the purchaser of the related mortgaged
property to assume the home equity loan. To the
extent permitted by applicable law, any
assumption will not release the original
borrower from its obligation under any
S-12
<PAGE>
home equity loan.
2/28 ADJUSTABLE RATE LOANS. Approximately _____%
of the Group II home equity loans, as of the
statistical calculation date, have a two year
fixed rate term followed by a 28 year adjustable
rate term. As with all home equity loans, the
rate of prepayments on these 2/28 adjustable
rate loans which are in the initial fixed rate
period is sensitive to prevailing interest
rates. The prepayment behavior of the 2/28
adjustable rate loans may differ from that of
the other home equity loans. As a 2/28
adjustable rate loan approaches its initial
adjustment date, the borrower may become more
likely to refinance the loan to avoid an
increase in the coupon rate, even if fixed rate
loans are only available at rates that are
slightly lower or higher than the coupon rate
before adjustment. The existence of the
applicable periodic rate cap, lifetime cap and
lifetime floor also may affect the likelihood of
prepayments resulting from refinancings.
EFFECT OF HOME EQUITY LOAN YIELD
ON CERTIFICATE RATE OF CLASS Approximately _____% of the Group II home equity
A-7 CERTIFICATES; BASIS RISK loans, as of the statistical calculation date,
adjust semi-annually based upon the London
interbank offered rate for six-month United
States dollar deposits. We refer to these loans
in this Prospectus Supplement as the six-month
adjustable rate loans. Approximately _____% of
the Group II home equity loans, as of the
statistical calculation date, are 2/28
adjustable rate loans. These home equity loans
provide for a fixed interest rate for a period
of approximately two years following origination
and thereafter provide for interest rate and
payment adjustments in a manner similar to the
six-month adjustable rate loans.
The interest rate for the Class A-7 certificates
is determined in accordance with and adjusts
monthly based upon one-month LIBOR, and is
subject to the Class A-7 available funds cap.
One-month LIBOR and six-month LIBOR may respond
to different economic and market factors, and
there is not necessarily a correlation between
them. Thus, it is possible, for example, that
one-month LIBOR may rise during periods in which
six-month LIBOR is stable or is falling or that,
even if both one-month LIBOR and six-month LIBOR
rise during the same period, one-month LIBOR may
rise more rapidly than six-month LIBOR.
Furthermore, even if one-month LIBOR and
six-month LIBOR were at the same level, the
Class A-7 available funds cap may still limit
the amount of interest that would otherwise be
distributable on the Class A-7 certificates. The
operation of the Class A-7 available funds cap
may cause the certificate rate of the Class A-7
certificates to be reduced for extended periods
in a rising interest rate environment. Although
we intend that we will pay to you on future
distribution dates the amount by which we reduce
a Class A-7 certificateholder's interest payment
S-13
<PAGE>
because of the Class A-7 available funds cap, we
cannot assure you that excess funds will be
available to make these payments.
In addition, Group II home equity loans are
subject to periodic adjustment caps and maximum
rate caps, and the weighted average margin is
subject to change based upon prepayment
experience, which also may result in the Class
A-7 available funds cap limiting increases in
the certificate rate for the class. Finally, the
Group II home equity loans accrue interest on
the basis of a 360-day year assumed to consist
of twelve 30-day months, while calculations of
interest on the Class A-7 certificates will be
made on the basis of the actual number of days
elapsed in the related interest period and a
year of 360 days. This may result in the Class
A-7 available funds cap limiting the certificate
rate for the Class A-7 certificates to less than
LIBOR plus the applicable margin in interest
periods that have more than 30 days related to
the loan group.
If you are a holder of a Class A-7 certificate
and the certificate rate is limited in any
period by the Class A-7 available funds cap you
may suffer a temporary or permanent decline in
the market value of your certificates.
EFFECT OF PREPAYMENTS OF
GROUP I HOME EQUITY LOANS The Class A-5 and A-6 certificates are subject
ON CERTIFICATE RATES OF to an interest rate cap based on the weighted
CLASSES A-5 AND A-6; average net coupon rate of the home equity loan
INTEREST RATE RISK group as of the time that interest on the
certificates is due. If there is a sufficiently
high prepayment rate with respect to home equity
loans bearing a higher coupon than the weighted
average coupon of the pool as a whole, the
interest rate payable on the Class A-5 and A-6
certificates may become subject to the interest
rate cap.
If you are a Class A-5 or Class A-6
certificateholder and the stated fixed rate
payable on your certificates is reduced as a
result of the interest rate cap, you may suffer
a decline in the market value of your
certificates.
S-14
<PAGE>
THE CERTIFICATE INSURANCE
POLICIES DO NOT COVER Payments of interest on the Class A Certificates
SHORTFALLS IN INTEREST are subject to an available funds cap or
PAYMENTS RESULTING FROM interest rate cap, depending on the class of
APPLICATION OF AN certificates. The insurance policies guarantee
AVAILABLE FUNDS OR INTEREST payments of interest on the Class A certificates
RATE CAP, OR CERTAIN OTHER only up to the amount of any available funds or
REDUCTIONS IN AVAILABLE or interest rate cap. In addition, the
INTEREST DISTRIBUTIONS certificate insurance policies do not cover
REQUIRED BY LAW reductions in available interest distributions
required by the Soldiers' and Sailors' Relief
Act of 1940, as amended. As a result, you may
realize a lower than anticipated yield on your
investments.
YIELD CONSIDERATIONS RELATING
TO EXCESS CASH If the Class A certificates related to a home
equity loan group are overcollateralized by the
home equity loan group below the required
amount, excess interest, if any, will be
distributable on the related Class A
certificates as a payment of principal. If
purchased at a premium or a discount, the yield
to maturity on your certificate will be affected
by the rate at which excess interest is
distributed as a payment of principal. If the
actual rate of excess interest distribution is
slower than the rate anticipated by an investor
who purchases a related Class A certificate at a
discount, the actual yield to the investor will
be lower than the investor's anticipated yield.
If the actual rate of excess interest
distribution is faster than the rate anticipated
by an investor who purchases a related Class A
certificate at a premium, the actual yield to
the investor will be lower than the investor's
anticipated yield. The amount of excess interest
available for distribution with respect to a
home equity loan group on any distribution date
will be affected by:
- the actual amount of interest received,
collected or recovered in respect of the
home equity loans during the calendar month
prior to the related distribution date;
- changes in the weighted average of the
coupon rates of the home equity loans
resulting from prepayments and liquidations
of home equity loans;
- adjustments in the interest rates on the
Group II home equity loans; and
- adjustments in the certificate rate on the
Class A-7 certificates.
The amount of excess interest distributed as
principal on the Class A certificates related to
a home equity loan group will be based on the
required amount of overcollateralization.
S-15
<PAGE>
The required level of overcollateralization may
increase or decrease during the period that the
related classes of Class A certificates remain
outstanding. Any increase in the required level
of overcollateralization for the Class A
certificates related to a home equity loan group
may result in an accelerated rate of
amortization of the related Class A certificates
until the overcollateralization for the Class A
certificates equals the required amount of
overcollateralization. Any decrease in the
required amount of overcollateralization will
result in a decelerated rate of amortization of
the related Class A certificates until the
overcollateralization for the Class A
certificates is reduced to the required amount
of overcollateralization for the Class A
certificates.
LIQUIDATION OF HOME EQUITY LOANS
COULD CAUSE PAYMENT DELAYS OVERVIEW. Even assuming that the mortgaged
AND/OR LOSSES properties provide adequate security for the
related home equity loans, substantial delays in
receiving proceeds could be encountered by the
trust in connection with the liquidation of
defaulted home equity loans. As a result,
shortfalls in distributions on Class A
certificates could occur if the certificate
insurer were unable to perform its obligations
under the policies. Further, liquidation
expenses (including legal fees, real estate
taxes, and maintenance and preservation
expenses) will reduce the proceeds payable on
the Class A certificates and thereby reduce the
security for the home equity loans. In the event
any of the mortgaged properties fail to provide
adequate security for the related home equity
loans, holders of Class A certificates could
experience a loss if the certificate insurer
were unable to perform its obligations under the
policies.
SECOND LIENS. As of the statistical calculation
date, approximately _____% of the aggregate
principal balance of the Group I home equity
loans are secured by first liens on the related
properties, and approximately ____% of the
aggregate principal balance of the Group I home
equity loans are secured by second liens on the
related properties. With respect to home equity
loans that are junior in priority to liens
having a first priority with respect to the
related mortgaged property, the servicer has the
power, in some cases, to consent to a new
mortgage lien on the mortgaged property having
priority over the home equity loan in connection
with the refinancing of the first lien. Home
equity loans secured by second mortgages are
entitled to proceeds that remain from the sale
of the related mortgaged property after any
related senior home equity loan and prior
statutory liens have been satisfied. In the
event that the proceeds are insufficient to
satisfy the loans and prior liens in the
aggregate and the certificate insurer is unable
to perform its obligations under the policy, the
trust and, accordingly, you, bear (1) the risk
of delay in distributions while a deficiency
judgment, if any, against the borrower is sought
and (2) the risk of loss if the deficiency
S-16
<PAGE>
judgment cannot be obtained or is not realized
upon, which may result in the acceleration of
payments of principal to you and affect the
yield and weighted average life of your
certificates.
HOME EQUITY LOANS TRANSFERRED TO
THE TRUST MAY HAVE Following the transfer of the home equity loans
CHARACTERISTICS THAT DIFFER to the trust on the closing date, the
THAT DIFFER FROM THOSE OF characteristics of the home equity loans may
THE HOME EQUITY LOANS differ from the information presented in this
PRESENTED IN THIS Prospectus Supplement. The characteristics that
PROSPECTUS SUPPLEMENT WHICH may differ include, among others, the
MAY REDUCE YOUR YIELD TO composition of the home equity loans and of the
MATURITY borrowers of the home equity loans, the credit
quality of the home equity loans, the
distribution by interest rate, the distribution
by principal balance, the distribution by
loan-to-value ratio and the distribution by
remaining term to stated maturity. You should
consider potential variances when making your
investment decision concerning the Class A
certificates. In addition, as a result of the
changes in the home equity loans included in the
trust, the principal balance of each class of
certificates is subject to a variance of plus or
minus _%.
THERE COULD BE DELAYS IN
DISTRIBUTIONS ON YOUR The sale of the home equity loans from the
CERTIFICATES IF THE TRANSFER sellers to the depositor and the depositor to
OF HOME EQUITY LOANS TO THE the trust will be treated by the sellers, the
TRUST IS NOT CONSIDERED A depositor and the trust as a sale of the home
SALE IN THE EVENT OF equity loans. In the event of an insolvency of
BANKRUPTCY either seller, it is possible that a receiver or
conservator for, or a creditor of, either seller
or the depositor, may argue that the transaction
between each seller, the depositor and the
trust, with respect to the home equity loans was
a pledge of the home equity loans in connection
with a borrowing rather than a true sale. This
attempt, even if unsuccessful, could result in
delays in distributions on the Class A
certificates.
PREPAYMENT INTEREST SHORTFALLS
MAY RESULT IN LOSS OF When a full principal prepayment is made on a
INTEREST home equity loan, the mortgagor is charged
interest only up to the date of the prepayment
instead of for a full month, which may result in
a prepayment interest shortfall. The servicer is
obligated to pay those shortfalls in interest
collections payable on the Class A certificates
that are attributable to prepayment interest
shortfalls, but only to the extent of the
aggregate servicing fee for the related due
period. Neither the servicing fee nor the policy
will be available to cover any shortfalls in
interest collections on the home equity loans
that are attributable to the Soldiers' and
Sailors' Civil Relief Act of 1940. Prepayment
interest shortfalls, after application of the
servicing fee as described above, will be
covered by the related policy.
S-17
<PAGE>
GEOGRAPHIC CONCENTRATION MAY Approximately _____%, ____% and ____% of the
AFFECT PERFORMANCE Group I home equity loans are located in _____,
_____ and _________, respectively, and
approximately ____%, ____%, ____%, ____% and
____% of the Group II home equity loans are
located in ________, _______, _________, ______
and _______, respectively. To the extent that
the related regions have experienced or may
experience in the future weaker economic
conditions or greater rates of decline in real
estate values than the United States generally,
a concentration of the home equity loans may be
expected to exacerbate the foregoing risks. The
sellers and the depositor can neither quantify
the impact of any recent property value declines
on the home equity loans nor predict whether, to
what extent or for how long declines may
continue.
Properties in California may be more susceptible
than homes located in other parts of the country
to certain types of uninsured hazards, such as
earthquakes, as well as floods, wildfires,
mudslides and other natural disasters.
VIOLATIONS OF CONSUMER
PROTECTION REDUCTION IN Approximately _____% of the aggregate principal
LAWS MAY RESULT IN LOSSES balance of the home equity loans are subject to
the Home Ownership and Equity Protection Act of
1994.
WE REFER YOU TO "RISK FACTORS--CONSUMER
PROTECTION LAWS MAy AFFECT HOME EQUITY LOANS"
AND "CERTAIN LEGAL ASPECTS OF LOANS" IN THE
PROSPECTUS FOR MORE DETAILS
REDUCTION IN CERTIFICATE
RATING COULD HAVE AN ADVERSE The rating of the Class A certificates will
EFFECT ON THE VALUE OF YOUR depend primarily on an assessment of the
CERTIFICATES claims-paying ability of the certificate insurer
and on an assessment by the rating agencies of
the home equity loans. Any reduction in a rating
assigned to the claims-paying ability of the
certificate insurer below the rating initially
given to the Class A certificates may result in
a reduction in the rating of the Class A
certificates.
The rating by the rating agencies of the Class A
certificates is not a recommendation for you to
purchase, hold or sell the Class A certificates,
inasmuch as the rating does not comment as to
the market price or suitability for a particular
investor. There is no assurance that the ratings
will remain in place for any given period of
time or that the ratings will not be lowered or
withdrawn by the rating agencies. In general,
the ratings address credit risk and do not
address the likelihood of prepayments on home
equity loans, the likelihood of the payment of
any interest payable to Class A-7
certificateholders on a subordinated basis due
to the
S-18
<PAGE>
application of any available funds cap described
under the section "DESCRIPTION OF THE
CERTIFICATES--Certificate Rate" or the
possibility that Class A certificateholders
might realize a lower than anticipated yield.
The ratings of the Class A certificates also do
not address the possibility of the imposition of
United States withholding tax with respect to
non-U.S. persons.
Any downgrade in the rating of the certificate
insurer will likely result in the downgrade of
the rating of the Class A certificates. None of
the sellers, the servicer or depositor is
required to maintain the rating of the Class A
certificates. Any downgrade in the ratings
assigned to your certificates will result in a
decline in the market value of your
certificates.
COMPUTER PROBLEMS IN THE
YEAR 2000 MAY RESULT The year 2000 issue is the result of prior
IN LOSSES computer programs being written using two
digits, rather than four digits, to define the
applicable year. Any of the servicer's computer
programs that have time-sensitive software may
recognize a date using "00" as the year 1900
rather than the year 2000. Any occurrence could
result in a major computer system failure or
miscalculations. The servicer is presently
engaged in various procedures to ensure that
their computer systems and software will be year
2000 compliant. With regard to the servicing
systems used by the servicer, the servicer has
received written verification from its software
provider that the software systems used by the
servicer are year 2000 compliant. The software
provider indicated that it has obtained
statements from its third party hardware,
software and service providers confirming that
the goods and services they provide the software
provider are year 2000 compliant. In addition,
the servicer's software provider has provided
the servicer with a written assurance that the
provider has put into place contingency plans to
address all of its internal business critical
areas, including any non-conformity with respect
to year 2000 of the provider's systems.
However, in the event that the servicer, or any
of its suppliers, customers, brokers or agents
do not successfully and timely achieve year 2000
compliance, the performance of obligations of
the servicer under the pooling and servicing
agreement could be materially adversely
affected.
S-19
<PAGE>
DESCRIPTION OF THE HOME EQUITY LOANS
OVERVIEW
The statistical information presented in this Prospectus Supplement
concerning the pool of home equity loans (the "Home Equity Loans") is based on
the pool of Home Equity Loans CHEC Funding, LLC (the "Depositor") expects to
transfer to Centex Home Equity Loan Trust ____-_ (the "Trust") on the date of
issuance of the Class A Certificates (the "Closing Date"). The statistical
information concerning the Home Equity Loans is as of the close of business on
_________ __, ____ (the "Statistical Calculation Date").
This subsection describes characteristics of the Home Equity Loans.
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are measured by the aggregate principal balance of the related Home
Equity Loans as of the Statistical Calculation Date (the "Statistical
Calculation Date Loan Balance"). Prior to the Closing Date, additional Home
Equity Loans will be added to each Home Equity Loan Group and other Home Equity
Loans may be removed from a Home Equity Loan Group, subject to the consent of
the Certificate Insurer. As a result, the characteristics of the Home Equity
Loans in each Home Equity Loan Group as of the Cut-Off Date will differ from the
characteristics presented in this Prospectus Supplement as of the Statistical
Calculation Date. The Depositor does not expect any material change in the
weighted average characteristics of any Home Equity Loan Group.
Each Home Equity Loan in the Trust will be assigned to one of two home
equity loan groups ("Group I" and "Group II," respectively, and each a "Home
Equity Loan Group"). Each Home Equity Loan Group will constitute a separate
sub-trust. The Home Equity Loans in Group I (the "Group I Home Equity Loans")
will bear interest at fixed interest rates. The Home Equity Loans in Group I are
referred to as the "Group I Home Equity Loans." The Home Equity Loans in Group
II (the "Group II Home Equity Loans") will bear interest at adjustable rates.
The Home Equity Loans in Group II are referred to as the "Group II Home Equity
Loans." Distributions on the Group I Certificates will be based primarily on
amounts available for distribution in respect of the Group I Home Equity Loans.
Distributions on the Group II Certificates will be based primarily on amounts
available for distribution in respect of the Group II Home Equity Loans.
The Home Equity Loans to be transferred by Centex Credit Corporation
d/b/a Centex Home Equity Corporation ("CHEC") and CHEC Conduit Funding, LLC
(together, the "Sellers") to the Depositor and from the Depositor to the Trust
on the Closing Date are fixed and adjustable rate home equity loans evidenced by
promissory notes (the "Notes") secured by first and second lien deeds of trust,
security deeds or mortgages on properties (the "Mortgaged Properties"). The
Mortgaged Properties securing the Home Equity Loans consist primarily of one-to
four-family residential properties and manufactured housing treated as real
property under applicable state law. The Mortgaged Properties may be
owner-occupied and non-owner occupied investment properties (which include
second and vacation homes). None of the Home Equity Loans are insured by pool
mortgage insurance policies or primary mortgage insurance policies. All of the
Home Equity Loans in the Trust have been or will be originated by CHEC, an
affiliate of CHEC or a broker for simultaneous assignment to CHEC. As of the
Statistical Calculation Date, these Home Equity Loans will have the following
general characteristics:
- - _____ total home equity loans
- - _____ fixed rate home equity loans
- - ___ floating rate home equity loans
- - all of the home equity loans were originated no earlier than _______
__, ____
- - location in __ states and the District of Columbia
- - Group I Home Equity Loans:
S-20
<PAGE>
- $_____________ aggregate outstanding loan balance
- ____% of total loan balance of all Home Equity Loans
- - Group II Home Equity Loans:
- $____________ aggregate outstanding loan balance
- ____% of total loan balance of all Home Equity Loans
The Original Combined Loan-to-Value Ratios with respect to the Home
Equity Loans were calculated based upon the lesser of the appraised values of
the Mortgaged Properties at the time of origination or the sales price of the
related Mortgaged Property if the Mortgaged Property was sold within the 12
month period preceding the time of loan origination (the "Appraised Values").
Where more than one appraisal was performed on the subject property, the lesser
of the two values was used to determine the Original Loan-to-Value Ratio and the
Original Combined Loan-to-Value Ratio.
In a limited number of circumstances, and within CHEC underwriting
guidelines, CHEC may discount the Appraised Value of Mortgaged Properties (when
calculating maximum Loan-to-Value Ratios) where the Mortgaged Properties are
unique, have a high value or where the comparables are not within Fannie Mae
guidelines. The purpose for making these reductions is to value the Mortgaged
Properties more conservatively than would otherwise be the case if the appraisal
were accepted as written.
The "Original Combined Loan-to-Value Ratio" of a Home Equity Loan is
the ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien mortgage balance plus the original balance of the Home Equity Loan divided
by the Appraised Value of the related Mortgaged Property.
WE REFER YOU TO "RISK FACTORS--THE BORROWERS HAVE LESS THAN PERFECT
CREDIT" IN THIS PROSPECTUS SUPPLEMENT FOR MORe DETAIL.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Home Equity Loans. If the residential real estate market has experienced
or should experience an overall decline in property values, causing the
outstanding balances of the Home Equity Loans, together with the outstanding
balances of any first mortgage, to become equal to or greater than the value of
the Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry.
S-21
<PAGE>
GROUP I HOME EQUITY LOANS
The following summary information with respect to the Group I Home
Equity Loans is as of the Statistical Calculation Date:
<TABLE>
<CAPTION>
SUMMARY STATISTICS RANGE (IF APPROPRIATE)
<S> <C> <C>
Avg. Outstanding Principal Balances (the "Loan Balances") $_________ $________ to $__________
Wtd. Avg. Coupon Rate (the "Coupon Rate") _____% ____% to _____%
Wtd. Avg. Combined Loan-to-Value Ratio (approximate) _____% ____% to _____%
Wtd. Avg. Remaining Term to Maturity (approximate) ___ months __ to ___ months
Wtd. Avg. Original Term to Maturity (approximate) ___ months __ to ___ months
Maximum Seasoning __ months
Ratio of First to Second Liens _____% / ____%
Maximum Original Principal Balance of Loans
Secured by First Liens
SINGLE-FAMILY PROPERTIES $
TWO-TO FOUR-FAMILY PROPERTIES $
Maximum Original Principal Balance of Loans
Secured by Second Liens
SINGLE-FAMILY PROPERTIES $
TWO-TO FOUR-FAMILY PROPERTIES $
Balloon Payments (as a percent of
the aggregate outstanding loan balance) ___%
Latest Maturity Date __/__/__
30 to 59 day Delinquencies (as a percent of
the aggregate outstanding loan balance)(1) ___%
</TABLE>
(1) Approximately ____% of the outstanding loan balance of the Group I Home
Equity Loans had first monthly payments duer after ____________, ____, so that
it was not possible for theses loans to be __ days past due as of the
Statistical Calculation Date.
The tables set forth below contain approximate statistical information
as of the Statistical Calculation Date regarding the Group I Home Equity Loans.
The sum of the percentage columns in the following tables may not equal 100% due
to rounding.
S-22
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP I HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
STATE HOME EQUITY LOANS BALANCE BALANCE
- ----- ----------------- ------- -------
<S> <C> <C> <C>
Arizona...................... $ %
Arkansas.....................
California...................
Colorado.....................
Connecticut..................
Delaware.....................
District of Columbia.........
Florida......................
Georgia......................
Idaho........................
Illinois.....................
Indiana......................
Iowa.........................
Kansas.......................
Kentucky.....................
Louisiana....................
Maine........................
Maryland.....................
Massachusetts................
Michigan.....................
Minnesota....................
Mississippi..................
Missouri.....................
Montana......................
Nebraska.....................
Nevada.......................
New Hampshire................
New Jersey...................
New Mexico...................
New York.....................
North Carolina...............
North Dakota.................
Ohio.........................
Oklahoma.....................
Oregon.......................
Pennsylvania.................
Rhode Island.................
South Carolina...............
South Dakota.................
Tennessee....................
Texas........................
Utah.........................
Vermont......................
Virginia.....................
Washington...................
West Virginia................
Wisconsin....................
Wyoming......................
------------- -------------- --------------------
Total..................... $ %
============= ============== ====================
</TABLE>
- --------------------------
(1)Determined by property address designated as such in the related Mortgage.
S-23
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIO
OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE LOAN CALCULATION
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE RATIONS (%) HOME EQUITY LOANS BALANCE DATE LOAN BALANCE
- ---------------------------------------------------- ----------------- ------- -----------------
<S> <C> <C> <C>
Less than or equal to 50.00......................... $ %
50.01 - 55.00.......................................
55.01 - 60.00.......................................
60.01 - 65.00.......................................
65.01 - 70.00.......................................
70.01 - 75.00.......................................
75.01 - 80.00.......................................
80.01 - 85.00.......................................
85.01 - 90.00.......................................
90.01 - 95.00.......................................
95.01 - 100.00......................................
------------- ------------- ---------
Total.................................... $ %
============= ============= =========
</TABLE>
S-24
<PAGE>
COUPON RATES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE LOAN CALCULATION
RANGE OF ORIGINAL COUPON RATES (%) HOME EQUITY LOANS BALANCE DATE LOAN BALANCE
- ---------------------------------- ----------------- ------- -----------------
<S> <C> <C> <C>
7.001 - 7.500....................................... $ %
7.501 - 8.000.......................................
8.001 - 8.500.......................................
8.501 - 9.000.......................................
9.001 - 9.500.......................................
9.501 - 10.000......................................
10.001 - 10.500.....................................
10.501 - 11.000.....................................
11.001 - 11.500.....................................
11.501 - 12.000.....................................
12.001 - 12.500.....................................
12.501 - 13.000.....................................
13.001 - 13.500.....................................
13.501 - 14.000.....................................
14.001 - 14.500.....................................
14.501 - 15.000.....................................
15.001 - 15.500.....................................
15.501 - 16.000.....................................
16.001 - 16.500.....................................
16.501 - 17.000.....................................
17.001 - 17.500.....................................
17.501 - 18.000.....................................
------------- --------------
Total.................................... $ %
============= ============== ==============
</TABLE>
STATISTICAL CALCULATION DATE LOAN BALANCES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF STATISTICAL CALCULATION DATE LOAN BALANCES HOME EQUITY LOANS BALANCE BALANCE
- --------------------------------------------------- ----------------- ------- -------
<S> <C> <C> <C>
$ 0.01 - 50,000.00.......................... $ %
50,000.01 - 100,000.00.........................
100,000.01 - 150,000.00.........................
150,000.01 - 200,000.00.........................
200,000.01 - 250,000.00.........................
------------- -------------
Total.................................... $ %
============= ============== ===========
</TABLE>
TYPES OF MORTGAGED PROPERTIES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
PROPERTY TYPE HOME EQUITY LOANS BALANCE BALANCE
- ------------- ----------------- ------- -------
<S> <C> <C> <C>
Single Family....................................... $ %
PUD.................................................
2-4 Family..........................................
Townhouses..........................................
Manufactured Housing................................
Condominiums........................................
------------- ------------- -------
Total.................................... $ %
============= ============== =======
</TABLE>
S-25
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
ORIGINAL TERM TO MATURITY (MONTHS) HOME EQUITY LOANS BALANCE BALANCE
- ---------------------------------- ----------------- ------- -------
<S> <C> <C> <C>
60 - 119............................................ $ %
120 - 179...........................................
180 - 239...........................................
240 - 299...........................................
300 - 360...........................................
------------- ------------- ------------
Total.................................... $ %
============= ============== ============
</TABLE>
REMAINING TERM TO MATURITY OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
REMAINING TERM TO MATURITY (MONTHS) HOME EQUITY LOANS BALANCE BALANCE
- ----------------------------------- ----------------- ------- -------
<S> <C> <C>
Less than or equal to 60............................ $ %
61 - 120............................................
121 - 180...........................................
181 - 240...........................................
240 - 300...........................................
301 - 360...........................................
------------- ------------- -------------
Total.................................... $ %
============= ============== =============
</TABLE>
SEASONING OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
SEASONING (MONTHS) HOME EQUITY LOANS BALANCE BALANCE
- ------------------ ----------------- ------- -------
<C> <C> <C>
0.................................................. $ %
1 - 6..............................................
7 - 2..............................................
------------- ------------- ------------
Total................................... $ %
============= ============== ============
</TABLE>
OCCUPANCY STATUS OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
OCCUPANCY STATUS HOME EQUITY LOANS BALANCE BALANCE
- ---------------- ----------------- ------- -------
<S> <C> <C> <C>
Owner Occupied (Primary)............................ $ %
Investment Property.................................
Second Home.........................................
------------- ------------- -------------
Total.................................... $ %
============= ============== =============
</TABLE>
LIEN POSITION OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
LIEN POSITION HOME EQUITY LOANS BALANCE BALANCE
- ------------- ----------------- ------- -------
<S> <C> <C> <C>
First.............................................. $ %
Second.............................................
------------- ------------- -------------
Total................................... $ %
============= ============== =============
</TABLE>
S-26
<PAGE>
DOCUMENTATION TYPE OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
DOCUMENTATION TYPE(1) HOME EQUITY LOANS BALANCE BALANCE
- --------------------- ----------------- ------- -------
<S> <C> <C> <C>
Full Documentation................................. $ %
Stated Income......................................
Limited Documentation..............................
------------- ------------- -------------
Total................................... $ %
============= ============== =============
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the Prospectus for a description of the
CHEC's documentation programs.
CREDIT GRADE OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
CREDIT GRADE BALANCE(1) HOME EQUITY LOANS BALANCE BALANCE
- ----------------------- ----------------- ------- -------
<S> <C> <C> <C>
A1.................................................. $ %
A2..................................................
A+..................................................
B...................................................
C1..................................................
C2..................................................
D...................................................
------------- ------------- -------------
Total.................................... $ %
============= ============== =============
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the Prospectus for a description of CHEC's credit grades and
underwriting criteria.
SECOND MORTGAGE RATIO OF GROUP I HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF SECOND MORTGAGE RATIOS (%) HOME EQUITY LOANS BALANCE BALANCE
- ----------------------------------- ----------------- ------- -------
<S> <C> <C> <C>
less than 10.00..................................... $ %
10.01 - 20.00.......................................
20.01 - 30.00.......................................
30.01 - 40.00.......................................
40.01 - 50.00.......................................
50.01 - 60.00.......................................
60.01 - 70.00.......................................
70.01 - 80.00.......................................
80.01 - 90.00.......................................
90.01 - 100.00......................................
------------- ------------- -------------
Total.................................... $ %
============= ============== =============
</TABLE>
- ------------------
(1) Applies only to Home Equity Loans in the second lien position. The Second
Mortgage Ratios shown above are equal to, with respect to each Home Equity
Loan in the second lien position, the original principal balance of the
Home Equity Loan at the date of origination divided by the sum of (a) the
original principal balance of the Home Equity Loan at the date of
origination and (b) the remaining principal balance of the senior lien on
the related Mortgaged Property at the date of origination of the Home
Equity Loan.
S-27
<PAGE>
GROUP II HOME EQUITY LOANS
The following summary information with respect to the Group II Home
Equity Loans is as of the Statistical Calculation Date:
<TABLE>
<CAPTION>
SUMMARY STATISTICS RANGE (IF APPROPRIATE)
<S> <C> <C>
Avg. Outstanding Principal Balances $_________ $_________ to $___________
Wtd. Avg. Coupon Rate (approximate)(1) _____% ____% to _____%
Wtd. Avg. Gross Margin (approximate)(1) ____% ____% to _____%
Wtd. Avg. Maximum Rates (approximate)(1) _____% _____% to _____%
Wtd. Avg. Minimum Rates (approximate)(1) _____% ____% to %
Wtd. Avg. Provided Combined Loan-to-Value Ratio
(approximate) _____% _____% to _____%
Wtd. Avg. Remaining Term to Maturity (approximate) ___ months __ to ___ months
Wtd. Avg. Original Term to Maturity (approximate) ___ months __ to ___ months
Maximum Seasoning __ months
Ratio of First to Second Liens _______% / _____%
Maximum Original Principal Balance of Loans
Secured by First Liens
SINCLE-FAMILY PROPERTIES $
TWO-TO FOUR-FAMILY PROPERTIES $
Maximum Original Principal Balance of Loans
Secured by Second Liens
SINGLE-FAMILY PROPERTIES $
TWO-TO FOUR-FAMILY PROPERTIES $
Balloon Payments (as a percent of
the aggregate outstanding loan balance) %
Latest Maturity Date __/__/__
30 to 59 day Delinquencies (as a percent of
the aggregate outstanding loan balance)(2) %
Six-Month Adjustable Rate Loans (3)
PERCENTAGE OF AGGREGATE OUTSTANDING
PRINCIPAL GROUP II LOAN BALANCE %
WTD. AVG. REMAINING PERIOD T-
COUPON RATE ADJUSTMENT (APPROXIMATE) __ months
WTD. AVG. INITIAL INTEREST RATE ADJUSTMENT CAP
(APPROXIMATE)(4) %
WTD. AVG. SEMI-ANNUAL INTEREST RATE ADJUSTMENT CAP
(APPROXIMATE)(4) %
WTD. AVG. LIFETIME INTEREST RATE ADJUSTMENT CAP
(APPROXIMATE)(5) %
</TABLE>
S-28
<PAGE>
<TABLE>
<CAPTION>
SUMMARY STATISTICS RANGE (IF APPROPRIATE)
<S> <C> <C>
2/28 Adjustable Rate Loans (6)
WTD. AVG. REMAINING PERIOD TO
COUPON RATE ADJUSTMENT (APPROXIMATE) __ months
INITIAL INTEREST RATE ADJUSTMENT CAP (4) %
SEMI-ANNUAL INTEREST RATE ADJUSTMENT CAP (4) %
LIFETIME INTEREST RATE ADJUSTMENT CAP (5) %
</TABLE>
(1) The "Maximum Rates" or "Minimum Rates" are the highest and lowest rates,
respectively, at which interest may accrue on the Group II Home Equity Loans.
(2) Approximately ____% of the outstanding loan balance of the Group II Home
Equity Loans had first monthly payments due after ____________, ____, and it was
not possible for these loans to be __ days past due as of the Statistical
Calculation Date.
(3) "Six-Month Adjustable Rate Loans" have their first adjustment date six
months following their date of origination, and adjusts semiannually thereafter,
based on six-month LIBOR plus a margin, subject to certain limitations.
(4) Above the then current coupon rate.
(5) Above the initial coupon rate.
(7) "2/28 Adjustable Rate Loans" have their first adjustment date two years
after the date of origination, and adjusts semiannually thereafter, based on
six-month LIBOR plus a margin, subject to certain limitations.
Set forth below is approximate statistical information as of the Statistical
Calculation Date regarding the Group II Home Equity Loans. The sum of the
percentage columns in the following tables may not equal 100% due to rounding.
S-29
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP II HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% OF
STATISTICAL
STATISTICAL CALCULATION
NUMBER OF CALCULATION DATE LOAN
STATE HOME EQUITY LOANS DATE LOAN BALANCE BALANCE
- ----- ----------------- ----------------- -------
<S> <C> <C> <C>
Arizona........................................ $ %
Arkansas.......................................
California.....................................
Colorado.......................................
Connecticut....................................
Delaware.......................................
Florida........................................
Georgia........................................
Idaho..........................................
Illinois.......................................
Indiana........................................
Iowa...........................................
Kansas.........................................
Kentucky.......................................
Louisiana......................................
Maine..........................................
Maryland.......................................
Massachusetts..................................
Michigan.......................................
Minnesota......................................
Mississippi....................................
Missouri.......................................
Montana........................................
Nebraska.......................................
Nevada.........................................
New Hampshire..................................
New Jersey.....................................
New Mexico.....................................
New York.......................................
North Carolina.................................
Ohio...........................................
Oklahoma.......................................
Oregon.........................................
Pennsylvania...................................
Rhode Island...................................
South Carolina.................................
Tennessee......................................
Texas..........................................
Utah...........................................
Vermont........................................
Virginia.......................................
Washington.....................................
West Virginia..................................
Wisconsin......................................
Wyoming........................................
------------- ------------- ------
Total.......................................... $ 100.00%
============= ============== ======
</TABLE>
- ------------------
(1)Determined by property address designated in the related Mortgage.
S-30
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL % OF
CALCULATION STATISTICAL
NUMBER OF DATE LOAN CALCULATION
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE RATIOS (%) HOME EQUITY LOANS BALANCE DATE LOAN BALANCE
- --------------------------------------------------- ----------------- ------- -----------------
<S> <C> <C> <C>
Less than or equal to 50.00.................... $ %
50.01 - 55.00..................................
55.01 - 60.00..................................
60.01 - 65.00..................................
65.01 - 70.00..................................
70.01 - 75.00..................................
75.01 - 80.00..................................
80.01 - 85.00..................................
85.01 - 90.00..................................
90.01 - 95.00..................................
95.01 - 100.00.................................
------------- -------------- ------
Total.......................................... $ 100.00%
============= ============== ======
</TABLE>
STATISTICAL CALCULATION DATE LOAN BALANCES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF STATISTICAL STATISTICAL
HOME EQUITY CALCULATION CALCULATION
RANGE OF STATISTICAL CALCULATION DATE LOAN BALANCES LOAN BALANCES DATE LOAN BALANCE DATE LOAN BALANCE
- --------------------------------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - 50,000.00.......................... $ %
50,000.01 - 100,000.00.........................
100,000.01 - 150,000.00........................
150,000.01 - 200,000.00........................
200,000.01 - 250,000.00........................
250,000.01 - 300,000.00........................
300,000.01 - 350,000.00........................
350,000.01 - 400,000.00........................
------------- -------------- ------
Total.......................................... $ 100.00%
============= ============== ======
</TABLE>
TYPES OF MORTGAGED PROPERTIES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF HOME CALCULATION CALCULATION
PROPERTY TYPE EQUITY LOANS DATE LOAN BALANCE DATE LOAN BALANCE
- ------------- ------------ ----------------- -----------------
<S> <C> <C> <C>
Single Family.................................. $ %
PUD............................................
2-4 Family.....................................
Townhouses.....................................
Condominiums...................................
Manufactured Housing...........................
------------- -------------- ------
Total.......................................... $ 100.00%
============= ============== ======
</TABLE>
S-31
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
ORIGINAL TERM TO NUMBER OF HOME DATE LOAN DATE LOAN
DATE MATURITY (MONTHS) EQUITY LOANS BALANCE BALANCE
- ---------------------- ------------ ------- -------
<S> <C> <C> <C>
120............................................. $ %
180.............................................
240.............................................
360.............................................
------------- -------------- ------
Total........................................... $ 100.00%
============= ============== ======
</TABLE>
SEASONING OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
SEASONING (MONTHS) EQUITY LOANS BALANCE BALANCE
- ------------------ ------------ ------- -------
<S> <C> <C> <C>
0............................................... $ %
1 - 6...........................................
7 - 12..........................................
13 and over.....................................
------------- -------------- ------
Total.................................. $ 100.00%
============= ============== ======
</TABLE>
REMAINING TERM TO MATURITY OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
REMAINING TERM TO MATURITY (MONTHS) EQUITY LOANS BALANCE BALANCE
- ----------------------------------- ------------ ------- -------
<S> <C> <C> <C>
61 - 120........................................ $ %
121 - 180.......................................
181 - 240.......................................
301 - 360.......................................
------------- -------------- ------
Total........................................... $ 100.00%
============= ============== ======
</TABLE>
OCCUPANCY STATUS OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
OCCUPANCY STATUS EQUITY LOANS BALANCE BALANCE
- ---------------- ------------ ------- -------
<S> <C> <C> <C>
Owner Occupied (Primary)........................ $ %
Investment Property.............................
Second Home.....................................
------------- -------------- ------
Total........................................... $ 100.00%
============= ============== ======
</TABLE>
S-32
<PAGE>
DOCUMENTATION TYPE OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
DOCUMENTATION TYPE (1) EQUITY LOANS BALANCE BALANCE
- ---------------------- ------------ ------- -------
<S> <C> <C> <C>
Full Documentation............................. $ %
Stated Income..................................
Limited Documentation..........................
------------- -------------- ------
Total.......................................... $ 100.00%
============= ============== ======
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the Prospectus for a description of
CHEC's documentation programs.
CREDIT GRADE OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
CREDIT GRADE (1) EQUITY LOANS BALANCE BALANCE
- ---------------- ------------ ------- -------
<S> <C> <C> <C>
A+.............................................. $ %
A1..............................................
A2.............................................
B..............................................
C1.............................................
C2.............................................
D..............................................
------------- -------------- ------
Total.......................................... $ 100.00%
============= ============== ======
</TABLE>
- ------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the Prospectus for a description of CHEC's credit grades and
underwriting criteria.
S-33
<PAGE>
CURRENT COUPON RATES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF CURRENT COUPON RATES (%) LOAN BALANCES BALANCE BALANCE
- --------------------------------- ------------- ------- -------
<S> <C> <C> <C>
6.501 - 7.000................................... $ %
7.501 - 8.000...................................
8.001 - 8.500...................................
8.501 - 9.000...................................
9.001 - 9.500...................................
9.501 - 10.000..................................
10.001 - 10.500.................................
10.501 - 11.000.................................
11.001 - 11.500.................................
11.501 - 12.000.................................
12.001 - 12.500.................................
12.501 - 13.000.................................
13.001 - 13.500.................................
13.501 - 14.000.................................
14.001 - 14.500.................................
14.501 - 15.000.................................
15.001 - 15.500.................................
------------- -------------- ------
Total........................................... $ 100.00%
============= ============== ======
</TABLE>
GROSS MARGINS OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
RANGE OF GROSS COUPON RATES (%) EQUITY LOANS BALANCE BALANCE
- ------------------------------- ------------ ------- -------
<S> <C> <C> <C>
2.001 - 4.000................................... $ %
4.001 - 6.000...................................
6.001 - 8.000...................................
8.001 - 10.000..................................
10.001 - 12.000.................................
------------- -------------- ------
Total........................................... $ 100.00%
============= ============== ======
</TABLE>
S-34
<PAGE>
MAXIMUM RATES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
RANGE OF MAXIMUM RATES (%) EQUITY LOANS BALANCES BALANCE
- -------------------------- ------------ -------- -------
<S> <C> <C> <C>
13.501 - 14.000................................. $ %
14.501 - 15.000.................................
15.001 - 15.500.................................
15.501 - 16.000.................................
16.001 - 16.500.................................
16.501 - 17.000.................................
17.001 - 17.500.................................
17.501 - 18.000.................................
18.001 - 18.500.................................
18.501 - 19.000.................................
19.001 - 19.500.................................
19.501 - 20.000.................................
20.001 - 20.500.................................
20.501 - 21.000.................................
21.001 - 21.500.................................
21.501 - 22.000.................................
22.001 - 22.500.................................
------------- -------------- ------
Total........................................... $ 100.00%
============= ============== ======
</TABLE>
NEXT INTEREST ADJUSTMENT DATE OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF HOME DATE LOAN DATE LOAN
NEXT INTEREST ADJUSTMENT DATE EQUITY LOANS BALANCE BALANCE
- ----------------------------- ------------ ------- -------
<S> <C> <C> <C>
October 1999.................................... $ %
November 1999...................................
December 1999...................................
January 2000....................................
February 2000...................................
June 2000 ......................................
July 2000.......................................
February 2001...................................
April 2001......................................
May 2001........................................
June 2001.......................................
July 2001.......................................
August 2001.....................................
------------- -------------- ------
Total........................................... $ 100.00%
============= ============== ======
</TABLE>
S-35
<PAGE>
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth the CHEC's delinquency experience with
respect to home equity loans similar in type to the Home Equity Loans as of the
last day of each of the months indicated. No home equity loan is considered
delinquent for purposes of the table until a payment is one calendar month past
due on a contractual basis. It should be noted that CHEC commenced its servicing
activities of home equity loans similar to the Home Equity Loans in October
1997. Accordingly, CHEC does not have significant historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
examining the delinquency experience of home equity loans similar to the Home
Equity Loans. The delinquency and loss percentages may be affected by the size
and relative lack of seasoning of the servicing portfolio which increased from
approximately $_________ at September 30, ____ to approximately $____________ at
September 30, ____. CHEC believes that as the existing loan portfolio becomes
more seasoned, the rate of delinquencies, loan losses, foreclosures and REO
Properties will increase. Accordingly, the information in the table below is for
illustrative purposes only and is not intended to indicate or predict the
expected delinquency experience on past, current or future pools of home equity
loans for which CHEC is the servicer.
S-36
<PAGE>
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF _________, ____ AS OF ________,____
--------------------- -------------------
BY NUMBER BY DOLLAR BY NUMBER BY DOLLAR
OF LOANS AMOUNT ($) OF LOANS AMOUNT ($)
<S> <C> <C> <C> <C>
Portfolio(1)...............................
Delinquency Percentage
30-59 days.......................... % % % %
60-89 days..........................
90 days and over....................
----- ----- ----- -----
Total Delinquency Percentage(2)............ % % % %
----- ----- ----- -----
Percentage of REO Properties............... % % % %
----- ----- ----- -----
</TABLE>
- ------------------
(1) Portfolio includes all loans originated after ____________ other than some
mortgage loan products originated for whole loan sales or retention by CHEC
or one of its affiliates.
(2) Excludes REO Properties.
S-37
<PAGE>
The following table sets forth the CHEC's loss experience with respect to home
equity loans similar in type to the Home Equity Loans for the periods indicated.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDING
-------- --, ---- ------ --, ----
DOLLAR DOLLAR
AMOUNT ($) AMOUNT ($)
---------- ----------
<S> <C> <C>
Average Portfolio(1)..........................................
Gross Losses(2)...............................................
Recoveries(3).................................................
Net Losses(4).................................................
Net Losses as a Percentage of Average Portfolio(5)............ % %
</TABLE>
- ------------------
(1) "Average Portfolio" during the period is the arithmetic average of the
principal balances of the loans outstanding on the last day of each month
during the period. Portfolio includes all loans originated after October
1997 other than some mortgage loan products originated for whole loan sales
or retention by CHEC or one of its affiliates.
(2) "Gross Losses" for each respective period are actual losses incurred on
liquidated properties or losses from the write-off of loans where the
properties were not liquidated. Losses include all principal, foreclosure
costs and all accrued interest.
(3) "Recoveries" are recoveries from deficiency judgments. (4) "Net Losses"
means "Gross Losses" minus "Recoveries".
(5) For the 6 months ending _________ __, ____, "Net Losses as a Percentage of
Average Portfolio" was annualized by multiplying "Net Losses" by 2 before
calculating the percentage of "Average Portfolio".
S-38
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on each Class of Class A Certificates,
the aggregate amount of distributions on the Class A Certificates and the yield
to maturity of the Class A Certificates will be related to the rate and timing
of payments of principal on the Home Equity Loans. The rate of principal
payments on the Home Equity Loans will in turn be affected by the amortization
schedules of the Home Equity Loans, by the rate of principal prepayments
(including for this purpose prepayments resulting from refinancing or
liquidations of the Home Equity Loans due to defaults, casualties, condemnations
and repurchases by CHEC ("Prepayments") and realized losses on the Home Equity
Loans. Certain of the Home Equity Loans may be prepaid by the mortgagors at any
time without penalty. Certain of the Home Equity Loans are subject to penalties
for prepayments.
PREPAYMENTS
Prepayments, liquidations and purchases of the Home Equity Loans
(including any optional purchase by the Servicer of a delinquent Home Equity
Loan and any prepayments resulting from the Servicer's exercise of its cleanup
call option in connection with the termination of the Trust) will result in
distributions on the Class A Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Home Equity Loans.
Since the rate of payment of principal of the Home Equity Loans will depend on
future events and a variety of factors, no assurance can be given as to the rate
or the rate of principal prepayments. The extent to which the yield to maturity
of a Class A Certificate may vary from the anticipated yield will depend upon
the degree to which a Certificate is purchased at a discount or premium, and the
degree to which the timing of payments on the Certificate is sensitive to
prepayments, liquidations and purchases of the Home Equity Loans.
The rate of prepayment on the Home Equity Loans cannot be predicted. As
of the Statistical Calculation Date, approximately _____% of the Group I Home
Equity Loans and approximately _____% of the Group II Home Equity Loans may be
prepaid in whole or in part at any time without penalty. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the Home
Equity Loans may experience a higher rate of prepayment than traditional
mortgage loans. The prepayment experience of the Trust with respect to the Home
Equity Loans may be affected by a wide variety of factors, including economic
conditions, prevailing interest rate levels, the availability of alternative
financing and homeowner mobility and changes affecting the deductibility for
Federal income tax purposes of interest payments on home equity loans. All of
the Home Equity Loans will contain "due-on-sale" provisions, and the Servicer is
required by the Agreement to enforce the provisions, unless the enforcement is
not permitted by applicable law or the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Home Equity Loan. The enforcement of a "due-on-sale"
provision will have the same effect as a prepayment of the related Home Equity
Loan. The rate of prepayment of the Home Equity Loans may also be affected by
the extent to which the Home Equity Loans provide for the payment of a penalty
in connection with a prepayment and the amount of the penalties.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE HOME EQUITY
LOANS--DUE-ON-SALE CLAUSES IN HOME EQUITY LOANS" IN THE PROSPECTUS FOR MORE
DETAIL.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates, including the Group I Home Equity
Loans, is affected by prevailing market rates for home equity loans of a
comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
home equity loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. The prepayment
behavior of the 2/28 Adjustable Rate Loans may differ from that of the other
Home Equity Loans. As a 2/28 Adjustable Rate Loan approaches its initial
adjustment date, the borrower may become more likely to refinance the loan to
avoid an increase in the Coupon Rate, even if fixed-rate loans are only
available at rates that are slightly lower or higher than the Coupon Rate before
adjustment. The existence of the applicable periodic rate cap, lifetime cap and
lifetime floor also may affect the
S-39
<PAGE>
likelihood of prepayments resulting from refinancings. As is the case with
conventional fixed-rate home equity loans, adjustable-rate home equity loans may
be subject to a greater rate of principal prepayments in a declining interest
rate environment. For example, if prevailing interest rates fall significantly,
adjustable-rate home equity loans could be subject to higher prepayment rates
than if prevailing interest rates remain constant because the availability of
fixed-rate home equity loans at competitive rates may encourage mortgagors to
refinance their adjustable-rate home equity loans to "lock in" a lower fixed
interest rate. However, no assurance can be given as to the level of prepayments
that the Home Equity Loans will experience.
Net Monthly Excess Cash Flow (as defined in "DESCRIPTION OF
CERTIFICATES--Glossary" below) for the Home Equity Loans in the applicable Home
Equity Loan Group will be distributed in reduction of the Class Principal
Balance of the related class or classes of Class A Certificates then entitled to
distributions of principal on each Distribution Date to the extent that the then
required overcollateralization amount for the Home Equity Loans in the Home
Equity Loan Group exceeds the actual overcollateralization amount for the Home
Equity Loan Group. If purchased at a premium or a discount, the yield to
maturity on a Class A Certificate will be affected by the rate at which the Net
Monthly Excess Cash Flow for the Home Equity Loans in the related Home Equity
Loan Group is distributed in reduction of the applicable Class Principal
Balance. If the actual rate of the Net Monthly Excess Cash Flow distribution is
slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to the investor will be lower than
the investor's anticipated yield. If the actual rate of the Net Monthly Excess
Cash Flow distribution is faster than the rate anticipated by an investor who
purchases a Class A Certificate at a premium, the actual yield to the investor
will be lower than the investor's anticipated yield. The amount of Net Monthly
Excess Cash Flow available for distribution on any Distribution Date will be
affected by the actual amount of interest received, advanced, collected or
recovered in respect of the Home Equity Loans during the related Due Period and
the amount will be influenced by changes in the weighted average of the Coupon
Rates of the Home Equity Loans resulting from prepayments and liquidations. The
amount of Net Monthly Excess Cash Flow distributions applied in reduction of the
Class Principal Balance of the applicable Class A Certificates on each
Distribution Date will be based on the then required overcollateralization
amount for the related Home Equity Loan Group, which may increase or decrease
during the period any class of Class A Certificates which remains outstanding.
Any increase in the required overcollateralization amount for a Home Equity Loan
Group may result in an accelerated rate of amortization of the related Class A
Certificates until the overcollateralization amount for the related Home Equity
Loan Group equals the required overcollateralization amount for the related Home
Equity Loan Group and any decrease in the required overcollateralization amount
for the related Home Equity Loan Group will result in a decelerated rate of
amortization of the related Class A Certificates until the overcollateralization
amount for the related Home Equity Loan Group is reduced to the required
overcollateralization amount.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CREDIT ENHANCEMENT"
IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
PAYMENT DELAY FEATURE OF THE FIXED RATE CERTIFICATES
The effective yield to the Class A-1 Certificateholders, the Class A-2
Certificateholders, the Class A-3 Certificateholders, the Class A-4
Certificateholders, the Class A-5 Certificateholders and the Class A-6
Certificateholders will be lower than the yield otherwise produced by the
applicable Certificate Rate and the purchase price of the Certificates because
distributions will not be payable to the Certificateholders until the
Distribution Date following the month of accrual (without any additional
distribution of interest or earnings on the Certificates in respect of the
delay).
PRINCIPAL PAYMENT FEATURES OF THE CLASS A-6 CERTIFICATES
Investors in the Class A-6 Certificates should be aware that because
the Class A-6 Certificates do not receive any portion of principal payments
prior to the Distribution Date occurring in ____________, thereafter, they will
receivean increasing percentage of their pro rata share of prinicpal payable to
the Group I Certificates based on a schedule. This percentage will, after
_____________, exceed ___% of their pro rata share of principal. As a result,
the weighted average life of the Class A-6 Certificates may be longer or shorter
than
S-40
<PAGE>
would otherwise be the case, and the effect on the market value of the Class A-6
Certificates of changes in market interest rates or market yields for similar
securities may be greater or lesser than for other classes of Class A
Certificates entitled to the distributions.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will
increase the yield on Class A Certificates purchased at a price less than par
and will decrease the yield on Class A Certificates purchased at a price greater
than par. The effect on an investor's yield due to principal prepayments on the
Home Equity Loans in the related Home Equity Loan Group occurring at a rate that
is faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Certificates will not be entirely
offset by a subsequent like reduction (or increase) in the rate of principal
payments. The weighted average life of the Class A Certificates will also be
affected by the amount and timing of delinquencies and defaults on the Home
Equity Loans in the related Home Equity Loan Group and the recoveries, if any,
on defaulted Home Equity Loans in the related Home Equity Loan Group and
foreclosed properties.
The "weighted average life" of a Certificate refers to the average
amount of time that will elapse from the date of issuance to the date each
dollar in respect of principal of the Certificate is repaid. The weighted
average life of any class of the Class A Certificates will be influenced by,
among other factors, the rate at which principal payments are made on the Home
Equity Loans, including final payments made upon the maturity of Home Equity
Loans for which the related monthly payments are insufficient to fully amortize
the Home Equity Loans ("Balloon Loans").
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Group I
Certificates is the prepayment assumption (the "Prepayment Assumption"). A 100%
Prepayment Assumption assumes constant prepayment rates ("CPR") of 4% per annum
of the then outstanding principal balance of the Group I Home Equity Loans in
the first month of the life of the Home Equity Loans and an additional 1.455%
(precisely 16/11%) per annum in each month thereafter until the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life of
the Home Equity Loans, a 100% Prepayment Assumption assumes a CPR of 20% per
annum of the outstanding principal balance of the Group I Home Equity Loans each
month. The model used with respect to the Group II Certificates is CPR, which is
a prepayment assumption that represents a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of home
equity loans for the life of the home equity loans. Neither model purports to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of home equity loans, including the
Home Equity Loans to be included in the Trust.
Since the following tables were prepared on the basis of the
assumptions in the following paragraph, there are discrepancies between
characteristics of the actual Home Equity Loans and the characteristics of the
Home Equity Loans assumed in preparing the tables. Any discrepancy may have an
effect upon the percentages of the Class Principal Balances outstanding and
weighted average lives of the Class A Certificates set forth in the tables. In
addition, since the actual Home Equity Loans in the Trust have characteristics
which differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Class A Certificates may be made earlier or
later than as indicated in the tables.
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the Home Equity Loans and the
following additional assumptions (collectively, the "Structuring Assumptions"):
- the Home Equity Loans consist of pools of loans with the
amortization characteristics set forth below,
- the Closing Date for the Class A Certificates is __________ __,
____,
S-41
<PAGE>
- distributions on the Class A Certificates are made on the __ day
of each month regardless of the day on which the
- Distribution Date actually occurs, commencing in ___________ and
are made in accordance with the priorities described in this
Prospectus Supplement, the scheduled monthly payments of principal
and interest on the Home Equity Loans will be timely delivered on
the first day of each month (with no defaults, delinquencies,
modifications, waivers or amendments),
- certain assumed Home Equity Loans identified in the tables below
will receive no payments in the first month,
- the Home Equity Loans prepay at the specified percentages of the
Prepayment Assumption in the case of the Group I Home Equity
Loans, or at the specified percentages of CPR, in the case of the
Group II Home Equity Loans,
- all prepayments are prepayments in full received on the last day
of each month and include 30 days' interest thereon,
- the optional termination is not exercised (except as noted in
footnote 2 on the following tables),
- the Class A Certificates of each Class have the respective
Certificate Rates and initial Class Principal Balances as set
forth in this Prospectus Supplement (with the Certificate Rate for
the Class A-7 Certificates being equal to the sum of One-Month
LIBOR and 0.35% per annum),
- the overcollateralization levels are set initially as specified in
the Agreement, and thereafter decrease in accordance with the
provisions of the Agreement (as defined in this Prospectus
Supplement),
- the Coupon Rate for each Group II Home Equity Loan is adjusted on
its next adjustment date and on subsequent adjustment dates which
occur on six month intervals following the initial adjustment date
to equal the sum of the applicable gross margin and Six-Month
LIBOR (the sum being subject to the applicable periodic rate
adjustment caps and floors and lifetime rate caps and floors), and
- Six-Month LIBOR remains constant at _______% per annum and
One-Month LIBOR remains constant at ______% per annum.
S-42
<PAGE>
GROUP I
<TABLE>
<CAPTION>
REMAINING ORIGINAL AMORTIZED
TERM TO TERM TO REMAINING
POOL LOAN COUPON MATURITY MATURITY TERM DELAY
NUMBER BALANCE RATE (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS)
- ------ ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1.............................. $
2..............................
3..............................
4..............................
5..............................
6..............................
7..............................
8..............................
9..............................
10.............................
11.............................
</TABLE>
GROUP II
<TABLE>
<CAPTION>
NUMBER
OF
MONTHS INITIAL
TO NEXT INTEREST INTEREST
COUPON GROSS RATE RATE MAXIMUM
POOL LOAN COUPON CHANGE MARGIN ADJUSTMENT ADJUSTMENT RATE
NUMBER BALANCE RATE (%) DATE (%) CAP (%) CAP (%) (%)
- ------ ------- -------- ---- --- ------- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
1 $
2
3
4
5
6
7
</TABLE>
<TABLE>
<CAPTION>
INTEREST
REMAINING ORIGINAL RATE
TERM TO TERM TO CHARGE
POOL MINIMUM MATURITY MATURITY FREQUENCY DELAY
NUMBER RATE (%) (MONTHS) (MONTHS) INDEX (MONTHS) (MONTHS)
- ------ -------- -------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1 22
2 23
3 24
4 5
5 6
6 25
7 7
</TABLE>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions,
the percentages of the initial Class Principal Balance of the Class A
Certificates that would be outstanding after each of the dates shown, based on
the indicated percentages of the Prepayment Assumption, in the case of the Group
I Certificates and at the indicated percentages of CPR, in the case of the Group
II Certificates, and the corresponding weighted average lives of the Classes. It
is not likely that
- all of the Home Equity Loans will have the characteristics
assumed,
- the Home Equity Loans will prepay at the specified percentages of
the Prepayment Assumption or CPR or at any other constant
percentage, or
- the level of One-Month LIBOR will remain constant at the level
assumed or at any other level.
Moreover, the diverse remaining terms to maturity of the Home Equity Loans could
produce slower or faster principal distributions than indicated in the tables at
the specified percentages of the Prepayment Assumption or CPR even if the
weighted average remaining term to maturity of the Home Equity Loans is
consistent with the remaining terms to maturity of the Home Equity Loans
specified in the Structuring Assumptions.
S-43
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-1
GROUP I PREPAYMENT
ASSUMPTION
DISTRIBUTION DATE 50% 75% 100% 120% 150% 200% 250%
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100% 100% 100%
[December 25, 2000]..............................
[December 25, 2001]..............................
[December 25, 2002]..............................
[December 25, 2003]..............................
[December 25, 2004]..............................
[December 25, 2005]..............................
[December 25, 2006]..............................
[December 25, 2007]..............................
[December 25, 2008]..............................
[December 25, 2009]..............................
[December 25, 2010]..............................
[December 25, 2011]..............................
[December 25, 2012]..............................
[December 25, 2013]..............................
[December 25, 2014]..............................
[December 25, 2015]..............................
[December 25, 2016]..............................
[December 25, 2017]..............................
[December 25, 2018]..............................
[December 25, 2019]..............................
[December 25, 2020]..............................
[December 25, 2021]..............................
[December 25, 2022]..............................
[December 25, 2023]..............................
[December 25, 2024]..............................
[December 25, 2025]..............................
[December 25, 2026]..............................
[December 25, 2027]..............................
[December 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- ------------------
* The weighted average life of a Class A Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Class Principal Balance by the number of years from the date of issuance of
the Class A Certificate to the related Distribution Date, (2) adding the
results, and (3) dividing the sum by the original Class Principal Balance
of the Class A Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Class A Certificates
being reduced to less than 10% of the aggregate outstanding principal
balance of the Class A Certificates on the Closing Date.
S-44
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-2
GROUP I PREPAYMENT
ASSUMPTION
DISTRIBUTION DATE 50% 75% 100% 120% 150% 200% 250%
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100% 100% 100%
[December 25, 2000]..............................
[December 25, 2001]..............................
[December 25, 2002]..............................
[December 25, 2003]..............................
[December 25, 2004]..............................
[December 25, 2005]..............................
[December 25, 2006]..............................
[December 25, 2007]..............................
[December 25, 2008]..............................
[December 25, 2009]..............................
[December 25, 2010]..............................
[December 25, 2011]..............................
[December 25, 2012]..............................
[December 25, 2013]..............................
[December 25, 2014]..............................
[December 25, 2015]..............................
[December 25, 2016]..............................
[December 25, 2017]..............................
[December 25, 2018]..............................
[December 25, 2019]..............................
[December 25, 2020]..............................
[December 25, 2021]..............................
[December 25, 2022]..............................
[December 25, 2023]..............................
[December 25, 2024]..............................
[December 25, 2025]..............................
[December 25, 2026]..............................
[December 25, 2027]..............................
[December 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- ------------------
* The weighted average life of a Class A Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Class Principal Balance by the number of years from the date of issuance of
the Class A Certificate to the related Distribution Date, (2) adding the
results, and (3) dividing the sum by the original Class Principal Balance
of the Class A Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Class A Certificates
being reduced to less than 10% of the aggregate outstanding principal
balance of the Class A Certificates on the Closing Date.
S-45
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-3
GROUP I PREPAYMENT
ASSUMPTION
DISTRIBUTION DATE 50% 75% 100% 120% 150% 200% 250%
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100% 100% 100%
[December 25, 2000]..............................
[December 25, 2001]..............................
[December 25, 2002]..............................
[December 25, 2003]..............................
[December 25, 2004]..............................
[December 25, 2005]..............................
[December 25, 2006]..............................
[December 25, 2007]..............................
[December 25, 2008]..............................
[December 25, 2009]..............................
[December 25, 2010]..............................
[December 25, 2011]..............................
[December 25, 2012]..............................
[December 25, 2013]..............................
[December 25, 2014]..............................
[December 25, 2015]..............................
[December 25, 2016]..............................
[December 25, 2017]..............................
[December 25, 2018]..............................
[December 25, 2019]..............................
[December 25, 2020]..............................
[December 25, 2021]..............................
[December 25, 2022]..............................
[December 25, 2023]..............................
[December 25, 2024]..............................
[December 25, 2025]..............................
[December 25, 2026]..............................
[December 25, 2027]..............................
[December 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- ------------------
* The weighted average life of a Class A Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Class Principal Balance by the number of years from the date of issuance of
the Class A Certificate to the related Distribution Date, (2) adding the
results, and (3) dividing the sum by the original Class Principal Balance
of the Class A Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Class A Certificatest
being reduced to less than 10% of the aggregate outstanding principal
balance of the Class A Certificates on the Closing Date.
S-46
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-4
GROUP I PREPAYMENT
ASSUMPTION
DISTRIBUTION DATE 50% 75% 100% 120% 150% 200% 250%
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100% 100% 100%
[December 25, 2000]..............................
[December 25, 2001]..............................
[December 25, 2002]..............................
[December 25, 2003]..............................
[December 25, 2004]..............................
[December 25, 2005]..............................
[December 25, 2006]..............................
[December 25, 2007]..............................
[December 25, 2008]..............................
[December 25, 2009]..............................
[December 25, 2010]..............................
[December 25, 2011]..............................
[December 25, 2012]..............................
[December 25, 2013]..............................
[December 25, 2014]..............................
[December 25, 2015]..............................
[December 25, 2016]..............................
[December 25, 2017]..............................
[December 25, 2018]..............................
[December 25, 2019]..............................
[December 25, 2020]..............................
[December 25, 2021]..............................
[December 25, 2022]..............................
[December 25, 2023]..............................
[December 25, 2024]..............................
[December 25, 2025]..............................
[December 25, 2026]..............................
[December 25, 2027]..............................
[December 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- ------------------
* The weighted average life of a Class A Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Class Principal Balance by the number of years from the date of issuance of
the Class A Certificate to the related Distribution Date, (2) adding the
results, and (3) dividing the sum by the original Class Principal Balance
of the Class A Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Class A Certificates
being reduced to less than 10% of the aggregate outstanding principal
balance of the Class A Certificates on the Closing Date.
S-47
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-5
GROUP I PREPAYMENT
ASSUMPTION
DISTRIBUTION DATE 50% 75% 100% 120% 150% 200% 250%
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100% 100% 100%
[December 25, 2000]..............................
[December 25, 2001]..............................
[December 25, 2002]..............................
[December 25, 2003]..............................
[December 25, 2004]..............................
[December 25, 2005]..............................
[December 25, 2006]..............................
[December 25, 2007]..............................
[December 25, 2008]..............................
[December 25, 2009]..............................
[December 25, 2010]..............................
[December 25, 2011]..............................
[December 25, 2012]..............................
[December 25, 2013]..............................
[December 25, 2014]..............................
[December 25, 2015]..............................
[December 25, 2016]..............................
[December 25, 2017]..............................
[December 25, 2018]..............................
[December 25, 2019]..............................
[December 25, 2020]..............................
[December 25, 2021]..............................
[December 25, 2022...............................
[December 25, 2023]..............................
[December 25, 2024]..............................
[December 25, 2025]..............................
[December 25, 2026]..............................
[December 25, 2027]..............................
[December 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- ------------------
* The weighted average life of a Class A Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Class Principal Balance by the number of years from the date of issuance of
the Class A Certificate to the related Distribution Date, (2) adding the
results, and (3) dividing the sum by the original Class Principal Balance
of the Class A Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Class A Certificates being
reduced to less than 10% of the aggregate outstanding principal balance of the
Class A Certificates on the Closing Date.
S-48
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-6
GROUP I PREPAYMENT
ASSUMPTION
DISTRIBUTION DATE 50% 75% 100% 120% 150% 200% 250%
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100% 100% 100%
[December 25, 2000]..............................
[December 25, 2001]..............................
[December 25, 2002]..............................
[December 25, 2003]..............................
[December 25, 2004]..............................
[December 25, 2005]..............................
[December 25, 2006]..............................
[December 25, 2007]..............................
[December 25, 2008]..............................
[December 25, 2009]..............................
[December 25, 2010]..............................
[December 25, 2011]..............................
[December 25, 2012]..............................
[December 25, 2013]..............................
[December 25, 2014]..............................
[December 25, 2015]..............................
[December 25, 2016]..............................
[December 25, 2017]..............................
[December 25, 2018]..............................
[December 25, 2019]..............................
[December 25, 2020]..............................
[December 25, 2021]..............................
[December 25, 2022]..............................
[December 25, 2023]..............................
[December 25, 2024]..............................
[December 25, 2025]..............................
[December 25, 2026]..............................
[December 25, 2027]..............................
[December 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- ------------------
* The weighted average life of a Class A Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Class Principal Balance by the number of years from the date of issuance of
the Class A Certificate to the related Distribution Date, (2) adding the
results, and (3) dividing the sum by the original Class Principal Balance
of the Class A Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Class A Certificates being
reduced to less than 10% of the aggregate outstanding principal balance of the
Class A Certificates on the Closing Date.
S-49
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-7
GROUP II % OF CPR
DISTRIBUTION DATE 11.0% 16.5% 22.0% 28.0% 33.0% 44.0% 55.0%
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100% 100% 100%
[December 25, 2000]..............................
[December 25, 2001]..............................
[December 25, 2002]..............................
[December 25, 2003]..............................
[December 25, 2004]..............................
[December 25, 2005]..............................
[December 25, 2006]..............................
[December 25, 2007]..............................
[December 25, 2008]..............................
[December 25, 2009]..............................
[December 25, 2010]..............................
[December 25, 2011]..............................
[December 25, 2012]..............................
[December 25, 2013]..............................
[December 25, 2014]..............................
[December 25, 2015]..............................
[December 25, 2016]..............................
[December 25, 2017]..............................
[December 25, 2018]..............................
[December 25, 2019...............................
[December 25, 2020]..............................
[December 25, 2021]..............................
[December 25, 2022]..............................
[December 25, 2023]..............................
[December 25, 2024]..............................
[December 25, 2025]..............................
[December 25, 2026]..............................
[December 25, 2027]..............................
[December 25, 2028]..............................
Weighted Average Life * (1)......................
Weighted Average Life * (2)......................
</TABLE>
- ------------------
* The weighted average life of a Class A Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Class Principal Balance by the number of years from the date of issuance of
the Class A Certificate to the related Distribution Date, (2) adding the
results, and (3) dividing the sum by the original Class Principal Balance
of the Class A Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Class A Certificates
being reduced to less than 10% of the aggregate outstanding principal
balance of the Class A Certificates on the Closing Date.
The above tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Home Equity Loans, which differ from the actual characteristics and performance
of the Home Equity Loans) and should be read in conjunction with those
assumptions.
S-50
<PAGE>
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement (the "Agreement") dated as of _________ __, ____ among the
Depositor, CHEC and ___________, as sellers, CHEC as servicer (in this capacity,
the "Servicer") and ____________ as trustee (the "Trustee"). On the Closing
Date, the Sellers will transfer without recourse the Home Equity Loans to the
Depositor and the Depositor will convey without recourse the Home Equity Loans
to the Trust and the Trust will issue the Class A Certificates, the Class X-IO
Certificates and the Class R Certificates at the direction of the Depositor.
The property of the Trust will include all
(a) the Home Equity Loans together with the related Home Equity Loan
documents and the each Seller's interest in any Mortgaged Property
which secures a Home Equity Loan and all payments on each Home
Equity Loan on or after the opening of business on _________ __,
____ (the "Cut-Off Date") and proceeds of the conversion,
voluntary or involuntary, of the foregoing,
(b) the amounts as may be held by the Trustee in the Certificate
Account and any other accounts held by the Trustee for the Trust
together with investment earnings on the amounts and the amounts
as may be held by the Servicer in the Principal and Interest
Account, if any, inclusive of investment earnings on those amounts
whether in the form of cash, instruments, securities or other
properties and
(c) proceeds of all the foregoing (including, but not by way of
limitation, all proceeds of any mortgage insurance, hazard
insurance and title insurance policy relating to the Home Equity
Loans, cash proceeds, accounts, accounts receivable, notes,
drafts, acceptances, chattel paper, checks, deposit accounts,
rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or
part of or are included in the proceeds of any of the foregoing)
to pay the Certificates as specified in the Agreement
(collectively, the "Trust Estate").
As described in the Agreement, the Trustee and the Servicer shall each receive
specified investment earnings on amounts on deposit in the Certificate Account
as additional compensation and the Servicer shall receive any investment
earnings on amounts on deposit in the Principal and Interest Account. In
addition to the foregoing, the Depositor shall cause the Certificate Insurer to
deliver two irrevocable and unconditional certificate guaranty insurance
policies, one with respect to the Group I Certificates and one with respect to
the Group II Certificates, (the "Policies") to the Trustee for the benefit of
the Owners of the Class A Certificates.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Sellers, the Servicer, the Trustee or any of their affiliates. Specified
distributions due to the Owners of the Class A Certificates are insured by the
Certificate Insurer.
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Certificates and distributing payments on the Certificates. The
Trust will not acquire any receivables or assets other than the Home Equity
Loans and their proceeds and rights appurtenant to them. To the extent that
borrowers make scheduled payments under the Home Equity Loans, the Trust will
have sufficient liquidity to make distributions on the Certificates. As the
Trust does not have any operating history and will not engage in any business
activity other than issuing the Certificates and making distributions on the
Certificates, there has not been included any historical or pro forma ratio of
earnings to fixed charges with respect to the Trust.
DESCRIPTION OF THE CERTIFICATES
Pursuant to the Agreement the Trust will issue on the Closing Date the
Centex Home Equity Loan Asset-Backed Certificates, Series ____-_, Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates,
S-51
<PAGE>
Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and Class
A-7 Certificates, (collectively referred to as the "Offered Certificates"). The
Trust will also issue on the Closing Date Class X-IO Certificates (the "Class
X-IO Certificates") and two residual classes of certificates (together, the
"Class R Certificates," and together with the Class X-IO Certificates, the
"Non-Offered Certificates" and together with the Class A Certificates, the
"Certificates"). Only the Class A Certificates are being offered pursuant to
this Prospectus Supplement. The Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates and Class
A-6 Certificates are sometimes referred to as the "Fixed Rate Certificates" or
the "Group I Certificates" The Class A-7 Certificates are sometimes referred to
as the "Variable Rate Certificates" or the "Group II Certificates". The form of
the Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus Supplement and the Prospectus is a part. The following
summaries describe important provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, the sections or
defined terms are incorporated in this Prospectus Supplement by reference.
The Class A Certificates will be issued in denominations of $1,000 and multiples
of $1 in excess of $1,000 and will evidence specified undivided interests in the
Trust. Definitive Certificates (as defined below) will be transferable and
exchangeable at the corporate trust office of the Trustee, which will initially
act as Certificate Registrar.
WE REFER YOU TO "--BOOK-ENTRY CERTIFICATES" BELOW FOR MORE DETAIL.
No service charge will be made for any registration of exchange or
transfer of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge.
The Group I Certificates will receive distributions primarily based
upon collections on the Home Equity Loans in Group I. The Group II Certificates
will receive distributions primarily based upon collections on the Home Equity
Loans in Group II.
The principal amount of a Class of Class A Certificates (each, a "Class
Principal Balance") on any Distribution Date is equal to the applicable Class
Principal Balance on the Closing Date minus the aggregate of amounts actually
distributed as principal to the holders of the class of Class A Certificates;
provided, however, that for purposes of the Certificate Insurer's rights as
subrogee, the Class Principal Balance shall not be reduced by principal amounts
paid under the Policies. On any date, the "Aggregate Class A Principal Balance"
is the aggregate of the Class Principal Balances of all Class A Certificates on
the date.
Each Class of Class A Certificates represents the right to receive
payments of interest at the for the Class and payments of principal as described
below.
The Person in whose name a Certificate is registered in the Certificate
Register is referred to in this Prospectus Supplement as a "Certificateholder."
BOOK-ENTRY CERTIFICATES
The Class A Certificates initially will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Class A Certificates ("Certificateowners") will hold the Certificates
through the Depository Trust and Clearing Company ("DTCC"), in the United
States, or Cedelbank ("Cedel") or the Euroclear System ("Euroclear"), in Europe,
if the Certificateowners are participants of the systems, or indirectly through
organizations that are participants in the systems. The Book-Entry Certificates
will be issued in one or more certificates per class, representing the aggregate
principal balance of each class of Class A Certificates, and will initially be
registered in the name of Cede & Co. ("Cede"), the nominee of DTCC. 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 which in turn will hold positions in customers'
securities accounts in the depositaries names on the books of DTCC. Citibank
N.A.
S-52
<PAGE>
("Citibank") will act as depositary for Cedel and Morgan Guaranty Trust Company
of New York ("Morgan") will act as depositary for Euroclear (Citibank and
Morgan, in these capacities, individually the "Relevant Depositary" and,
collectively, the "European Depositaries"). Investors may hold beneficial
interests in the Book-Entry Certificates in minimum denominations representing
Certificate Principal Balances of $1,000 and in integral multiples of $1 in
excess of $1,000. Except as described below, no person acquiring a Book-Entry
Certificate will be entitled to receive a physical certificate representing the
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only "Certificateholder" of
the Class A Certificates will be Cede, as nominee of DTCC. Certificateowners
will not be Certificateholders as that term is used in the Agreement.
Certificateowners are permitted to exercise their rights only indirectly through
DTCC and its Participants (including Cedel and Euroclear).
DTCC has advised the Depositor that management of DTCC is aware that
some computer applications, systems, and the like for processing data
("Systems") that are dependent upon calendar dates, including dates before, on,
and after January 1, 2000, may encounter "Year 2000 problems." DTCC 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 security holders, book-entry deliveries, and settlement of
trades within DTCC ("Depositary Services"), continue to function appropriately.
This program includes a technical assessment and a remediation plan, each of
which is complete. Additionally, DTCC's plan includes a testing phase, which is
expected to be completed within appropriate time frames.
However, DTCC's ability to perform properly its service is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTCC's direct and indirect participants and third party
vendors from whom DTCC licenses software and hardware, and third party vendors
on whom DTCC relies for information or the provision of services, including
telecommunication and electrical utility service providers, among others. DTCC
has informed the Industry that it is contacting (and will continue to contact)
third party vendors from whom DTCC acquires services to: (1) impress upon them
the importance of the services being Year 2000 compliant; and (2) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, DTCC is in the process of developing contingency
plans as it deems appropriate.
According to DTCC, the information set forth in the preceding two
paragraphs about DTCC has been provided to the Industry by DTCC for information
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
DISTRIBUTION DATES
On the __ day of each month, or if the __ day is not a Business Day,
then the next succeeding Business Day (each, a "Distribution Date"), the Class A
Certificateholders for each Home Equity Loan Group will be entitled to receive
the Class A Distribution Amount for the related Home Equity Loan Group from
amounts then on deposit in the certificate account established and maintained by
the Trustee in accordance with the Agreement (the "Certificate Account").
Distributions will be made in immediately available funds to Certificateholders
of Class A Certificates by wire transfer or otherwise, to the account of the
Certificateholder at a domestic bank or other entity having appropriate
facilities therefor, if the Certificateholder has so notified the Trustee at
least five Business Days prior to the Record Date, or by check mailed to the
address of the person entitled to the distributions as it appears on the
register (the "Certificate Register") maintained by the Trustee as registrar
(the "Certificate Registrar"). Certificate Owners may experience some delay in
the receipt of their payments due to the operations of DTCC.
"Business Day" means any day other than (1) a Saturday or Sunday or (2)
a day on which banking institutions in New York, New York, Dallas, Texas or the
city in which the corporate trust office of the Trustee is located or the city
in which the Certificate Insurer is located are authorized or obligated by law
or executive order to be closed.
S-53
<PAGE>
"Record Date" means (1) with respect to any Distribution Date and each
class of Fixed Rate Certificates, the last Business Day of the month immediately
preceding the calendar month in which the Distribution Date occurs and (2) with
respect to any Distribution Date and the Variable Rate Certificates, the last
Business Day immediately preceding the Distribution Date, or if Definitive
Certificates have been issued, the last Business Day of the month immediately
preceding the calendar month in which the Distribution Date occurs.
WE REFER YOU TO "--BOOK-ENTRY CERTIFICATES" FOR MORE DETAIL.
The Agreement will provide that a Certificateholder, upon receiving the
final distribution on a Certificate, will be required to send the Certificate to
the Trustee. The Agreement additionally will provide that, in any event, any
Certificate as to which the final distribution on that Certificate has been made
shall be deemed cancelled for all purposes of the Agreement and the Policies.
Each Certificateholder of record of a class of Class A Certificates
will be entitled to receive the Certificateholder's Percentage Interest in the
amounts due the Class on each Distribution Date. The "Percentage Interest" of a
Class A Certificate as of any date of determination will be equal to the
percentage obtained by dividing the principal balance of the Class A Certificate
as of the Closing Date by the Class Principal Balance for the related class of
Class A Certificates as of the Closing Date.
GLOSSARY
"AVAILABLE FUNDS" as to each Home Equity Loan Group and Distribution
Date is the amount on deposit in the Certificate Account with respect to the
related Home Equity Loan Group on the Distribution Date, disregarding the
amounts of any Insured Payments to be made on the Distribution Date.
"AVAILABLE FUNDS SHORTFALL" as to each Home Equity Loan Group and
Distribution Date, is the excess, if any, of (x) the aggregate of the amounts
required to be distributed pursuant to clauses 2 and 3 below under
"-Distributions" over (y) the Available Funds for these payments for the Home
Equity Loan Group and Distribution Date.
The "CARRY-FORWARD AMOUNT" with respect to any class of Class A
Certificates is the amount as of any Distribution Date, equal to the sum of (1)
the amount, if any, by which (x) the Current Interest for the Class for the
immediately preceding Distribution Date exceeded (y) the amount of the actual
distribution in respect to interest on the class of Class A Certificates made to
the Certificateholders of the class of Class A Certificates on the immediately
preceding Distribution Date and (2) interest on the excess for the related
Interest Period at the related Certificate Rate for the class of Class A
Certificates.
"CERTIFICATE INSURER DEFAULT" is defined under the Agreement as the
occurrence and continuance of (x) the failure by the Certificate Insurer to make
a required payment under either Policy or (y) specified events of bankruptcy or
insolvency of the Certificate Insurer.
The "CLASS A DISTRIBUTION AMOUNT" for each Home Equity Loan Group and
Distribution Date shall be the sum of (x) Current Interest for the Class A
Certificates related to the Home Equity Loan Group and (y) the Class A Principal
Distribution Amount for the Home Equity Loan Group.
The "CLASS A PRINCIPAL DISTRIBUTION AMOUNT" with respect to the Class A
Certificates of the related Home Equity Loan Group and Distribution Date shall
be the lesser of:
(a) the related Available Funds remaining after distributions
pursuant to clauses 1 and 2 under "--Distributions" below; and
(b) the excess, if any, of
S-54
<PAGE>
(1) the sum of (without duplication):
(A) the principal portion of all scheduled monthly
payments on the Home Equity Loans related to the Home
Equity Loan Group actually received by the Servicer
during the related Due Period and any Prepayments on
the Home Equity Loans made by the mortgagors of Home
Equity Loans in the related Home Equity Loan Group
and actually received by the Servicer during the
related Due Period in each case to the extent the
amounts are received by the Trustee on or prior to
the Monthly Remittance Date;
(B) the outstanding principal balance of each Home Equity
Loan in the related Home Equity Loan Group that was
purchased or repurchased by CHEC on or prior to the
related Monthly Remittance Date in each case to the
extent the amounts are received by the Trustee on or
prior to the Monthly Remittance Date;
(C) any Substitution Amounts (as defined in the
Prospectus) relating to principal, delivered by CHEC
on the related Monthly Remittance Date in connection
with a substitution of a Home Equity Loan in the
related Home Equity Loan Group, in each case to the
extent the amounts are received by the Trustee on or
prior to the Monthly Remittance Date;
(D) all Net Liquidation Proceeds (as defined in the
Prospectus) actually collected by or on behalf of the
Servicer with respect to the Home Equity Loans in the
related Home Equity Loan Group during the related Due
Period (to the extent the Net Liquidation Proceeds
relate to principal) in each case to the extent the
amounts are received by the Trustee on or prior to
the Monthly Remittance Date;
(E) the amount of any Collateralization Deficit with
respect to the related Home Equity Loan Group for the
Distribution Date; and
(F) the principal portion of the proceeds received by the
Trustee with respect to the related Home Equity Loan
Group upon termination of the Trust (to the extent
the proceeds relate to principal); over
(2) the amount of any Overcollateralization Release Amount with
respect to the related Home Equity Loan Group for the
Distribution Date;
provided, however, on the occuring in ______________, the related Class A
Principal Distribution Amount payable to any outstanding class of Class A
Certificates shall be no less than the Class Principal Balance for each class of
Class A Certificates.
The "CLASS A-6 CALCULATION PERCENTAGE" for any Distribution Date will
be the fraction, expressed as a percentage, the numerator of which is the Class
Principal Balance of the Class A-6 Certificates and the denominator of which is
the total of the Class Principal Balances of all of the Group I Certificates, in
each case before giving effect to distributions of principal on that
Distribution Date.
The "CLASS A-6 LOCKOUT DISTRIBUTION AMOUNT" for any Distribution Date
will be an amount equal to the product of (1) the applicable Class A-6 Lockout
Percentage for the Distribution Date, (2) the Class A-6 Calculation Percentage
and (3) the Class A Principal Distribution Amount with respect to the Group I
Certificates for the Distribution Date. In no event shall the Class A-6 Lockout
Distribution Amount exceed the outstanding Class Principal Balance of the Class
A-6 Certificates or the Class A Principal Distribution Amount applicable to the
Group I Certificates for the Distribution Date.
The "CLASS A-6 LOCKOUT PERCENTAGE" for each Distribution Date will be
as follows:
<TABLE>
<CAPTION>
Distribution Date Lockout Percentage
S-55
<PAGE>
<S> <C>
[January 2000 through December 2002] %
[January 2003 through December 2004] %
[January 2005 through December 2005] %
[January 2006 through December 2006] %
[January 2007 and thereafter] %
</TABLE>
"CURRENT INTEREST" with respect to each class of Class A Certificates
means, with respect to any Distribution Date: (1) the aggregate amount of
interest accrued at the related Certificate Rate on the Class Principal Balance
of the related Class A Certificates plus (2) the Carry-Forward Amount, if any,
with respect to the Class of Class A Certificates; provided, however, that with
respect to each class of Class A Certificates, the amount described in clause
(1) above will be reduced by the Class' pro rata share of any shortfalls with
respect to the related Home Equity Loan Group resulting from the application of
the Soldiers' and Sailors' Civil Relief Act of 1940 ("Civil Relief Act Interest
Shortfalls") during the related Due Period.
The Class A-5 Certificate Rate and Class A-6 Certificate Rate are each
subject to the Group I Net WAC Cap, and the Class A-7 Certificate Rate is
subject to the Class A-7 Available Funds Cap. For a description of the
calculation of the Class A-1 Certificate Rate, the Class A-2 Certificate Rate,
the Class A-3 Certificate Rate, the Class A-4 Certificate Rate, the Class A-5
Certificate Rate, Class A-6 Certificate Rate, Class A-7 Certificate Rate, the
Group I Net WAC Cap and the Class A-7 Available Funds Cap see "--Certificate
Rate."
"DUE PERIOD" with respect to any Distribution Date is the calendar
month preceding the calendar month in which the Distribution Date occurs.
"EXTRA PRINCIPAL DISTRIBUTION AMOUNT" means as to either the Group I or
Group II Certificates and any Distribution Date, the lesser of (1) the related
Target Deficiency and (2) the related Net Monthly Excess Cashflow Amount.
"MONTHLY REMITTANCE DATE" means the __ day of each month, or if the __
day is not a Business Day, the preceding Business Day. On each Monthly
Remittance Date, the Servicer will be required to transfer funds on deposit in
the Principal and Interest Account to the Certificate Account.
"NET MONTHLY EXCESS CASHFLOW" with respect to each Home Equity Loan
Group and Distribution Date, means the Available Funds remaining for each Home
Equity Loan Group, if any, after the application of clauses 1 through 6 below
under "--Distributions" for the Distribution Date.
"OVERCOLLATERALIZATION AMOUNT" means, with respect to each Home Equity
Loan Group and Distribution Date, the excess, if any, of (x) the aggregate Loan
Balance of the Home Equity Loans in the Home Equity Loan Group as of the close
of business on the last day of the preceding Due Period over (y) the aggregate
outstanding Class Principal Balances of the related Class A Certificates as of
the Distribution Date (after taking into account the payment of the Class A
Principal Distribution Amount related to the Home Equity Loan Group on the
Distribution Date).
"OVERCOLLATERALIZATION RELEASE AMOUNT" means as to either the Group I
or Group II Certificates and any Distribution Date, the lesser of (1) the
related Class A Principal Distribution Amount for the related Distribution Date
and (2) the excess, if any, of (A) the related Overcollateralization Amount over
(B) the related Target Overcollateralization Amount.
"TARGET DEFICIENCY" means as to either the Group I or Group II
Certificates and any Distribution Date, the excess, if any, of (1) the related
Target Overcollateralization Amount for the related Distribution Date over (2)
the related Overcollateralization Amount for the related Distribution Date after
giving effect to the distribution of the related Class A Principal Distribution
Amount on the related Distribution Date; provided, however, that in no event
will the Target Deficiency be less than zero.
S-56
<PAGE>
"TARGET OVERCOLLATERALIZATION AMOUNT" is the required level of the
Overcollateralization Amount for each Home Equity Loan Group with respect to a
Distribution Date.
"TRANSITION EXPENSES" means expenses incurred by the Trustee in
connection with the transfer of servicing upon the termination of the Servicer
for a Servicer Termination Event; provided that the amount shall not exceed
$50,000 in any one calendar year (and no more than $100,000 in the aggregate).
DISTRIBUTIONS
The Trustee will be required to deposit into the Certificate Account:
- the proceeds of any liquidation of the assets of the Trust, and
- all collections on the Home Equity Loans received during the
related Due Period and remitted by the Servicer to the Trustee
- and all other remittances made to the Trustee by or on behalf of
the Seller or the Servicer.
The Agreement establishes a certificate rate on each class of Class A
Certificates (each, a "Certificate Rate") as set forth in this Prospectus
Supplement under "--Certificate Rate." The "Expense Fee" for any Distribution
Date will equal the sum of the Trustee Fee and the amounts payable to the
Certificate Insurer as premium on the Policies (the "Premium Amount") on the
Distribution Date.
On each Distribution Date, the Trustee will make the following
disbursements and transfers from monies then on deposit in the Certificate
Account with respect to the related Home Equity Loan Group (and, in certain
limited circumstances described below, from the other Home Equity Loan Group)
and apply the amounts in the following order of priority, in each case, to the
extent of funds remaining:
1. Concurrently, to the Trustee and the Certificate Insurer,
the Trustee Fee and any Transition Expenses for the related Home Equity
Group and provided that no Certificate Insurer Default as defined in
clause (x) of the definition thereof has occurred and is continuing,
the Premium Amount for the related classes of Class A Certificates for
the Distribution Date to the Certificate Insurer.
2. To the related classes of Class A Certificates, the related
Current Interest for the class on a pro rata basis based on each Class
A Certificate's Current Interest without priority among the Class A
Certificates for the Distribution Date.
3. To the related classes of Class A Certificates, an amount
up to the related Class A Principal Distribution Amount in the
following order of priority:
A. With respect to the Home Equity Loan Group relating
to the Group I Certificates, the Class A Principal
Distribution Amount applicable to the Group I
Certificates shall be distributed as follows:
- To the Certificateholders of the Class A-6
Certificates, an amount equal to the Class A-6
Lockout Distribution Amount and
- The remainder as follows: first, to the Class
A-1 Certificateholders until the Class Principal
Balance of the Class A-1 Certificates is reduced
to zero; second, to the Class A-2
Certificateholders until the Class Principal
Balance of the Class A-2 Certificates is reduced
to zero; third, to the Class A-3
Certificateholders until the Class Principal
Balance of the Class A-3 Certificates is reduced
to zero; fourth, to the Class A-4
Certificateholders until the Class Principal
Balance of the Class A-4 Certificates is reduced
to zero; fifth, to the Class A-5
Certificateholders until the Class Principal
Balance of the Class A-5 Certificates
S-57
<PAGE>
is reduced to zero; and sixth, to the Class A-6
Certificateholders until the Principal Balance
of the Class A-6 Certificates is reduced to
zero;
provided, however, during the continuance of a
Certificate Insurer Default, if there is a
Collateralization Deficit with respect to the Group I
Certificates, then the Class A Principal Distribution
Amount applicable to the Group I Certificates shall
be distributed pro rata to the Certificateholders of
the Group I Certificates.
B. With respect to the Home Equity Loan Group relating
to the Group II Certificates, the Class A Principal
Distribution Amount applicable to the Group II
Certificates shall be distributed to the
Certificateholders of the Class A-7 Certificates,
until the Class Principal Balance of the Class A-7
Certificates is reduced to zero.
4. Concurrently, to the Trustee and the Certificate Insurer,
any unpaid Trustee Fee and any unpaid Transition Expenses for the
unrelated Home Equity Group and provided that no Certificate Insurer
Default as defined in clause (x) of the definition thereof has occurred
and is continuing, any unpaid Premium Amount for the unrelated class or
classes of Class A Certificates for the Distribution Date to the
Certificate Insurer.
5. To the classes of Class A Certificates with respect to the
unrelated Home Equity Loan Group, the amount of the Available Funds
Shortfall with respect to the other Home Equity Loan Group.
6. To the Certificate Insurer, in the following order of
priority, the sum of:
- Any Reimbursement Amount (as defined in the
Agreement) owed to the Certificate Insurer with
respect to the related classes of Class A
Certificates; provided that if a Certificate
Insurer Default as defined in clause (x) of the
definition thereof has occurred and is
continuing, then the priority of this
allocations shall follow immediately after
clause 7 below and
- Any unpaid Reimbursement Amount owed to the
Certificate Insurer with respect to the
unrelated classes of Class A Certificates;
provided that if a Certificate Insurer Default
as defined in clause (x) of the definition
thereof has occurred and is continuing, then the
priority of this allocations shall follow
immediately after clause 8 below.
7. To the classes of Class A Certificates with respect to the
related Home Equity Loan Group, an amount up to the Extra Principal
Distribution Amount for the related Home Equity Loan Group, until the
related Target Overcollateralization Amount is reached, these amounts
to be applied in the same order of priority as the Class A Principal
Distribution Amount for the Home Equity Loan Group pursuant to clause 3
above.
8. To the classes of Class A Certificates with respect to the
unrelated Home Equity Loan Group, any Target Deficiency for the Home
Equity Loan Group remaining after the distributions above and with
respect to the unrelated Home Equity Loan Group.
9. To the Class A-_ Certificates to make a payment to the
extent of any unpaid Class A-7 Certificateholders' Interest Index
Carryover.
10. To the Trustee as reimbursement for all reimbursable
expenses incurred in connection with its duties and obligations under
the Agreement to the extent not paid as Transition Expenses pursuant to
clauses 1 or 4 above.
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11. To the Servicer to the extent of any unreimbursed
Delinquency Advances (as defined in the Prospectus), unreimbursed
Servicing Advances (as defined in the Prospectus) and unreimbursed
Compensating Interest (as defined in the Prospectus).
12. To the Non-Offered Certificates, the remainder.
The Premium Amount as of each Distribution Date and each Home Equity
Loan Group will be as defined in the Agreement.
CERTIFICATE RATE
With respect to any Distribution Date and the Class A-1 Certificates,
the "Certificate Rate" will equal ____% per annum.
With respect to any Distribution Date and the Class A-2 Certificates,
the "Certificate Rate" will equal ____% per annum.
With respect to any Distribution Date and the Class A-3 Certificates,
the "Certificate Rate" will equal ____% per annum.
With respect to any Distribution Date and the Class A-4 Certificates,
the "Certificate Rate" will equal ____% per annum.
With respect to any Distribution Date and the Class A-5 Certificates,
the "Certificate Rate" will equal the lesser of (A) ____% per annum (or ____%
per annum for each Interest Period occurring after the Servicer first fails to
exercise its clean-up call option) and (B) the Group I Net WAC Cap for the
Distribution Date.
With respect to any Distribution Date and the Class A-6 Certificates,
the "Certificate Rate" will equal the lesser of (A) ____% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class A-7 Certificates,
the "Certificate Rate" will equal the lesser of (A) the Class A-7 Formula Rate
and (B) the Class A-7 Available Funds Cap for the Distribution Date.
The "Class A-7 Formula Rate" for any Distribution Date is the sum of
(1) One-Month LIBOR and (2) ____% per annum (or ____% per annum for each
Interest Period occurring after the date on which the Servicer has failed to
exercise its right to terminate the Agreement by purchasing all outstanding Home
Equity Loans).
The "Class A-7 Available Funds Cap" with respect to any Interest Period
and the related Distribution Date will be a rate per annum equal to the
fraction, expressed as a percentage, the numerator of which is the product of
(a) the weighted average of the Net Coupon Rates (minus the Minimum Spread) on
the Group II Home Equity Loans as of the beginning of the related Due Period and
(b) the aggregate Loan Balance of the Group II Home Equity Loans as of the
beginning of the related Due Period, and the denominator of which is the
outstanding Class Principal Balance of the Class A-7 Certificates (before giving
effect to payments of principal on the Distribution Date) (adjusted to an
effective rate reflecting accrued interest calculated on the basis of a 360-day
year and the actual number of days elapsed).
The "Minimum Spread" shall be a percentage per annum equal to 0% for
Distribution Dates which occur prior to ___________ and 0.50% for Distribution
Dates which occur in __________ or thereafter.
The "Net Coupon Rate" of any Group I Home Equity Loan or Group II Home
Equity Loan will be the rate per annum equal to the Coupon Rate of the Home
Equity Loan minus the sum of (1) the rate at which the Servicing Fee accrues,
(2) the rate at which the Trustee Fee accrues and (3) the applicable Premium
Amount
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(expressed as a per annum percentage of the aggregate principal balance of the
Group I or Group II Home Equity Loans, as applicable).
The "Group I Net WAC Cap" with respect to any Distribution Date will be
a rate per annum equal to the weighted average of the Net Coupon Rates on the
Group I Home Equity Loans as of the beginning of the related Due Period.
If on any Distribution Date the Certificate Rate for the Class A-5
Certificates or the Class A-6 Certificates is based on the Group I Net WAC Cap,
the related Certificateholders will not be entitled to receive any interest
carryover on subsequent Distribution Dates.
If on any Distribution Date the Certificate Rate for the Class A-7
Certificates is based on the Class A-7 Available Funds Cap, the Class A-7
Certificateholders will be entitled to receive on subsequent Distribution Dates
the Class A-7 Certificateholders' Interest Index Carryover as described above.
The "Class A-7 Certificateholders' Interest Index Carryover" is equal
to the sum of (A) the excess of (1) the amount of interest the Class A-7
Certificates would otherwise be entitled to receive on the Distribution Date had
the rate been calculated at the Class A-7 Formula Rate for the Distribution Date
over (2) the amount of interest payable on the Class A-7 Certificates at the
Class A-7 Available Funds Cap for the Distribution Date and (B) the Class A-7
Certificateholders' Interest Index Carryover for all previous Distribution Dates
not previously paid to Class A-7 Certificateholders (including any interest
accrued on that amount at the Class A-7 Formula Rate).
The Policies will not cover any Class A-7 Certificateholders' Interest
Index Carryover, and the ratings on the Class A-7 Certificates by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") and together with Moody's
the "Rating Agencies") will not address the likelihood of receipt by the Class
A-7 Certificateholders of any amounts in respect of Class A-7
Certificateholders' Interest Index Carryover. Payment of the Class A-7
Certificateholders' Interest Index Carryover will be subject to availability of
funds therefor in accordance with the priority of payments set forth under
"--Distributions" above.
"Interest Period" means, with respect to each Distribution Date and the
Fixed Rate Certificates, the period from the first day of the calendar month
preceding the month of the Distribution Date through the last day of the
calendar month. Interest on the Fixed Rate Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year consisting of twelve 30-day months.
"Interest Period" means, with respect to each Distribution Date and the
Variable Rate Certificates, the period from and including the preceding
Distribution Date (or the Closing Date in the case of the first Distribution
Date) to and including the day preceding the related Distribution Date. Interest
will accrue on the Variable Rate Certificates during the related Interest Period
on the basis of the actual number of days in the related Interest Period and a
year of 360 days.
CALCULATION OF ONE-MONTH LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine One-Month LIBOR for the next Interest Period for the Class A-7
Certificates.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Telerate Page 3750 as of 11:00 a.m., London time, on this 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 United States dollars
are offered by the Reference Banks at approximately 11:00 a.m. (London time), on
that day to prime banks in the London interbank market. The Trustee will request
the principal London office of each of the Reference Banks 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
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(rounded upwards if necessary to the nearest whole multiple of 1/16%). If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Servicer, at approximately 11:00 a.m. (New York City time) on that day for
loans in United States dollars to leading European banks.
"LIBOR Determination Date" means, with respect to any Interest Period,
the second London business day preceding the commencement of the Interest Period
(or in the case of the first Distribution Date, __________ __, ____). For
purposes of determining One-Month LIBOR, a "London business day" is any day on
which dealings in deposits of United States dollars are transacted in the London
interbank market.
"Telerate Page 3750" means the display page currently so designated on
the Bridge Telerate Service (or another page that replaces this page on the
service for the purpose of displaying comparable rates or prices) and "Reference
Banks" means leading banks selected by CHEC and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market.
CREDIT ENHANCEMENT
THE POLICIES.
FOR AN EXPLANATION OF THE POLICIES, WE REFER YOU TO "THE POLICIES AND
THE CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT.
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Agreement
requires that, on each Distribution Date, Net Monthly Excess Cashflow with
respect to a Home Equity Loan Group be applied on the Distribution Date as an
accelerated payment of principal on the related class or classes of Class A
Certificates, but only to the limited extent hereafter described.
The application of Net Monthly Excess Cashflow for the payment of
principal has the effect of accelerating the amortization of the related Class A
Certificates relative to the amortization of the Home Equity Loans in the
related Home Equity Loan Group. The Net Monthly Excess Cashflow with respect to
a Home Equity Loan Group may, to the extent available therefor, be used to make
any required accelerated payments of principal on the unrelated class or classes
of Class A Certificates. To the extent that any Net Monthly Excess Cashflow is
not so used, the Agreement provides that it will be used:
(1) with respect to the Net Monthly Excess Cashflow for the Group
II Home Equity Loans, to pay the Certificateholders of the
Class A-7 Certificates any Class A-7 Certificateholders'
Interest Index Carryover,
(2) with respect to the Net Monthly Excess Cashflows for both Home
Equity Loan Groups, to reimburse the Servicer and the Trustee
with respect to any amounts owing to them, and
(3) with respect to the Net Monthly Excess Cashflow for both Home
Equity Loan Groups, to pay the Class X-IO and the Class R
Certificateholders, as specified in the Agreement.
Pursuant to the Agreement, each Home Equity Loan Group's Net Monthly
Excess Cashflow will be applied as an accelerated payment of principal on the
Class A Certificates until the related Overcollateralization Amount has
increased to the related Target Overcollateralization Amount.
The Agreement generally provides that the related Target
Overcollateralization Amount may, over time, decrease or increase, subject to
floors, caps and triggers including triggers that allow the related Target
Overcollateralization Amount to decrease or "step down" based on the performance
on the Home Equity Loans in the related Home Equity Loan Group with respect to
the tests specified in the Agreement based on delinquency rates and cumulative
losses. In addition, Net Monthly Excess Cashflow for each Home Equity Loan Group
will be applied to the payment in reduction of principal of the related Class A
Certificates during the
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period that the Home Equity Loans in the Home Equity Loan Group are unable to
meet the tests specified in the Agreement based on delinquency rates and
cumulative losses.
In the event that the Target Overcollateralization Amount with respect
to a Home Equity Loan Group is permitted to decrease or "step down" on a
Distribution Date in the future, the Agreement provides that a portion of the
principal which would otherwise be distributed to the Certificateholders of the
related Class A Certificates on the Distribution Date shall be distributed to
the Class X-IO Certificateholders or as otherwise provided in the Agreement (to
the extent available therefor) over the period specified in the Agreement. This
has the effect of decelerating the amortization of Class A Certificates relative
to the amortization of the Home Equity Loans and of reducing the related
Overcollateralization Amount.
If, on any Distribution Date, the Overcollateralization Amount is, or,
after taking into account all other distributions to be made on the Distribution
Date, would be, greater than the related Target Overcollateralization Amount,
then any amounts relating to principal which would otherwise be distributed to
the Certificateholders of the related class or classes of Class A Certificates
on the Distribution Date shall instead be distributed to the Certificateholders
of the Class X-IO Certificates or as otherwise provided in the Agreement (to the
extent available therefor) in an amount equal to the Overcollateralization
Release Amount.
The Agreement provides generally that, on any Distribution Date all
amounts collected on account of principal (other than any amount applied to the
payment of an Overcollateralization Release Amount) during the prior Due Period
will be distributed to the Certificateholders of the related Class A
Certificates on the Distribution Date. If any Home Equity Loan became a
Liquidated Loan during the prior Due Period, the Net Liquidation Proceeds
related to that Home Equity Loan and allocated to principal may be less than the
principal balance of the related Home Equity Loan. The amount of any
insufficiency is referred to as a "Realized Loss." In addition, the Agreement
provides that the Loan Balance of any Home Equity Loan which becomes a
Liquidated Loan shall thereafter equal zero. The Agreement does not contain any
requirement that the amount of any Realized Loss be distributed to the
Certificateholders of the related Class A Certificates on the Distribution Date
which immediately follows the event of loss, i.e., the Agreement does not
require the current recovery of losses.
However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount with respect to a Home Equity Loan Group, which to
the extent that the reduction causes the Overcollateralization Amount to be less
than the Target Overcollateralization Amount applicable to the related
Distribution Date, will require the payment of an Extra Principal Distribution
Amount on the Distribution Date (or, if insufficient funds are available on the
Distribution Date, on subsequent Distribution Dates, until the
Overcollateralization Amount equals the Target Overcollateralization Amount).
The effect of the foregoing is to allocate losses to the Certificateholders of
the Class X-IO and Class R Certificates, as specified in the Agreement, by
reducing, or eliminating entirely, payments of Net Monthly Excess Cashflow which
the Certificateholders would otherwise receive.
A "Liquidated Loan" is a Home Equity Loan with respect to which a
determination has been made by the Servicer that all recoveries have been
recovered or that the Servicer reasonably believes that the cost of obtaining
any additional recoveries from that loan would exceed the amount of the
recoveries.
OVERCOLLATERALIZATION AND THE POLICIES. The Agreement defines a
"Collateralization Deficit" with respect to a Home Equity Loan Group and
Distribution Date to be the amount, if any, by which (x) the aggregate Class
Principal Balance of the related Class A Certificates with respect to the
Distribution Date, after taking into account all distributions to be made on the
Distribution Date (except for any Insured Payment or any payment in respect of
the Collateralization Deficit), exceeds (y) the aggregate Loan Balances of the
Home Equity Loans in the Home Equity Loan Group as of the close of business on
the last day of the related Due Period.
The Agreement requires the Trustee to make a claim for an Insured
Payment under the related Policy not later than the third Business Day prior to
any Distribution Date as to which the Trustee has determined that a
Collateralization Deficit will occur after giving effect to all other payments
of principal on the Distribution Date (except
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for any Insured Payment) for the purpose of applying the proceeds of the Insured
Payment as a payment of principal to the Certificateholders of the related Class
A Certificates on the Distribution Date.
Each Policy is thus similar to the subordination provisions described
above insofar as the Policy guarantees ultimate, rather than current, payment of
the amounts of any Realized Losses to the Certificateholders of the Class A
Certificates.
Investors in the Class A Certificates should realize that, under
extreme loss or delinquency scenarios applicable to the related Home Equity Loan
Group, they may temporarily receive no distributions of principal when they
would otherwise be entitled to distributions under the principal allocation
provisions described in this Prospectus Supplement. Nevertheless, the exposure
to risk of loss of principal of the Certificateholders of the Class A
Certificates depends in part on the ability of the Certificate Insurer to
satisfy its obligations under the Policies. In that respect and to the extent
that the Certificate Insurer satisfies the obligations, the Certificateholders
of the Class A Certificates are insulated from principal losses on the
Certificates.
CROSSCOLLATERALIZATION PROVISIONS. Certain Total Available Funds (as
defined below) with respect to each Home Equity Loan Group will be available to
cover certain shortfalls and to create overcollateralization with respect to the
Class A Certificates relating to the other Home Equity Loan Group as described
above under "Description of the Certificates--Distributions."
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled Distribution Date (the "Final Scheduled
Distribution Date") for each class of Class A Certificates is specified on the
cover page of this Prospectus Supplement.
The Final Scheduled Distribution Date for each of the Class A-1, Class
A-2, Class A-3 and Class A-4 Certificates is the Distribution Date occurring two
months after the date on which the Certificate Principal Balance for the related
class would be reduced to zero assuming that no prepayments are received on the
related Home Equity Loans, no excess cashflow is applied to create
overcollateralization and that scheduled monthly payments of principal of and
interest on each of the Home Equity Loans are timely received. The Final
Scheduled Distribution date for each of the Class A-5, Class A-6 and Class A-7
Certificates is the Distribution Date occurring ______ months after the maturity
date of latest possible maturing Home Equity Loan.
It is expected that the actual last Distribution Date for each class of
Class A Certificates will occur significantly earlier than the Final Scheduled
Distribution Date. The Policies do not guarantee that the Class Principal
Balances of the Class A-1, Class A-2, Class A-3 or Class A-4 Certificates will
be paid in full by their respective Final Scheduled Distribution Dates.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" FOR MORE DETAIL.
SERVICING FEE
As to each Home Equity Loan, the Servicer will retain a fee (the
"Servicing Fee") equal to 0.50% per annum, payable monthly at one-twelfth of the
annual rate of the then outstanding principal balance of the Home Equity Loan
serviced as of the first day of each Due Period. If a successor Servicer is
appointed in accordance with the Agreement, the Servicing Fee shall be an amount
agreed upon by the Trustee, the Certificate Insurer, and the successor Servicer
but in no event in an amount greater than the amount paid to the predecessor
Servicer. The Servicer will also be able to retain late fees, prepayment
charges, assumption fees, release fees, bad check charges and any other
servicing related charges.
THE TRUSTEE
_______________ has been named Trustee pursuant to the Agreement.
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The Trustee may have normal banking relationships with the Depositor,
the Sellers and the Servicer.
As to each Home Equity Loan the Trustee will receive a fee (the
"Trustee Fee") set forth in the Agreement.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer and the Servicer. The Depositor and the Servicer may also remove the
Trustee if the Trustee ceases to be eligible to continue under the Agreement or
if the Trustee becomes insolvent. Upon becoming aware of these circumstances,
the Depositor will be obligated to appoint a successor Trustee, as approved by
the Certificate Insurer and the Servicer (Servicer approval not to be
unreasonably withheld). Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless the holder
previously has received the Certificate Insurer's prior written consent (unless
a Certificate Insurer Default as defined in clause (x) of the definition thereof
has occurred and is continuing) and has given to the Trustee written notice of
default and unless Certificateholders holding Certificates evidencing at least
51% of the Percentage Interests in the Trust, have made written requests upon
the Trustee to institute a proceeding in its own name as Trustee under the
Agreement and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has neglected or refused to institute any proceeding. The Trustee
will be under no obligation to exercise any of the trusts or powers vested in it
by the Agreement or to make any investigation of matters arising under the
Agreement or to institute, conduct or defend any litigation under the Agreement
or in relation to the Agreement at the request, order or direction of any of the
Certificateholders, unless the Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred in this Prospectus Supplement or thereby.
The Trustee will make the monthly statement to Certificateholders (and,
at its option, any additional files containing the same information in an
alternative format) available each month to Certificateholders, and the other
parties to the Agreement via the Trustee's and its fax-on-demand service. The
Trustee's fax-on-demand service may be accessed by calling ______________.
Parties that are unable to use the above distribution options are entitled to
have a paper copy mailed to them via first class mail by calling the customer
service desk. The Trustee shall have the right to change the way monthly
statements are distributed in order to make distribution more convenient and/or
more accessible to the above parties and the Trustee shall provide timely and
adequate notification to all above parties regarding any changes.
THE POLICIES AND THE CERTIFICATE INSURER
THE POLICIES
The following information has been supplied by _____________________
(the "Certificate Insurer") for inclusion in this Prospectus Supplement. The
Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained in this Prospectus Supplement, or omitted from this Prospectus
Supplement, other than with respect to the accuracy of the information regarding
the Certificate Guaranty Insurance Policies (the "Policies") and the Certificate
Insurer set forth under the heading "The Policies and the Certificate Insurer."
Additionally, the Certificate Insurer makes no representation regarding the
Certificates or the advisability of investing in the Certificates.
The Certificate Insurer, in consideration of the payment of a premium
and subject to the terms of the Policies, thereby unconditionally and
irrevocably guarantees to any Certificateholder that an amount equal to each
full and complete Insured Payment will be received from the Certificate Insurer
by the Trustee, or its successors, as trustee for the Certificateholders, on
behalf of the Certificateholders for distribution by the Trustee to each
Certificateholder of each Certificateholder's proportionate share of the Insured
Payment.
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The Certificate Insurer's obligations under the Policies with respect
to a particular Insured Payment will be discharged to the extent funds equal to
the applicable Insured Payment are received by the Trustee, whether or not those
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in the Policies and no accelerated Insured Payments will
be made regardless of any acceleration of the Class A Certificates, unless
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policies do not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any liability for withholding taxes). The Policies do not cover, and
Insured Payments shall not include, any Civil Relief Act Interest Shortfalls,
any Class A-7 Certificateholders' Interest Index Carryover, any reduction in
interest on the Class A-5 or Class A-6 Certificates due to the application of
the Group I Net WAC Cap or any reduction in interest on the Class A-7
Certificates due to the Class A-7 Available Funds Cap.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the business day following receipt on a business day by the
Certificate Insurer's fiscal agent of:
- a certified copy of the order requiring the return of a
preference payment,
- an opinion of counsel satisfactory to the Certificate Insurer
that the order is final and not subject to appeal,
- an assignment in a form reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Certificateholder relating to or
arising under the Class A Certificates against the debtor
which made the preference payment or otherwise with respect to
the preference payment and
- appropriate instruments to effect the appointment of the
Certificate Insurer as agent for the Certificateholder in any
legal proceeding related to the preference payment, the
instruments being in a form satisfactory to the Certificate
Insurer,
provided that if the documents are received after 12:00 p.m., New York time, on
that business day, they will be deemed to be received on the following business
day. Payments by the Certificate Insurer will be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Certificateholder and not to any Certificateholder
directly unless the Certificateholder has returned principal or interest paid on
the Class A Certificates to the receiver or trustee in bankruptcy, in which case
that payment will be disbursed to the Certificateholder.
The Certificate Insurer will pay any other amount payable under a
Policy no later than 12:00 p.m., New York time, on the later of the Distribution
Date on which the related Deficiency Amount is due or the third business day
following receipt in _________, _______ on a business day by _______________ and
____________., as fiscal agent for the Certificate Insurer, or any successor
fiscal agent appointed by the Certificate Insurer of a notice from the Trustee
specifying the Insured Payment which is due and owing on the applicable
Distribution Date; provided that if the notice is received after 12:00 p.m., New
York time, on that business day, it will be deemed to be received on the
following business day. If any Notice received by the Certificate Insurer's
fiscal agent is not in proper form or is otherwise insufficient for the purpose
of making a claim under a Policy, it will be deemed not to have been received by
the Certificate Insurer's fiscal agent for purposes of this paragraph, and the
Certificate Insurer or the fiscal agent, as the case may be, will promptly so
advise the Trustee and the Trustee may submit an amended notice.
Insured Payments due under a Policy unless otherwise stated in the
Policy will be disbursed by the Certificate Insurer's fiscal agent to the
Trustee, on behalf of the Certificateholders by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of the Insured Payment and legally available therefor.
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The fiscal agent is the agent of the Certificate Insurer only and the
fiscal agent will in no event be liable to Certificateholders for any acts of
the fiscal agent or any failure of the Certificate Insurer to deposit, or cause
to be deposited, sufficient funds to make payments due under the related Policy.
As used in the Policies, the following terms shall have the following
meanings:
"Class Principal Balance" means "Certificate Principal Balance" as
defined in the Agreement.
"Deficiency Amount" means, as of any Distribution Date, the excess, if
any, of (a) the sum of (1) the Current Interest for the related Class A
Certificates for the Distribution Date and (2) the Group I Guaranteed Principal
Amount or the Group II Guaranteed Principal Amount, as applicable, for the
Distribution Date over (b) the related Total Available Funds for the related
Distribution Date (net of the Premium Amount with respect to the related Class A
Certificates, the Trustee Fee and Transition Expenses of the related Home Equity
Loan Group and after giving effect to the cross-collateralization provisions of
the Agreement).
"Group I Guaranteed Principal Amount" means (a) with respect to any
Distribution Date other than the Distribution Date in __________ the
Collateralization Deficit with respect to Group I for the Distribution Date and
(b) with respect to the Distribution Date in _____________, the Class Principal
Balance of the Group I Certificates after giving effect to distributions on the
Group I Certificates on the Distribution Date (including Insured Payments
distributed in respect of clause (a) above but excluding any other Insured
Payment).
"Group II Guaranteed Principal Amount" means (a) with respect to any
Distribution Date other than the Distribution Date in February 2031, the
Collateralization Deficit with respect to Group II for the Distribution Date and
(b) with respect to the Distribution Date in February 2031, the Class Principal
Balance of the Group II Certificates after giving effect to distributions on the
Group II Certificates on the Distribution Date (including Insured Payments
distributed in respect of clause (a) above but excluding any other Insured
Payment).
"Insured Payment" means (a) as of any Distribution Date, any Deficiency
Amount and (b) any Preference Amount.
"Preference Amount" means any amount previously distributed to an Owner
on the Class A Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a
final nonappealable order of a court having competent jurisdiction.
"Total Available Funds" means, as to each Distribution Date and a Home
Equity Loan Group, the sum of (x) the amount on deposit in the Certificate
Account with respect to the Home Equity Loan Group and (y) any amounts on
deposit in the Certificate Account with respect to the other Home Equity Loan
Group to be applied to an Available Funds Shortfall with respect to the related
classes of Class A Certificates pursuant to clause 5 under "--Distributions" on
the Distribution Date (disregarding the amount of any Insured Payment to be made
on the Distribution Date).
Capitalized terms used in the Policies and not otherwise defined in the
Policies shall have the meanings set forth in the Agreement as of the date of
execution of the Policies, without giving effect to any subsequent amendment to
or modification of the Agreement unless the amendment or modification has been
approved in writing by the Certificate Insurer.
The Policies are not cancelable for any reason. The premium on each
Policy is not refundable for any reason including payment, or provision being
made for payment, prior to maturity of the related Class A Certificates.
EACH POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND WILL BE
CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES OF THE STATE OF NEW YORK.
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The insurance provided by each Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
THE CERTIFICATE INSURER
[To be inserted].
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Depositor towards the purchase of the Home Equity Loans from
the Sellers.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following section in conjunction with the section in the Prospectus
captioned "FEDERAL INCOME TAX CONSEQUENCES" discusses the material federal
income tax consequences of the purchase, ownership and disposition of the Class
A Certificates. This section must be considered only in connection with "FEDERAL
INCOME TAX CONSEQUENCES" in the Prospectus. The discussion in this Prospectus
Supplement and in the Prospectus is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change. The discussion
below and in the Prospectus does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Class A Certificates. No portion
of the "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" or "FEDERAL INCOME TAX
CONSEQUENCES" sections of the Prospectus Supplement or Prospectus constitutes an
opinion of counsel, other than the opinion set forth in the second paragraph of
"--REMIC Elections" below and in clause (2) of "FEDERAL INCOME TAX
CONSEQUENCES--OPINIONS" in the Prospectus.
REMIC ELECTIONS
Two separate elections will be made to treat the assets of the Trust as
real estate mortgage investment conduits ("REMICs") for federal income tax
purposes, creating a two-tiered REMIC structure. The Class A and Class X-IO
Certificates will be designated as regular interests in a REMIC (the "Regular
Certificates" or the "REMIC Regular Certificates"), and the Class R-1 and Class
R-2 Certificates each will be designated as the residual interest in a REMIC
(the "Residual Certificates" or the "REMIC Residual Certificates"). In addition,
as described below, the Class A-7 Certificates will represent an undivided
beneficial ownership interest in an interest rate cap.
Qualification as a REMIC requires ongoing compliance with relevant
conditions. Stroock & Stroock & Lavan LLP, special tax counsel to the Sellers
and the Depositor, is of the opinion that, for federal income tax purposes,
assuming (1) the appropriate REMIC elections are made, and (2) compliance with
all of the provisions of the Agreement, the REMICs formed pursuant to the
Agreement will each constitute a REMIC, the Class A and Class X-IO Certificates
will be considered "regular interests" in a REMIC, and the Residual Certificates
will be considered the sole class of "residual interests" in each REMIC.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. Some or
all of the Classes of Offered Certificates may be subject to the original issue
discount provisions. WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE
PROSPECTUS FOR MORE DETAIL.
S-67
<PAGE>
In addition, Classes of Offered Certificates may be treated as issued
with a premium. WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE
PROSPECTUS FOR MORE DETAIL.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount is ___% Prepayment Assumption with respect to
the Group I Home Equity Loans and __% CPR with respect to the Group II Home
Equity Loans. See "Prepayment and Yield Considerations" in this Prospectus
Supplement for a description of the prepayment assumption model. However, no
representation is made as to the rate at which prepayments actually will occur.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code for domestic building and loan associations, and
"real estate assets" for real estate investment trusts (REITs), subject to the
limitations described in "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
Similarly, interest on the Class A Certificates will be considered "interest on
obligations secured by mortgages on real property" for REITs, subject to the
limitations described in "Federal Income Tax Consequences" in the Prospectus.
CLASS A-7 CERTIFICATES
The Agreement provides for a reserve fund (the "Supplemental Interest
Reserve Fund"), which is held by the Trustee on behalf of the holders of the
Class A-7 Certificates. To the extent amounts on deposit are sufficient, holders
of the Class A-7 Certificates will be entitled to receive payments from the fund
equal to any Current WAC Excess and any Class A-7 Certificateholders' Interest
Index Carryover. The "Current WAC Express" is the portion of the Current
Interest being distributed on any particular Distribution Date with respect to
the Class A-7 Certificates equal to the amount of interest accrued on those
Certificates at a rate equal to the excess of the Certificate Rate over the
Group II Net WAC Cap. The "Group II Net WAC Cap" with respect to any
Distribution Date will be the rate per annum equal to the weighted average Net
Coupon Rates of the Group II Home Equity Loans as of the beginning of the
related Due Period minus the Minimum Spread. The amount required to be deposited
in the fund on any Distribution Date (the "Supplemental Interest Reserve Fund
Deposit") will equal any Current WAC Excess or Class A-7 Certificateholders'
Interest Index Carryover for the related Distribution Date, or, if no Current
WAC Excess or Class A-7 Certificateholders' Interest Index Carryover is payable
on that Distribution Date, an amount that when added to other amounts already on
deposit in the fund, the aggregate amount on deposit in the fund is equal to
$_______. Any investment earnings on amounts on deposit in the fund will be paid
to (and for the benefit of) the holders of the Class X-IO Certificates and will
not be available to pay any Current WAC Excess or Class A-7 Certificateholders'
Index Carryover. The Supplemental Interest Reserve Fund will not be included as
an asset of any REMIC created pursuant to the Agreement.
The Class A-7 Certificates, except to the extent of any Current WAC
Excess and any Class A-7 Certificateholders' Interest Index Carryover, will be
treated as regular interests in a REMIC under section 860G of the Code (the
"Class A-7 Regular Interests"). Accordingly, the portion of the Class A-7
Certificates representing the Class A-7 Regular Interests will be treated as (i)
assets described in section 7701(a)(19)(C) or the Code, and (ii) "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, in each case to
the extent described in the Prospectus. Interest on the portion of the Class A-7
Certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that the portion of the Class A-7 Certificates is treated as real estate
assets. WE REFER YOU TO "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" IN THE
PROSPECTUS.
The right to receive any Current WAC Excess and any Class A-7
Certificateholders' Interest Index Carryover will not be (i) a regular interest
in a REMIC under section 860G of the Code, (ii) an asset described in section
7701(a)(19)(C) of the Code, or (iii) a "real estate asset" within the meaning of
section 856(c)(4)(A) of the Code. Further, neither the Current WAC Excess nor
the Class A-7 Certificateholders' Interest Index Carryover will be considered
interest on obligations secured by mortgages on real property within the meaning
of section 856(c)(3)(B) of the Code.
S-68
<PAGE>
Each holder of a Class A-7 Certificate is deemed to own an undivided
beneficial ownership interest in two assets: (i) the Class A-7 Regular Interests
and (ii) an interest rate cap contract (a "Cap Agreement") under which the
Current WAC Excess and Class A-7 Certificateholders' Interest Index Carryover is
paid. The Cap Agreement with respect to the Class A-7 Certificates is not
included in any REMIC. The treatment of amounts received by a Class A-7
Certificateholder under the Certificateholder's right to receive the Current WAC
Excess and the Class A-7 Certificateholders' Interest Index Carryover will
depend upon the portion of the Certificateholder's purchase price allocable
thereto. Under the REMIC regulations, each Class A-7 Certificateholder must
allocate its purchase price for the Class A-7 Certificates between its undivided
interest in the Class A-7 Regular Interests and its undivided interest in the
Cap Agreement in accordance with the relative fair market values of each
property right. No representation is or will be made as to the relative fair
market values. Generally, payments made to the Class A-7 Certificates under the
Cap Agreement will be included in income based on, and the purchase price
allocated to the Cap Agreement may be amortized in accordance with, the
regulations relating to notional principal contracts.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to
predict the income tax consequences to the Certificateholders in all of the
state taxing jurisdictions in which they are subject to tax. Certificateholders
are urged to consult their own tax advisors with respect to state and local
income and franchise taxes.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should consider the fiduciary standards under
ERISA in the context of the plan's particular circumstances before authorizing
an investment of a portion of the plan's assets in the Class A Certificates.
Accordingly, pursuant to Section 404 of ERISA, the fiduciary should consider
among other factors:
(1) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries;
(2) whether the investment satisfies the applicable
diversification requirements;
(3) whether the investment is in accordance with the documents and
instruments governing the plan; and
(4) whether the investment is prudent, considering the nature of
the investment. Fiduciaries of plans also should consider
ERISA's prohibition on improper delegation of control over, or
responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code and any entity whose source of funds for the purchase
of Class A Certificates includes plan assets by reason of a plan or account
investing in the entity (each, a "Plan"), are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having specified
relationships to a Plan ("parties in interest" and "disqualified persons").
These transactions are treated as "prohibited transactions" under Sections 406
and 407 of ERISA and excise taxes are imposed upon these persons by Section 4975
of the Code.
An investment in Class A Certificates by a Plan might result in the
assets of the Trust being deemed to constitute Plan assets, which in turn might
mean that aspects of the investment, including the operation of the Trust, might
be prohibited transactions under ERISA and the Code. Neither ERISA nor the Code
defines the term "plan assets." Under Section 2510.3-101 of the United States
Department of Labor ("DOL") regulations (the "Regulation"), a Plan's assets may
include an interest in the underlying assets of an entity (including a trust),
including the prohibited transaction provisions of ERISA and the Code, if the
Plan acquires an "equity interest" in the entity, unless exceptions apply. The
Depositor believes that the Class A Certificates will give Certificateholders an
equity interest in the Trust for purposes of the Regulation and can give no
assurance that the Class A Certificates will qualify for any of the exceptions
under the Regulation. As a result, the assets of the Trust may be considered the
assets of any Plan which acquires a Class A Certificate.
S-69
<PAGE>
The U.S. Department of Labor has granted to _______________ an
administrative exemption (Prohibited Transaction Exemption ("PTE") __-__, as
amended, Exemption Application No. _____-____, __ Fed. Reg. _____
(______________)) (the "Exemption") from the prohibited transaction rules of
ERISA which may be applicable to the initial purchase, the holding and the
subsequent resale in the secondary market by Plans of pass-through certificates
representing a beneficial undivided ownership interest in the assets of a trust
that consist of receivables, loans and other obligations that meet the
conditions and requirements of the Exemption which may be applicable to the
Class A Certificates if _____________________. or any of its affiliates is
either the sole underwriter or manager or co-manager of the underwriting
syndicate, or a selling or placement agent. The conditions which must be
satisfied for the Exemption to apply to the purchase, holding and transfer of
the Class A Certificates include the following:
(1) The acquisition of the Class A Certificates by a Plan is on
terms (included the price for the Class A Certificates) that
are at least as favorable to the Plan as they would be in an
arm's length transaction with an unrelated party.
(2) The rights and interest evidenced by a class of Class A
Certificates acquired by the Plan are not subordinated to the
rights and interest evidenced by any other Certificates of the
Trust.
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of the acquisition that is in one of the
three highest generic rating categories from any of Moody's,
Duff & Phelps Credit Rating Co., S&P or Fitch IBCA, Inc.
("Authorized Rating Agencies") and the investment pool
consists only of assets of the type enumerated in the
Exemption, and which have been included in other investment
pools; certificates evidencing interests in the other
investment pools have been rated in one of the three highest
generic rating categories by an Authorized Rating Agency for
at least one year prior to a Plan's acquisition of
certificates; and certificates evidencing interests in the
other investment pool have been purchased by investors other
than Plans for at least one year prior to a Plan's acquisition
of the Class A Certificates.
(4) The sum of all payments made to the Underwriters in connection
with the distribution of the Class A Certificates represents
not more than reasonable compensation for distributing the
Class A Certificates. The sum of all payments made to and
retained by the Depositor pursuant to the sale of the Home
Equity Loans to the Trust represents not more than the fair
market value for the Home Equity Loans. The sum of all
payments made to and retained by the Servicer or any other
servicer represents not more than reasonable compensation for
the services under the Agreement and reimbursement of the
servicer's reasonable expenses in connection with the
Servicer's services under the Agreement.
(5) The Trustee must not be an affiliate of any member of the
Restricted Group as defined blow.
In addition, it is a condition that the Plan investing in the Class A
Certificates be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D under the Securities Act of 1933, as amended.
The Exemption does not apply to Plans sponsored by the Sellers, the
Depositor, the Certificate Insurer, the Underwriters, the Trustee, the Servicer
or any Mortgagor with respect to Home Equity Loans included in the Trust
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the Trust or any affiliate of the parties (the "Restricted Group"). No
exemption is provided from the restrictions of ERISA for the acquisition or
holding of Class A Certificates on behalf of an "Excluded Plan" by any person
who is a fiduciary with respect to the assets of the Excluded Plan. For purposes
of the Class A Certificates, an Excluded Plan is a Plan sponsored by any member
of the Restricted Group. In addition, no Plan's investment in any class of Class
A Certificates may exceed 25% of all of the Certificates of the Class
outstanding at the time of the Plan's acquisition and after the Plan's
acquisition of the class of Class A Certificates, no more than 25% of the assets
over which the fiduciary has investment authority may be invested in securities
of a trust containing assets which are sold or serviced by the same entity.
Finally, in the case of initial issuance (but not secondary market
S-70
<PAGE>
transactions), at least 50% of each class of Class A Certificates, and at least
50% of the aggregate interest in the Trust, must be acquired by persons
independent of the Restricted Group.
The Depositor believes that the Exemption will apply to the
acquisition, holding and resale of the Class A Certificates by a Plan and that
all conditions of the Exemption other than those within the control of the
investors have been or will be met.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THE PROSPECTUS FOR MORE
DETAIL.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that the Class A Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific conditions set forth in the
Exemption and the other requirements set forth in the Exemption will be
satisfied.
Any Plan fiduciary considering whether to purchase a Class A
Certificate 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.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Class A Certificates
will be rated in the highest rating category of the Rating Agencies, the Class A
Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Accordingly,
many institutions with legal authority to invest in comparably rated securities
may not be legally authorized to invest in the Class A Certificates.
WE REFER YOU TO "LEGAL INVESTMENT" IN THE PROSPECTUS FOR MORE DETAIL.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ________ __, ____ (the "Underwriting Agreement"), among the
Depositor and the Underwriters named below (the "Underwriters") the Depositor
has agreed to sell to the Underwriters and the Underwriters have agreed to
purchase from the Depositor the principal amount of the Class A Certificates set
forth opposite their respective names. The Class A Certificates will be offered
by the Underwriters when as and if issued and sold by the Depositor to the
Underwriters, subject to the Underwriters' right to reject any subscription, in
whole or in part.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
OF CLASS OF CLASS OF CLASS OF CLASS OF CLASS OF CLASS OF CLASS
A-1 A-2 A-3 A-4 A-5 A-6 A-7
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
$ $ $ $ $ $ $
</TABLE>
The Underwriters have informed the Depositor that they propose to offer
the Class A Certificates for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriters may effect the transactions by
selling the Class A Certificates to or through dealers, and the dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters. In connection with the sale of the Class A
Certificates, the Underwriters may be deemed to have received compensation from
the Depositor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Class
A Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Securities Act").
S-71
<PAGE>
No Class A Certificate will have an established trading market when
issued. The Underwriters may, from time to time, act as a broker or purchase and
sell Class A Certificates in the secondary market, but the Underwriters are
under no obligation to do so and there can be no assurance that there will be a
secondary market for the Class A Certificates or liquidity in the secondary
market if one does develop.
From time to time the Underwriters or their affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, affiliates of the Depositor.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters against described civil liabilities, including liabilities
under the Act.
EXPERTS
The consolidated balance sheets of _______________ and ____________ as
of __________ __, ____ and __________ __, ____ and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended ______________ __, ____, incorporated by
reference in this Prospectus Supplement have been incorporated in this
Prospectus Supplement in reliance on the report of ____________________,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Depositor, the Sellers and the Servicer by Stroock & Stroock
& Lavan LLP, New York, New York. Certain legal matters with respect to the Class
A Certificates will be passed upon for the Underwriters by __________________.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
receive ratings of "AAA" by S&P and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Class A
Certificateholders of distributions on the Home Equity Loans. The rating takes
into consideration the characteristics of the Home Equity Loans and the
structural, legal and tax aspects associated with the Class A Certificates. The
ratings on the Class A Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Home Equity Loans,
the likelihood of payment of any Class A-7 Certificateholders' Interest Index
Carryover or the possibility that Class A Certificateholders might realize a
lower than anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the financial strength of the Certificate Insurer below the ratings
initially assigned to the Class A Certificates may result in a reduction of one
or more of the ratings assigned to the Class A Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-72
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
<S> <C>
2/28 Adjustable Rate Loans................................................................................S-29
accredited investor.......................................................................................S-70
Aggregate Class A Principal Balance.......................................................................S-52
Agreement.................................................................................................S-51
Appraised Values..........................................................................................S-21
Authorized Rating Agencies................................................................................S-70
Available Funds...........................................................................................S-54
Available Funds Shortfall.................................................................................S-54
Average Portfolio.........................................................................................S-38
Balloon Loans.............................................................................................S-41
Book-Entry Certificates...................................................................................S-52
Business Day..............................................................................................S-53
Cap Agreement.............................................................................................S-69
Carry-Forward Amount......................................................................................S-54
Cede......................................................................................................S-52
Cedel.....................................................................................................S-52
Certificate Account.......................................................................................S-53
Certificate Insurer.......................................................................................S-64
Certificate Insurer Default...............................................................................S-54
Certificate Rate..........................................................................................S-59
Certificate Register......................................................................................S-53
Certificate Registrar.....................................................................................S-53
Certificateholder.........................................................................................S-53
Certificateowners.........................................................................................S-52
Certificates..............................................................................................S-71
CHEC......................................................................................................S-20
Citibank..................................................................................................S-52
Civil Relief Act Interest Shortfalls......................................................................S-56
Class A Distribution Amount...............................................................................S-54
Class A Principal Distribution Amount.....................................................................S-54
Class A-1 Certificates....................................................................................S-51
Class A-2 Certificates....................................................................................S-51
Class A-3 Certificates....................................................................................S-51
Class A-4 Certificates....................................................................................S-52
Class A-5 Certificates....................................................................................S-52
Class A-6 Calculation Percentage..........................................................................S-55
Class A-6 Certificates....................................................................................S-52
Class A-6 Lockout Distribution Amount.....................................................................S-55
Class A-6 Lockout Percentage..............................................................................S-55
Class A-7 Available Funds Cap.............................................................................S-59
Class A-7 Certificateholders' Interest Index Carryover....................................................S-60
Class A-7 Certificates....................................................................................S-52
Class A-7 Formula Rate....................................................................................S-59
Class A-7 Regular Interests...............................................................................S-68
Class Principal Balance...................................................................................S-66
Class R Certificates......................................................................................S-52
Class X-IO Certificates...................................................................................S-52
Closing Date..............................................................................................S-20
Code......................................................................................................S-67
Collateralization Deficit.................................................................................S-62
S-73
<PAGE>
Coupon Rate...............................................................................................S-22
CPR.......................................................................................................S-41
Current Interest..........................................................................................S-56
Current WAC Express.......................................................................................S-68
Cut-Off Date..............................................................................................S-51
Deficiency Amount.........................................................................................S-66
Definitive Certificate....................................................................................S-53
Depositary Services.......................................................................................S-53
Depositor.................................................................................................S-20
disqualified persons......................................................................................S-69
Distribution Date.........................................................................................S-53
DOL.......................................................................................................S-69
DTCC......................................................................................................S-52
Due Period................................................................................................S-56
equity interest...........................................................................................S-69
ERISA.....................................................................................................S-69
Euroclear.................................................................................................S-52
European Depositaries.....................................................................................S-53
Excluded Plan.............................................................................................S-70
Exemption.................................................................................................S-70
Expense Fee...............................................................................................S-57
Extra Principal Distribution Amount.......................................................................S-56
Final Scheduled Distribution Date.........................................................................S-63
Fixed Rate Certificates...................................................................................S-52
Gross Losses..............................................................................................S-38
Group I Certificates......................................................................................S-52
Group I Guaranteed Principal Amount.......................................................................S-66
Group I Home Equity Loans.................................................................................S-20
Group I Net WAC Cap.......................................................................................S-60
Group II Certificates.....................................................................................S-52
Group II Guaranteed Principal Amount......................................................................S-66
Group II Home Equity Loans................................................................................S-20
Group II Net WAC Cap......................................................................................S-68
Home Equity Loan Group....................................................................................S-20
Home Equity Loans.........................................................................................S-20
Industry..................................................................................................S-53
Insured Payment...........................................................................................S-66
Interest Period...........................................................................................S-60
LIBOR Determination Date..................................................................................S-61
Liquidated Loan...........................................................................................S-62
Loan Balances.............................................................................................S-22
London Business Day.......................................................................................S-61
Maximum Rates.............................................................................................S-29
Minimum Rates.............................................................................................S-29
Minimum Spread............................................................................................S-59
Monthly Remittance Date...................................................................................S-56
Moody's...................................................................................................S-60
Morgan....................................................................................................S-53
Mortgaged Properties......................................................................................S-20
Net Coupon Rate...........................................................................................S-59
Net Losses................................................................................................S-38
Net Monthly Excess Cashflow...............................................................................S-56
Non-Offered Certificates..................................................................................S-52
Notes.....................................................................................................S-20
S-74
<PAGE>
Offered Certificates......................................................................................S-52
One-Month LIBOR...........................................................................................S-60
Original Combined Loan-to-Value Ratio.....................................................................S-21
Overcollateralization Amount..............................................................................S-56
Overcollateralization Release Amount......................................................................S-56
Parties in Interest.......................................................................................S-69
Percentage Interest.......................................................................................S-54
Plan......................................................................................................S-69
Policies..................................................................................................S-51
Preference Amount.........................................................................................S-66
Premium Amount............................................................................................S-57
Prepayment Assumption.....................................................................................S-41
Prepayments...............................................................................................S-39
prohibited transactions...................................................................................S-69
PTE.......................................................................................................S-70
Rating Agencies...........................................................................................S-60
Realized Loss.............................................................................................S-62
Record Date...............................................................................................S-54
Recoveries................................................................................................S-38
Reference Banks...........................................................................................S-61
Regular Certificates......................................................................................S-67
Regulation................................................................................................S-69
Relevant Depositary.......................................................................................S-53
REMIC Regular Certificates................................................................................S-67
REMIC Residual Certificates...............................................................................S-67
REMICs....................................................................................................S-10
Residual Certificates.....................................................................................S-67
Restricted Group..........................................................................................S-70
S&P.......................................................................................................S-60
Securities Act............................................................................................S-71
Sellers...................................................................................................S-20
Servicer..................................................................................................S-51
Servicing Fee.............................................................................................S-63
Six-Month Adjustable Rate Loans...........................................................................S-29
SMMEA.....................................................................................................S-71
Statistical Calculation Date..............................................................................S-20
Statistical Calculation Date Loan Balance.................................................................S-20
Structuring Assumptions...................................................................................S-41
Supplemental Interest Reserve Fund........................................................................S-68
Supplemental Interest Reserve Fund Deposit................................................................S-68
Systems...................................................................................................S-53
Target Deficiency.........................................................................................S-56
Target Overcollateralization Amount.......................................................................S-57
Telerate Page 3750........................................................................................S-61
Total Available Funds.....................................................................................S-66
Transition Expenses.......................................................................................S-57
Trust.....................................................................................................S-20
Trust Estate..............................................................................................S-51
Trustee...................................................................................................S-51
Trustee Fee...............................................................................................S-64
Underwriters..............................................................................................S-71
Underwriting Agreement....................................................................................S-71
Variable Rate Certificates................................................................................S-52
Weighted Average Life.....................................................................................S-41
</TABLE>
S-75
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except under limited circumstances, the globally offered Centex Home
Equity Loan Asset-Backed Certificates, Series 1999-4 (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold the Global Securities through any of DTCC, Cedel or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through 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 DTCC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTCC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear and as DTCC
Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet established
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 DTCC in the
name of Cede & Co. as nominee of DTCC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTCC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold the positions in accounts as
DTCC Participants.
Investors electing to hold their Global Securities through DTCC will
follow the settlement practices applicable to prior Home Equity Loan
Asset-Backed Certificates issues. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through 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 sellers'
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTCC Participants. Secondary market trading between
DTCC Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
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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.
Trading between DTCC Seller and Cedel or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTCC 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 will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, on the basis of either the actual number
of days in the accrual period and a year assumed to consist of 360 days or a
360-day year of 12 30-day months as applicable to the related class of Global
Securities. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTCC 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 debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt 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 can elect not to
preposition funds and allow that credit line to be drawn upon the 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 the 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,
DTCC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTCC Seller on the settlement date. Thus, to the DTCC Participants a
cross-market transaction will settle no differently than a trade between two
DTCC Participants.
Trading between Cedel or Euroclear Seller and DTCC 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 the respective Depositary, to a DTCC Participant. The seller will
send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTCC 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 either the actual number of days in the
accrual period and a year assumed to consist of 360 days or a 360-day year of
12 30-day months as applicable to the related class of Global Securities. For
transactions settling on the 31st of the month, payment
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will include interest accrued to and excluding the first day of the following
month. The payment will then be reflected in the account of the 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 debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (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 DTCC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through 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;
(b) borrowing the Global Securities in the U.S. from a DTCC
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
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTCC
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 DTCC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (1) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (as defined below) (Form W-8).
Beneficial owners of Global Securities that are non-U.S. Persons can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of the change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate 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
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that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws of
the United States, any state of the United States or the District of
Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations),
(3) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or
(4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and
one or more United States persons have authority to control all
substantial decisions of the trust.
Notwithstanding clause (4), to the extent provided in the regulations,
some trusts in existence on August 20, 1996, and treated as United States
persons prior to the date, that elect to continue to be treated as United States
persons shall also be a U.S. Person. Entities not considered U.S. Persons shall
be considered non-U.S. Persons.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with the application of Treasury regulations relating to tax documentation
requirements that are generally effective with respect to payments made after
December 31, 1999. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
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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 jurisdiction where the offer or sale
is not permitted.
<PAGE>
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
-------------------------------------
CHEC FUNDING, LLC
(DEPOSITOR)
CENTEX CREDIT CORPORATION
D/B/A
CENTEX HOME EQUITY CORPORATION
(SELLER AND SERVICER)
-------------------------------------
OFFERED SECURITIES
Asset-Backed Certificates and Asset-Backed Notes will be sold from time to time
pursuant to a prospectus supplement in amounts, at prices and on terms to be
determined at the time of sale. Each series will include one or more classes of
certificates or one or more classes of notes with differing payment terms,
priority of payments, and maturities.
A series of certificates will evidence undivided interests in a trust fund
created in connection with the issuance of the series. A series of notes will be
issued pursuant to an indenture and secured by the trust fund. In each case, the
certificates and notes will be payable only from the assets of the trust fund.
Separate trust funds may be established for one or several classes of a series
of notes or certificates, with each class or group of classes being entitled to
payment only from the assets of their individual trust fund.
Crosscollateralization among trust funds may be permitted.
Credit enhancement will be provided for all offered securities.
TRUST FUND
Each trust fund will include the following assets, among others:
- - closed-end home equity loans secured by first or second mortgages on one-
to four- family residential or mixed properties
- - amounts received or due on the home equity loans
- - the mortgaged properties securing the home equity loans and certain
proceeds of liquidation of these properties
- - funds on deposit in one or more prefunding , capitalized interest, or other
accounts
- - reserve funds, letters of credit, surety bonds, insurance policies and/or
other forms of credit enhancement
Prefunding accounts may be established to purchase additional home equity loans
during a specified prefunding period.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT ARE
TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------- ---, ----
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND IN
THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the offered securities in two separate
documents that provide progressively more detail:
- - this prospectus, which provides general information, some of which may not
be applicable to your series of notes or certificates; and
- - the accompanying prospectus supplement, which describes the specific terms
of your series of notes or certificates.
IF THE DESCRIPTION OF YOUR NOTES OR CERTIFICATES IN THE ACCOMPANYING PROSPECTUS
SUPPLEMENT DIFFERS FOR THE RELATED DESCRIPTION IN THIS PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information," "Reports to Securityholders" and
"Incorporation of Certain Information by Reference" in this prospectus. You can
request information incorporated by reference from Centex Credit Corporation
d/b/a Centex Home Equity Corporation by calling us at (214) 981-5000 or writing
to us at Centex Credit Corporation, 2728 N. Harwood Street, Dallas, Texas,
75201. We have not authorized anyone to provide you with different information.
We are not offering the notes or certificates in any state where the offer is
not permitted.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement....................................5
Reports to Holders.......................................5
Available Information....................................6
Incorporation of Certain Documents by Reference..........6
Introduction.............................................7
The Depositor............................................8
The Seller and the Servicer..............................8
General...............................................8
Underwriting Guidelines Applicable to the Home
Equity Loans.........................................8
Underwriting Criteria of the Seller..................11
Servicing............................................14
Description of the Securities...........................15
General..............................................15
Book-Entry Securities................................17
Valuation of the Home Equity Loans...................20
Payments of Interest.................................21
Payments of Principal................................21
Final Scheduled Distribution Date....................21
Special Redemption...................................22
Weighted Average Life of the Securities..............22
The Trust Funds.........................................23
General..............................................23
The Home Equity Loans................................24
Additional Information...............................25
Accounts................................................26
Certificate and Distribution Accounts................26
Prefunding and Capitalized Interest Accounts.........26
Eligible Investments.................................27
Revolving Period and Amortization Period;
Retained Interest...................................28
Enhancement.............................................28
The Agreements..........................................30
General..............................................30
Repurchase and Substitution of Non-Conforming
Home Equity Loans...................................30
Assignment of Home Equity Loans......................32
Servicing and Sub-Servicing..........................33
Deposits to Principal and Interest Account and
Certificate Account.................................34
Advances; Compensating Interest......................35
Optional Repurchase of Defaulted Home Equity
Loans...............................................36
Realization Upon Defaulted Home Equity Loans.........36
Hazard Insurance.....................................36
General Servicing Standard...........................37
Sub-Servicing Arrangements...........................37
Certain Matters Regarding the Servicer..................37
Removal and Resignation of Servicer..................38
The Trustee..........................................39
Reporting Requirements...............................39
Removal of Trustee for Cause.........................41
Governing Law........................................41
Amendments...........................................41
Termination of the Trust.............................42
Optional Termination.................................42
REMIC Administrator..................................44
Certain Legal Aspects of the Home Equity Loans..........45
Home Equity Loans....................................45
Foreclosure..........................................45
Rights of Redemption.................................47
Junior Home Equity Loans; Rights of Senior Home
Equity Loans........................................48
Anti-Deficiency Legislation and Other Limitations
on Lenders..........................................48
Due-on-Sale Clauses in Home Equity Loans.............49
Enforceability of Prepayment and Late Payment Fees...50
Equitable Limitations on Remedies....................50
Applicability of Usury Laws..........................51
Environmental Legislation............................51
Soldiers' and Sailors' Civil Relief Act of 1940......51
Use of Proceeds.........................................52
Federal Income Tax Consequences.........................53
General..............................................53
Opinions.............................................53
Taxation of Debt Securities (Including Regular
Interest Securities)................................54
Taxation of the REMIC and its Holders................60
REMIC Expenses; Single Class REMICs..................60
Taxation of the REMIC................................61
Taxation of Holders of Residual Interest Securities..62
Administrative Matters...............................65
Tax Status as a Grantor Trust........................65
Miscellaneous Tax Aspects............................68
Tax Treatment of Foreign Investors...................69
Tax Characterization of the Trust as a Partnership
or Division.........................................70
Tax Consequences to Holders of the Notes Issued
by a Partnership or Division.......................70
Tax Consequences to Holders of the Certificates
Issued by a Partnership............................71
State Tax Consequences..................................75
ERISA Considerations....................................75
Legal Investment........................................79
Plan of Distribution....................................80
Legal Matters...........................................80
</TABLE>
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PROSPECTUS SUPPLEMENT
The prospectus supplement relating to a series of securities to be
offered under this prospectus will, among other things, set forth with respect
to the series of securities:
- the aggregate principal amount, interest rate, and authorized
denominations of each class;
- the type of securities to be issued with respect to each class;
- certain information concerning the home equity loans;
- the terms of any credit enhancement with respect to the series;
- the terms of any insurance related to the home equity loans;
- information concerning any other assets in the related trust
fund, including any reserve fund;
- the final scheduled distribution date of each class of the
securities;
- the method to be used to calculate the amount of interest and
principal required to be applied to the securities of each class
of the series on each distribution date, the timing, order of
priority and allocation of interest and principal among the
classes;
- the distribution dates on which payments of principal and
interest on the securities, along with other amounts specified in
the prospectus supplement, are made;
- any assumed reinvestment rate with respect to funds held in any
fund or account for the series;
- the amount, if any, deposited in a Prefunding Account available
to purchase additional home equity loans, the length of the
prefunding period and the criteria for determining which
additional home equity loans may become part of the trust fund;
- additional information with respect to the plan of distribution
of the securities; and
- whether one or more REMIC elections will be made with respect to
some or all of the trust fund for the series and if so, the
designation of the offered securities as regular interests or
residual interests in a REMIC.
REPORTS TO HOLDERS
Depending on whether a series of certificates or a series of notes is
being issued, the agreements governing the transaction will include:
- a pooling and servicing agreement or a trust agreement for a
transaction involving the issuance of certificates; or
- a sale and servicing agreement and an indenture for a transaction
involving the issuance of notes.
The agreements require periodic and annual reports concerning the
related trust fund for a series of securities to be forwarded to holders.
Unless otherwise specified in the related prospectus supplement, these reports
will not be examined and reported on by an independent public accountant. If
specified in the prospectus supplement for a series of securities, the series
or one or more classes of the series will be issued in book-entry form. In
this case, owners of the notes or certificates will not be considered
"holders" under the agreements and will not receive any reports directly.
Instead, reports will be furnished to owners through the participants and
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<PAGE>
indirect participants of the applicable book-entry system. References in this
prospectus to the rights of "holders" will refer to the rights of owners as
they may be exercised indirectly through these participants.
WE REFER YOU TO "THE AGREEMENTS--REPORTS TO HOLDERS" FOR MORE DETAIL.
AVAILABLE INFORMATION
The seller has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, with
respect to the securities. This prospectus, which forms a part of the
registration statement, and the prospectus supplement relating to each series of
securities contain summaries of the material terms of the documents referred to
in the prospectus supplement and this prospectus, but do not contain all of the
information set forth in the registration statement pursuant to the Rules and
Regulations of the Commission. For further information, we refer investors to
the registration statement and the related exhibits. The registration statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Office located as follows, Midwest Regional Office, 500 West Madison Street,
Chicago, Illinois 60661; and Northeast Regional Office, Seven World Trade
Center, New York, New York 10048. The Commission maintains an internet web site
that contains reports, proxy and information statements and other information
regarding the registrants that file electronically with the Commission,
including the seller. The address of the internet web site is
(http://www.sec.gov).
Each trust fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended. The depositor and the seller intend to cause each trust fund to
suspend filing reports if and when these reports are no longer required under
the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus and any prospectus
supplement. Investors should not rely on any information or representations not
contained in this prospectus or any prospectus supplement. This prospectus and
any prospectus supplement do not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the securities offered under this
prospectus and the applicable prospectus supplement, and is not an offer of the
securities to any person in any state or other jurisdiction in which an offer
would be unlawful. The delivery of this prospectus does not imply that
information contained in the prospectus is correct as of any time subsequent to
its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed with the Commission by or on behalf of
the trust fund referred to in the accompanying prospectus supplement pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and prior to the termination of any offering of the securities issued
by the trust fund will be deemed to be incorporated by reference in this
prospectus and to be a part of this prospectus from the date of the filing of
the documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this prospectus should be deemed to be modified
or superseded for all purposes of this prospectus to the extent that a statement
contained in this prospectus (or in the accompanying prospectus supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces the statement. Any statement
modified or superseded in this manner should not be deemed, except as modified
or superseded, to constitute a part of this prospectus.
The seller on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, on written or oral request,
a copy of any or all of the documents referred to above that have been or may
be incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless these exhibits are
specifically incorporated by reference into the information incorporated this
prospectus).
6
<PAGE>
INTRODUCTION
This prospectus provides for the issuance of series of certificates or
notes consisting of one or more classes, one or more of which may be classes of:
- Compound Interest Securities
- Planned Amortization Class Securities
- Variable Interest Securities
- Zero Coupon Securities
- Principal Only Securities
- Interest Only Securities
Certain classes of securities may be subordinated to other classes,
both as to payment priority and as to allocation of losses with respect to the
home equity loans. In addition, Residual Interest Securities representing a
residual interest in the trust fund may be provided for. Each class may differ
in, among other things, payment terms and priorities, final scheduled
distribution dates and distribution dates with respect to distributions of
interest and principal.
The certificates will represent interests in, and the notes will be
secured by, all or a portion of the assets in the trust fund with respect to the
series issued. Where one or more classes of securities are backed by only a
portion of the assets in the trust fund, it will, unless crosscollateralization
is permitted pursuant to the prospectus supplement, only be entitled to payment
out of the assets of its portion of the trust fund.
This prospectus provides for various features, including a Prefunding
Account to be used to purchase assets after the closing date for a specified
prefunding period, revolving and amortizing periods, and optional termination of
the trust. Credit enhancement is available in a number of forms, which are
discussed in this prospectus.
7
<PAGE>
THE DEPOSITOR
Unless otherwise specified in the prospectus supplement, CHEC Funding,
LLC will act as depositor. It was formed in the State of Delaware on December 7,
1999, and is a wholly-owned subsidiary of the seller. The depositor maintains
its principal offices at 2728 N. Harwood Street, Dallas, Texas, 75201. Its
telephone number is (214) 981-5000.
The depositor does not have, nor is it expected in the future to have,
any significant assets.
THE SELLER AND THE SERVICER
GENERAL
The seller and servicer, Centex Credit Corporation d/b/a Centex Home
Equity Corporation, a Nevada corporation, is a sub-prime mortgage lender formed
in 1994 that engages in originating primarily non-conforming home equity loans,
directly through four major origination sources. The seller was originally named
Nova Credit Corporation and was headquartered in Denver, Colorado. In the first
calendar quarter of 1997, the seller's operations were moved to Dallas, Texas
and the seller underwent a reorganization and the hiring of a new management
team. In April of 1997, the seller's name was changed to Centex Credit
Corporation d/b/a Centex Home Equity Corporation. The seller is a wholly-owned
subsidiary of Centex Financial Services, Inc., a financial services subsidiary
of Centex Corporation, headquartered in Dallas, Texas. Centex Corporation is a
publicly traded, diversified company with a market capitalization of
approximately $1.5 billion and is primarily engaged in the home building,
financial services, contracting and construction services industries. The seller
is also affiliated with CTX Mortgage Company, a Nevada corporation, which
originates home equity loans conforming to Fannie Mae and/or Freddie Mac
guidelines. Since inception, the seller has focused on lending to individuals
who have substantial equity in their homes but have impaired or limited credit
histories. The seller's home equity loans to these borrowers are made for many
purposes such as debt consolidation, refinancing, home improvement or
educational expenses. Substantially all of the seller's home equity loans are
secured by first or second mortgage liens on one-to four-family residences, and
have amortization schedules ranging from five years to 30 years.
The seller is currently licensed to do business in 47 states plus the
District of Columbia and employs approximately 1,075 people located in 130
offices in 37 states. The seller originates home equity loans through its retail
branch network of 66 branch offices located in 29 states. In addition, the
seller originates home equity loans through a broker referral network from six
division offices with a total of 22 regions. A third production source for the
seller is referral of home equity loans from its affiliate conforming mortgage
company, CTX Mortgage Company. The final source of origination of home equity
loans is the seller's direct sales unit which sources loans through
telemarketing and direct mail efforts. All home equity loans are originated in
the name of Centex Home Equity Corporation, in the name of an affiliate of
Centex Home Equity Corporation or in the name of a broker for simultaneous
assignment to Centex Home Equity Corporation. The seller's strategy is to
utilize these origination channels to generate growth in the volume of the home
equity loans originated while diversifying sources of the home equity loans and
maintaining emphasis on its underwriting standards.
The seller has centralized its underwriting, servicing and quality
control functions in its Dallas headquarters.
The seller's headquarters are located at 2728 North Harwood Street,
Dallas, Texas, 75201 and its telephone number is (214) 981-5000.
UNDERWRITING GUIDELINES APPLICABLE TO THE HOME EQUITY LOANS
THE PRE-UNDERWRITING PROCESS. The seller's home equity loan
application process is conducted by the seller's branch officers and approved
mortgage brokers who compile information necessary for the seller's
underwriting department to evaluate the home equity loan. The approval process
is generally coordinated over
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the telephone with applications and credit reports obtained by branch
processors or brokers and usually sent by facsimile transmission to the
processing department at one of the seller's offices. Branch personnel
communicate with the seller's centralized underwriting staff, located in
Dallas, Texas, which consists of approximately 24 underwriters. The seller
also employs 24 other underwriters in six divisional offices, which have loan
approval authority on a limited basis. Branch operation personnel review the
applicant's credit history, based on the information contained in the
application as well as reports available from credit reporting bureaus, to see
if the credit history is acceptable given the seller's underwriting
guidelines. A credit report from one approved repository is required for
pre-approval and at least two reports are required prior to underwriting
review. These credit reports are the primary means utilized to verify each
borrower's mortgage and other debt payment histories. Based on this review,
the proposed terms of the home equity loan are then communicated to the branch
officer or broker responsible for the application who in turn discusses the
proposal with the home equity loan applicant. If the applicant accepts the
proposed terms, a branch officer or broker will gather additional information
necessary for the underwriting, closing, and funding of the loan.
THE STANDARD NON-CONFORMING PROGRAM. The home equity loans were
originated under the seller's Standard Non-Conforming Program. The Standard
Non-Conforming Program is applicable to residential loans which, for credit
reasons, do not conform to "traditional lenders" underwriting guidelines
comparable to those employed by savings and loans and commercial banks. The
seller began underwriting home equity loans in accordance with the Standard
Non-Conforming Program in May 1997.
The seller's underwriting standards under the Standard Non-Conforming
Program are primarily intended to assess creditworthiness of the mortgagor, the
value of the mortgaged property and to evaluate the adequacy of the property as
collateral for the home equity loan. While the seller's primary consideration in
underwriting a home equity loan is the borrower's employment stability and
debt-to-income ratio, the condition and value of the mortgaged property relative
to the amount of the home equity loan is another critical factor. In addition,
it also considers, among other things, a mortgagor's credit history and
repayment ability, as well as the type and use of the mortgaged property.
The seller currently employs approximately 48 underwriters and has its
underwriting functions primarily centralized in its Dallas, Texas headquarters.
The seller does not delegate underwriting authority to any broker or
correspondent. The seller's underwriting department functions independently of
its mortgage origination departments. Underwriters are compensated on a salary
basis, and are not compensated on commission.
The seller's policy is that every home equity loan is reviewed and
approved by an underwriter with assigned approval authorities. Home equity loans
exceeding those authorities require a second approval, generally from a manager
of underwriting or an underwriting supervisor.
The seller has established classifications with respect to the credit
profile of the applicant, and each loan is placed into one of seven ratings "A+"
through "D". Terms of loans made by the seller as well as maximum loan-to-value
ratios and debt-to-income ratios vary depending on the classification of the
applicant. Home equity loan applicants with less favorable credit ratings are
generally offered home equity loans with higher interest rates and lower
loan-to-value ratios than applicants with more favorable credit ratings.
The home equity loans underwritten under the seller's Standard
Non-Conforming Programs are adjustable and fixed rate loans. Except for
balloon loans, the fixed rate home equity loans originated by the seller have
amortization schedules ranging from 5 years to 30 years, and generally require
equal monthly payments which are due as of a scheduled day of each month which
is fixed at the time of origination. The fixed rate balloon loans, originated
by the seller, generally provide for scheduled amortization over 30 years,
with a maturity date and a balloon payment at the end of the fifteenth year.
The seller originates adjustable rate loan products called six-month ARMs or
2/28 ARMs, depending on whether the loan bears interest at rates which adjust
based on six-month LIBOR, with the initial rate adjustment date being either
six months after the date of origination of the loan or 24 months after the
date of origination of the loan. The six-month ARMs amortize over 15 to 30
years, adjust every six months and allow for a maximum periodic rate
adjustment of 1.00%. The maximum adjustment over the life of a six-month ARM
is capped at 7.00% above the initial interest rate of the
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loan and the minimum interest rate is generally equal to the initial interest
rate. The 2/28 ARMs amortize over 30 years, have an initial interest rate
adjustment date which is 24 months after the date of origination and allow for
a maximum rate adjustment on the initial interest rate adjustment date of
2.00%. After the initial rate adjustment date, the 2/28 ARMs adjust every six
months, allow for a maximum periodic interest rate adjustment of 1.00%, have a
lifetime cap on interest rate adjustments of 7.00% above the initial interest
rate of the loan and allow for a minimum rate generally equal to the initial
interest rate of the loan. The seller does not currently originate ARMs with a
balloon feature. The principal amounts of the home equity loans originated by
the seller generally range from a minimum of $5,000 to a maximum of $500,000.
The collateral securing loans originated by the seller are generally one- to
four-family residences, including condominiums, cooperatives, townhomes and
manufactured housing treated as real property under applicable state law.
These properties may or may not be occupied by the owner. It is the seller's
policy not to accept commercial properties, mixed-use properties or unimproved
land as collateral. Rural property requires a 5% reduction in loan-to-value
ratio. Second mortgages require a 5% reduction in loan-to-value ratio on owner
occupied property. The seller generally does not originate second lien home
equity loans where any senior mortgage lien allows for open-end advances or
negative amortization, is a private party mortgage or has shared appreciation
provisions.
The home equity loans underwritten under the Standard Non-Conforming
Program are underwritten pursuant to the "Full Documentation" residential loan
program, the "Limited Documentation" residential loan program or the "Stated
Income" residential loan program. Under each of these programs, the seller
reviews the home equity loan applicant's source of income, calculates the amount
of income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt-to-income ratio to determine the applicant's ability to repay the home
equity loan, reviews the type and use of the property being financed and reviews
the property for compliance with the seller's standards. In determining an
applicant's ability to repay a six-month ARM, the seller uses a qualifying rate
equal to six-month LIBOR plus a margin. In determining an applicant's ability to
pay 2/28 ARM, the seller uses a qualifying rate equal to the initial interest
rate on the home equity loans, that is, six-month LIBOR plus a margin less up to
2.50%. It is the policy of the seller for its underwriting process to consist of
a thorough credit review and a thorough appraisal review on each home equity
loan by its underwriting department. In addition, the Seller performs a separate
appraisal review by the seller's appraisal review department on home equity
loans with a loan-to-value ratio of 85% or greater. Finally, the seller performs
a full compliance review is performed, to ensure that all documents have been
properly prepared, all applicable disclosures given in a timely fashion, and
that there has been proper compliance with all federal and state regulations.
Appraisals are performed by third party, independent, fee-based, state-licensed
appraisers generally approved by the seller's staff appraiser and generally
conforming to current Fannie Mae and/or Freddie Mac secondary market
requirements for residential property appraisals. Each appraisal includes, among
other things, an inspection of the interior and exterior of the subject property
and data from sales within the same general location as the subject property
where available.
The seller's underwriting criteria require it to determine the income
of each borrower and the source of funds (if applicable). Under the Full
Documentation Program, it is the policy of the seller that home equity loans to
borrowers who are salaried employees be supported by current employment
information in addition to employment history. This information for salaried
borrowers is verified based on any of the following: written confirmation from
employers, one or more pay-stubs, recent W-2 tax forms or recent tax returns. In
addition, a telephone confirmation of employment is made. Under the Limited
Documentation Program, self-employed borrowers are qualified based upon monthly
income stated on the home equity loan application. Current tax return or six
months of current bank statements and a signed profit and loss statement are
obtained to verify existence of business and acceptable cash flow. Under the
Stated Income Program, borrowers are qualified based upon monthly income as
stated on the home equity loan application and telephone confirmation of
employment. Self-employed borrowers under the Stated Income Program are required
to submit a business license, current bank statements, and verification with
directory assistance to ensure existence of the business.
Verification of the source of funds (if any) required by the applicant
is generally required under purchase money programs in the form of a standard
verification of deposit, current bank statement or other acceptable
documentation. Twelve months of mortgage payments or rental history must be
verified by lender or landlord. If appropriate compensating factors exist, the
seller may waive certain documentation requirements for individual borrowers.
All documentation should be no more than 60 days old at underwriting and no more
than
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90 days old at the time of the funding of the related loan. Upon completion of
a home equity loan's underwriting and processing, the closing of the loan is
scheduled with a closing attorney or agent approved by the seller. The closing
attorney or agent is responsible for completing the loan closing transaction
in accordance with applicable law and the seller's operating procedures. Title
insurance that insures the seller's interest as mortgagee and evidence of
adequate homeowner's insurance naming the seller and its assignees as an
additional insured party are required on all loans.
CREDIT INSURANCE. The seller is currently underwriting some, but not
all, of its home equity loans with truncated decreasing credit insurance that
is underwritten by an unrelated third party. One type of credit insurance is
credit life insurance which provides for the payment of indebtedness upon the
death of the insured. This type of insurance may be underwritten as either
joint insurance (covering both borrower and co-borrower) or single insurance
(covering the primary borrower only). The maximum coverage amount of the
credit life insurance is $100,000 and is based upon a net payoff basis. The
term of the coverage is limited to five years. A second type of credit
insurance is involuntary unemployment insurance. This type of insurance pays
to the creditor the scheduled monthly payment obligation of an insured debtor
in cases where the debtor has become unemployed involuntarily. The maximum
monthly benefit is $750 with the term of the insurance being limited to five
years.
LAND HOME LOANS. Centex Finance Company, a Nevada corporation and an
affiliate of the seller, originates land home loans. A land home loan is a loan
that is secured by a multi-section manufactured home and the related real
estate. Centex Finance Company is in the first lien position on all of the land
home loans. All of the Centex Finance Company land home loans are underwritten
pursuant to Centex Finance Company guidelines which are separate from, and
different than, the underwriting guidelines used for the home equity loans
originated by seller. Critical aspects of Centex Finance Company underwriting
requirements include:
- the manufactured home must be used as the borrower's primary
or secondary residence, and must meet minimum down payment or
equity requirements;
- all manufactured homes securing the land home loans are
considered to be real property and title insurance policies are
acquired on all land home loans;
- loan-to-value ratios with regard to the land home loans
are calculated by dividing the amount financed by either the
total sales price of the real estate and the manufactured home
together or the total sales price of the manufactured home and
improvements plus an independent fee appraisal performed by a
company-approved appraiser of the underlying real estate in cases
where the borrower has previously owned the underlying real
property;
- the maximum amount financed is limited to the value of the
real estate (as determined by the lesser of the sales price of
the land and an independent fee appraisal performed by a company
approved appraiser at the time of origination) plus the sales
price of the manufactured home (which is limited to 30% over the
wholesale cost of the home) plus site improvements such as
utilities hook up, septic and driveway (which is limited to 25%
of the wholesale cost of the home);
- land home loans are underwritten using a system that
manually evaluates the borrower's credit history and employment
stability and significantly relies on FICO scores; and
- the borrower's income is verified and debt ratios are
carefully evaluated.
The general criteria used by the seller's underwriting staff in classifying loan
applicants are set forth below.
UNDERWRITING CRITERIA OF THE SELLER
"A+" RISK. Under the "A+" risk category, the prospective borrower must
have repaid installment or revolving consumer debt according to its terms with
no 30-day late payments within the last 12 months and within the prior 12 month
period no 30-day late payments are permitted on an existing mortgage. No
Collection
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Accounts, unpaid charge-offs, judgments or a derogatory public record is
permitted within the past two years (except medical collections under
$500.00). No bankruptcy or foreclosure may have occurred during the preceding
seven years commencing from the date of discharge or the date the foreclosure
was filed. No state or federal tax liens (paid or unpaid) and no delinquent
property taxes are permitted in the last two years. A maximum loan-to-value
ratio of 90% for home equity loans originated under the Full Documentation
Program (85% for Limited Documentation Program or 80% if the home equity loan
is originated under the Stated Income Program) is permitted for a home equity
loan of less than $500,000 on an owner-occupied property. A maximum
loan-to-value ratio of 85% for a home equity loan originated under the Full
Documentation Program (75% for Limited Documentation Program or 70% if the
home equity loan is originated under the Stated Income Program) is permitted
for a home equity loan of less than $500,000 on non-owner occupied property.
The maximum debt service-to-income ratio is 45%.
"A-1" RISK. Under the "A-1" risk category, the prospective borrower
must have generally repaid installment or revolving debt according to its terms
with no 60-day late payments within the last 12 months. A maximum of one 30-day
late payment is acceptable in the last 12 months on an existing mortgage.
Consecutive 30-day delinquencies may be considered as a single late. This is
limited to 30-days late only. Minor derogatory items are allowed as to
non-mortgage credit. No Collection Accounts, charge-offs or judgments over $500
within the last two years are allowed. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding five years. A
maximum loan-to-value ratio of up to 90% (85% for the Limited Documentation
Program or 80% for home equity loans originated under the Stated Income Program)
is permitted for a home equity loan on a one-to-four family owner-occupied
property. A maximum loan-to-value ratio of up to 85% (75% for the Limited
Documentation Program or 70% for home equity loan originating under the Stated
Income Program) is permitted for a home equity loan on a non-owner occupied
property. The debt service-to-income ratio generally is 50% or less based on the
relevant qualifying rate for the home equity loan. The maximum loan amount is
$500,000 for a one-to-four family property under the Full Documentation Program.
The maximum loan amount is $350,000 for a home equity loan on a one-to-four
family property under the Limited Documentation Program or Stated Income
Program. Exceptions to the maximum loan amount for a single-family, owner
occupied property are considered by the seller on a limited basis.
"A-2" RISK. Under the "A-2" risk category, the prospective borrower
must have generally repaid installment or revolving debt according to its terms
with no 90-day late payments within the last 12 months. A maximum of two 30-day
late payments and no 60-day late payments within the last 12 months is
acceptable on an existing home equity loan. Minor derogatory items are allowed
as to non-mortgage credit. No unpaid Collection Accounts, charge-offs or
judgments over $1,000 within the last two years are allowed. No bankruptcy or
notice of default filings by the borrower may have occurred during the preceding
three years. A maximum loan-to-value ratio of up to 90% (80% for Limited
Documentation Program or 80% for home equity loans originated under the Stated
Income Program) is permitted for a home equity loan on a one-to-four family
owner occupied property. A maximum loan-to-value ratio of up to 80% (75% for
Limited Documentation Program or 65% for home equity loans originated under the
Stated Income Program) is permitted for a home equity loan on a non-owner
occupied property. The debt service-to-income ratio generally is 50% or less
based on the relevant qualifying rate of the home equity loan. The maximum loan
amount is $500,000 for a one-to-four family property under the Full
Documentation Program. The maximum loan amount is $350,000 for a home equity
loan on a one-to-four family property under the Limited Documentation Program or
Stated Income Program. Exceptions to the maximum loan amount for a
single-family, owner occupied property are considered by the seller on a limited
basis.
"B" RISK. Under the "B" risk category the prospective borrower must
have generally repaid consumer debt according to its terms with no 120-day
late payments within the last 12 months. A maximum of three 30-day late
payments within the last 12 months is acceptable on an existing home equity
loan on the subject property. As to non-mortgage credit, some prior defaults
may have occurred. Isolated and insignificant collections and/or charge-offs
and judgments within the last 24 months less than $2,500 are permitted and are
not required to be paid from the proceeds of the home equity loan. No
bankruptcy or foreclosure by the borrower may have occurred during the
preceding 24 months. A maximum loan-to-value ratio of 85% (80% for Limited
Documentation Program or 75% for Stated Income Program) is permitted for a
home equity loan on a one-to-four family owner occupied property. A maximum
loan-to-value ratio of 75% (70% for Limited
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Documentation Program or 65% for home equity loans originated under the Stated
Income Program) is permitted for a home equity loan on a non-owner occupied
property. The debt service-to-income ratio generally is 50% or less based on
the relevant qualifying rate for the home equity loan. The maximum loan amount
is $500,000 for a one-to-four family property under the Full Documentation
Program. The maximum loan amount is $250,000 for home equity loans originated
under the Limited Documentation Program or Stated Income Program.
"C-1" RISK. Under the "C-1" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
four 30-day late payments and one 60-day late payment within the last 12 months
is acceptable on an existing home equity loan. The existing home equity
obligation can be up to 60 days past due at the funding of the loan. As to
non-mortgage credit, significant prior defaults may have occurred. There may be
open collections or charge-offs not to exceed $2,500 and up to $5,000 in
isolated circumstances. However, Collection Accounts, unpaid charge-offs or
judgments are not required to be paid from the proceeds of the home equity loan.
No bankruptcy or notice of default filings by the borrower may have occurred
during the preceding 12 months. A maximum loan-to-value ratio of 80% (75% on the
Limited Documentation Program or 70% for home equity loans originated under the
Stated Income Program) is permitted for a home equity loan on a one-to-four
family owner-occupied property. A maximum loan-to-value ratio of 70% (65% on
Limited Documentation Program) is permitted for a home equity loan on a
non-owner-occupied property. The debt service-to-income ratio is generally 50%
or less based on the relevant qualifying rate for the home equity loan. The
maximum loan amount is $350,000 for a home equity loan on a one-to-four family
owner-occupied or non-owner occupied property. The maximum loan amount is
$250,000 on the Limited Documentation Program.
"C-2" RISK. Under the "C-2" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
two 60-day late payments or one 90-day late payment within 12 months is
acceptable on an existing home equity loan on the subject property. The existing
home equity obligation can be up to 90 days past due at the funding of the loan.
As to non-mortgage credit, significant prior defaults may have occurred. There
may be open collections or charge-offs not to exceed $5,000 and Collection
Accounts, unpaid charge-offs or judgments are not required to be paid from the
proceeds of the home equity loan. No bankruptcy or notice of default filings by
the borrower may have occurred during the preceding 6 months. A maximum
loan-to-value ratio of 75% is permitted for a home equity loan on a one-to-four
family owner-occupied property. A maximum loan-to-value ratio of 65% is
permitted for a home equity loan on a non-owner-occupied property. The debt
service-to-income ratio is generally 50% or less based on the relevant
qualifying rate for the home equity loan. The maximum loan amount is $350,000.
"D" RISK. Under the "D" risk category, the prospective borrower may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a disregard for timely payment or credit standing.
With respect to an existing home equity loan on the subject property, the home
equity loan may be no more than one time 120 days late and may be in
foreclosure proceedings. The existing home equity loan is not required to be
current at the time the application is submitted. The borrower may have open
collections, charge-offs and judgments, which are generally paid through the
loan proceeds if amount exceeds $5,000. Bankruptcy or notice of default
filings by the borrower may be present at the time of the loan. A maximum
loan-to-value ratio of 70% is permitted for a home equity loan on a
one-to-four family owner-occupied property. A maximum loan to value ratio of
50% is permitted for a home equity loan on non-owner occupied one-to-four
family property. The maximum loan amount is $350,000. The debt
service-to-income ratio generally is 50% or less based on the relevant
qualifying rate for the home equity loan.
EXCEPTIONS. As described above, the seller uses the foregoing
categories and characteristics as underwriting guidelines only. On a
case-by-case basis, it may determine that the prospective borrower warrants a
risk category upgrade, a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception or an exception from certain requirements
of a particular risk category. An upgrade or exception may generally be
allowed if the application reflects certain compensating factors, among
others:
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- reduced loan-to-value ratio;
- good property maintenance;
- mortgage history consistent with the risk category upgrade;
- stable employment;
- disposable income; and
- the length of residence in the subject property.
Accordingly, the seller may classify certain home equity loan applications in a
more favorable risk category than other home equity loan applications that, in
the absence of these compensating factors, would satisfy only the criteria of a
less favorable risk category.
SERVICING
The servicer has been servicing loans since March 1997, when it assumed
the default management cycle of loans previously handled by CTX Mortgage
Company, which is primarily a conforming seller/servicer. The servicer or one of
its affiliates originates all of the loans it services. Servicing encompasses,
among other activities, the following processes: billing and collection of
payments when due, movement and reporting of cash to the payment clearing bank
accounts, customer help, reconveyance, recovery of delinquent installments,
instituting foreclosure, and liquidation of the underlying collateral. As of
November 30, 1999, the servicer was servicing a portfolio of approximately $1.8
billion.
The servicer services all loans in its Dallas, Texas headquarters
facility using a mid-range AS-400 based servicing platform, known as LSAMS, for
which the servicer purchased a separate user license in August of 1997. The
LSAMS system is also employed by other large, nonconforming servicers in the
subprime industry. The company has purchased an additional servicing system from
London Bridge Corporation, known as FORTRACS, an event-tracking system with
separate modules for foreclosure, bankruptcy, and REO property. FORTRACS has
generally increased the servicer's ability to track and monitor loans in the
default process.
The servicer's operating and compliance policies and procedures are
published and updated to comply with state and federal, legal and regulatory
requirements.
The servicer's default management policy has been designed to identify
collection problems so as to facilitate a prompt response to the delinquent
borrower's situation. Early identification of a significant collection problem
is especially critical in the subprime mortgage environment.
Borrowers are mailed a monthly billing statement approximately two
weeks prior to their due date. Collection activity on an account begins as
soon as five (5) days after the scheduled due date if a payment is not made. A
"First Notice" is generated by LSAMS and mailed to the mortgagor generally on
the 8th day after the due date. Loans on which one of the initial three
payments on a new loan have not been received will generally be called on the
third day of default to ensure that all terms of the new loan are understood
by the borrower(s) and to determine if any serious problems exist which will
affect prompt repayment of the loan.
The collection strategy is to determine the facts surrounding the
delinquency, obtain customer agreement for the solution, and to attempt to
preclude future delinquency on the part of the borrower. Generally, when a
promise for payment is obtained from the borrower by the collector, LSAMS will
target the loan in the "queue" for the date of the promised payment. If the
payment is made, the account is removed from the collection queue. If the
arrangement for payment was not kept, the loan is placed back in the call
route for the collector to contact and follow up on the previous arrangements
for payment. If the payment is received per the arrangements and no future
promise or target dates are noted on LSAMS, the loan will be removed from the
collection cycle unless the account becomes delinquent in the future.
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Generally, when a loan appears in the LSAMS default management auto
queue, the collector will telephone the borrower(s) to discuss the past due
payment situation. Standard collection form letters, approved by the servicer's
legal department, are generally utilized in conjunction with telephone calling,
in order to reach the delinquent borrower(s). Documentation of collection
activity is critically important in the default management process. Collectors
have access on LSAMS to borrower demographics, telephone numbers, loan payment
history, and all previous collection notes, to assist in the collection of a
past due account. The policy of the servicer is that managers in the collection
department are required to monitor collectors' work on LSAMS and to offer
guidance and training to their employees.
It is the policy of the servicer to send out a notice of demand at the
61st day of delinquencies. This may be done sooner if the circumstances of a
particular account indicate that legal action appears likely. This letter will
give the customer 30 days' notice of the servicer's intent to initiate
foreclosure action on the loan. If an alternative to foreclosure is appropriate,
a recommended course of action will be prescribed by senior servicing
management. Servicing and collection practices regarding the liquidation of
properties (e.g., foreclosure) and the rights of the borrower vary from state to
state.
Prior to any foreclosure action, and intermittently updated throughout
the process, the servicer performs an in-depth market value analysis on all
defaulted loans. This analysis includes a current appraisal or broker price
opinion conducted by an independent vendor from the servicer's approved network
of appraisers or real estate brokers. In addition, all property evaluations are
reviewed by an internal staff appraiser in order to ensure that the most
accurate value is known. It is this value which will determine its strategy for
bidding, repairs, and sale of the property.
If the servicer acquires title to a property at a foreclosure sale or
through other means, the REO property department immediately begins working on
the file by obtaining at least two local real estate brokers to inspect the
property and provide an estimate of repairs needed and a recommended list price.
Repairs are performed if it is determined that they will increase the net
liquidation proceeds and speed of disposal.
If the property is not vacated when it is acquired, a local attorney
will be hired to commence eviction proceedings. Once it has listed a foreclosed
property, the REO property department will follow up closely with the listing
agent to ensure that the collateral is secure and that it is being aggressively
marketed.
The servicer outsources the tracking and follow up on homeowner's
insurance and property taxes. Expiration lists on homeowner insurance are
provided on a biweekly basis to the servicer by the service provider. When
insurance policies lapse, a letter is mailed to the borrower, advising that
coverage has lapsed and in the absence of a new policy, that the servicer will
obtain a force-placed insurance policy at the borrower's expense. The servicer
has a master policy with the force-placed provider which protects against errors
and omissions with a blanket policy covering the servicer's balance on the loan.
Despite the description of the seller's servicing procedures
described above, the servicer will be required to service the home equity
loans in accordance with the servicing standards and other terms set forth in
the relevant agreements.
DESCRIPTION OF THE SECURITIES
GENERAL
Each series of notes will be issued pursuant to an indenture between
the related trust fund and the entity named in the related prospectus
supplement as indenture trustee with respect to the series. A form of
indenture has been filed as an exhibit to the registration statement of which
this prospectus forms a part. Certificates will be issued in series pursuant
to a pooling and servicing agreement or a trust agreement among the depositor,
the seller, the servicer and the entity named in the prospectus supplement as
the trustee. A form of pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus forms a part. A
series may consist of both notes and certificates. For purposes of this
prospectus, the term "trustee" will be used to refer to the trustee with
respect to a series of certificates or the indenture trustee with respect to a
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series of notes. The term "agreement" or "agreements" will refer to the
relevant agreement or agreements in the context in which the term appears.
The following summaries describe the material provisions in the
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the agreements and the prospectus supplement relating to
each series of securities. Where particular provisions or terms used in the
agreements are referred to, the actual provisions (including definitions of
terms) are incorporated in this prospectus by reference as part of the summaries
contained in this prospectus.
Each series of securities will consist of one or more classes of
securities, one or more of which may be:
- Compound Interest Securities, with respect to which, for a
certain specified period of time, instead of requiring payment of
interest, all or a portion of the accrued interest is
capitalized, that is, added to the principal balance on each
distribution date. At the end of this period, interest payments
will be made on a principal balance that includes the capitalized
interest;
- Variable Interest Securities, with respect to which interest
accrues at a rate that is adjusted, based upon a predetermined
index, at fixed periodic intervals, as set forth in the related
prospectus supplement;
- Planned Amortization Class (PAC) Securities, with respect
to which payments of principal are made in accordance with a
schedule specified in the related prospectus supplement, based on
certain assumptions stated in the prospectus supplement;
- Zero Coupon Securities, which are entitled to receive
payments of principal only;
- Principal Only Securities, which are entitled solely or
primarily to distributions of principal and identified as set
forth in the prospectus supplement; or
- Interest Only Securities, which are solely or primarily
entitled to distributions of interest as set forth in the related
prospectus supplement.
A series may also include one or more classes of subordinated
securities. The right to receive principal and/or interest on a subordinated
security is subordinated to the rights of more senior classes to distribution of
interest and/or principal, and the subordinated securities may also be allocated
losses and shortfalls prior to senior classes. Residual Interest Securities may
also be issued to represent a retained interest in the residual value of the
trust fund.
The securities of each series will be issued only in fully registered
form, without coupons, in the authorized denominations for each class specified
in the related prospectus supplement. Upon satisfaction of the conditions, if
any, applicable to a class of a series, as described in the related prospectus
supplement, the transfer of the securities may be registered and the securities
may be exchanged at the office of the trustee specified in the prospectus
supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
Payments of principal of and interest on a series of securities will
be made on the distribution dates specified in the related prospectus
supplement (which may be different for each class for the payment of principal
and interest) by check mailed to holders of the securities of the series
registered as holders at the close of business on the record date applicable
to the relevant distribution date, as specified in the related prospectus
supplement, at their addresses appearing on the security register. However,
payments may be made by wire transfer (which, unless otherwise specified in
the related prospectus supplement, will be at the expense of the holder
requesting payment by wire transfer) in certain circumstances described in the
related prospectus supplement. In addition, final payments of principal in
retirement of each security will be made only upon
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presentation and surrender of the security at the office of the trustee
specified in the prospectus supplement. Notice of the final payment on a
security will be mailed to the holder of the security before the distribution
date on which the final principal payment on any security is expected to be
made to the holder of the security.
Payments of principal of and interest on the securities will be made by
the trustee, or a paying agent on behalf of the trustee, as specified in the
related prospectus supplement. All payments with respect to the home equity
loans for a series, together with reinvestment income on these payments, amounts
withdrawn from any reserve fund, and amounts available pursuant to any other
credit enhancement will be deposited into the Collection Account or the
Certificate Account as specified in the related agreement. If provided in the
related prospectus supplement, these amounts may be net of certain amounts
payable to the servicer and any other person specified in the prospectus
supplement. These amounts may then be deposited into the Distribution Account
and will be available to make payments on the securities of the series on the
next applicable distribution date. See "THE TRUST FUNDS--Collection, Certificate
and Distribution Accounts."
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement, one or more classes
of securities may be issued in book-entry form. Persons acquiring beneficial
ownership interests in the book-entry securities will hold their securities
through DTCC in the United States, or Cedelbank or the Euroclear System in
Europe if they are participants of those systems, or indirectly through
organizations which are participants in any of those systems. The book-entry
securities will be issued in one or more certificates which equal the aggregate
principal balance of the applicable class or classes of securities and will
initially be registered in the name of Cede & Co., the nominee of DTCC.
Cedelbank and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositories which in turn
will hold positions in customers' securities accounts in the depositories' names
on the books of DTCC. Citibank N.A. will act as depository for Cedelbank and The
Chase Manhattan Bank will act as depository for Euroclear. Except as described
below, no person acquiring a book-entry security will be entitled to receive a
physical definitive certificate representing its security.
Unless and until definitive securities are issued, it is anticipated
that the only certificateholder or noteholder, as applicable, will be Cede &
Co., as nominee of DTCC. Beneficial owners are only permitted to exercise their
rights indirectly through DTCC or, in Europe, Cedelbank and Euroclear, and their
participants.
The beneficial owner's ownership of a book-entry security will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary that maintains the beneficial owner's account for
this purpose. In turn, the financial intermediary's ownership of the book-entry
security will be recorded on the records of DTCC (or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
he recorded on the records of DTCC, if the beneficial owner's financial
intermediary is not a DTCC participant and on the records of Cedelbank or
Euroclear, as appropriate).
Beneficial owners will receive all distributions of principal of, and
interest on, the book-entry securities from the trustee through DTCC and DTCC
participants. While the book-entry securities are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTCC and its operations, DTCC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the securities and is required to receive and transmit
distributions of principal of, and interest on, the securities. Participants
and indirect participants with whom beneficial owners have accounts with
respect to securities are similarly required to make book-entry transfers and
receive and transmit distributions on behalf of their respective beneficial
owners. Accordingly, although beneficial owners will not possess certificates
or notes, the DTCC rules provide a mechanism by which beneficial owners will
receive distributions and will be able to transfer their interest.
Beneficial owners will not receive or be entitled to receive
certificates representing their respective interests in the securities, except
under the limited circumstances described below. Unless and until definitive
securities are issued, beneficial owners who are not participants may transfer
ownership of securities only through participants and indirect participants by
instructing participants and indirect participants to transfer
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securities, by book-entry transfer, through DTCC for the account of the
purchasers of these securities, which must be maintained with their
participants. Under the DTCC rules and in accordance with DTCC's normal
procedures, transfers of ownership of securities will be executed through DTCC
and the accounts of the respective participants at DTCC will be debited and
credited. Similarly, the participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing beneficial owners.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTCC settlement date. These credits or any transactions in
securities settled during subsequent securities settlement processing will be
reported to the relevant Euroclear or Cedelbank participants on that business
day. Cash received in Cedelbank or Euroclear as a result of sales of securities
by or through a Cedelbank participant or Euroclear participant to a DTCC
participant will be received with value on the DTCC settlement date but will be
available in the relevant Cedelbank or Euroclear cash account only as of the
business day following settlement in DTCC.
Transfers between participants will occur in accordance with DTCC
rules. Transfers between Cedelbank participants and Euroclear participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTCC, on the one hand, and directly or indirectly through Cedelbank
participants or Euroclear participants, on the other, will be effected in DTCC
in accordance with DTCC rules on behalf of the relevant European international
clearing system by the relevant European depository; however, these cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant European depository to take action to effect final settlement on its
behalf by delivering or receiving securities in DTCC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTCC. Cedelbank participants and Euroclear participants may not
deliver instructions directly to the European depositories.
DTCC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTCC. In accordance with its normal procedures, DTCC is
expected to record the positions held by each DTCC participant in the
book-entry securities, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of book-entry securities will
be subject to the rules, regulations and procedures governing DTCC and DTCC
participants as in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thus eliminating the need for
physical movement of certificates. Transactions may be settled in Cedelbank in
any of 28 currencies, including United States dollars. Cedelbank provides to
its Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic
markets in several countries. As a professional depository, Cedelbank is
subject to regulation by the Luxembourg Monetary Institute. Cedelbank
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedelbank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedelbank
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thus
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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 32 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing
and interfaces with domestic markets in several countries generally similar to
the arrangements for cross-market transfers with DTCC described above. The
Brussels, Belgium office of Morgan Guaranty Trust Company of New York
functions as Euroclear operator, under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. All operations are conducted
by the Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not
Euroclear Clearance Systems. The Euroclear Clearance Systems establish 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.
Because the Euroclear operator is the Belgian branch of a New York
banking corporation which is a member bank of the Federal Reserve System, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. These Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under these
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Distributions on the book-entry securities will be made on each
distribution date by the trustee to DTCC. DTCC will be responsible for crediting
the amount of these payments to the accounts of the applicable DTCC participants
in accordance with DTCC's normal procedures. Each DTCC participant will be
responsible for disbursing these payments to the beneficial owners that it
represents and to each financial intermediary for which it acts as agent. Each
financial intermediary will be responsible for disbursing funds to the
beneficial owners that it represents.
Under a book-entry format, beneficial owners may experience some delay
in their receipt of payments, since these payments will be forwarded by the
trustee to Cede & Co. Distributions with respect to securities held through
Cedelbank or Euroclear will be credited to the cash accounts of Cedelbank
participants or Euroclear participants in accordance with the relevant system's
rules and procedures, to the extent received by the relevant European
depository. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTCC can only act
on behalf of financial intermediaries, the ability of a beneficial owner to
pledge book-entry securities to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of the book-entry
securities, may be limited due to the lack of physical certificates for
book-entry securities. In addition, issuance of the book-entry securities in
book-entry form may reduce the liquidity of the securities in the secondary
market since certain potential investors may be unwilling to purchase securities
for which they cannot obtain physical certificates.
Monthly and annual reports on the applicable trust fund will be
provided to Cede & Co., as nominee of DTCC, and may be made available by Cede
& Co. to beneficial owners upon request, in accordance with the rules,
regulations and procedures creating and affecting the Depository, and to the
financial intermediaries to whose DTCC accounts the book-entry securities of
the beneficial owners are credited.
DTCC has advised the trustee that, unless and until definitive
securities are issued, DTCC will take any action permitted to be taken by the
holders of the book-entry securities under the relevant agreement only at the
direction of one or more financial intermediaries to whose DTCC accounts the
book-entry securities are credited, to the extent that these actions are taken
on behalf of financial intermediaries whose holdings include
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the book-entry securities. Cedelbank or the Euroclear operator, as the case
may be, will take any other action permitted to be taken by a holder under the
relevant operating agreement on behalf of a Cedelbank participant or Euroclear
participant only in accordance with its relevant rules and procedures and
subject to the ability of the relevant European depository to effect these
actions on its behalf through DTCC. DTCC may take actions, at the direction of
the related participants, with respect to some securities which conflict with
actions taken with respect to other securities.
Definitive securities will be issued to beneficial owners, or their
nominees, rather than to DTCC, only if:
- DTCC or the seller advises the trustee in writing that DTCC
is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the
book-entry securities and the seller or the trustee is unable to
locate a qualified successor;
- the seller, at its sole option, elects to terminate a
book-entry system through DTCC; or
- after the occurrence of an event of default, beneficial
owners owning a majority in principal amount of the applicable
securities advise the trustee and DTCC through the financial
intermediaries and the DTCC participants in writing that the
continuation of a book-entry system through DTCC (or its
successor) is no longer in the best interests of beneficial
owners.
WE REFER YOU TO "THE AGREEMENTS--SERVICER TERMINATION EVENTS; EVENT OF
DEFAULT" FOR A DISCUSSION OF WHAT CONSTITUTES AN EVENT OF DEFAULT.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all applicable
beneficial owners of the occurrence of the event and the availability through
DTCC of definitive securities. Upon surrender by DTCC of the global certificate
or certificates representing the book-entry securities and instructions for
re-registration, the trustee will issue definitive securities, and thereafter
the trustee will recognize the holders of the definitive securities as
certificateholders or noteholders, as applicable, under the applicable
agreement.
Although DTCC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants
of DTCC, Cedelbank and Euroclear, they are under no obligation to perform or
continue to perform these procedures, and these procedures may be discontinued
at any time.
Neither the depositor, the seller, the servicer the owner trustee (if
applicable), the trustee or any of their affiliates will have any responsibility
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the book-entry securities held by Cede & Co.,
as nominee for DTCC, or for maintaining, supervising or reviewing any records
relating to these beneficial ownership interests.
VALUATION OF THE HOME EQUITY LOANS
If specified in the related prospectus supplement for a series of
notes, each home equity loan included in the related trust fund for a series
will be assigned an initial "asset value." Generally, the related agreement will
specify that at any time the asset value of the home equity loans will be equal
to the product of the asset value percentage as set forth in the indenture and
the lesser of:
- the stream of remaining regularly scheduled payments on the home
equity loans, net, of certain amounts payable as expenses,
together with income earned on each scheduled payment received
through the day preceding the next distribution date at the
"assumed reinvestment rate," if any, discounted to present value
at the highest interest rate on the notes of the series over
periods equal to the interval between payments on the notes; and
- the then principal balance of the home equity loans.
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Generally, the related agreement will specify that, the initial asset
value of the home equity loans will be at least equal to the principal amount of
the notes of the related series at the date of issuance.
The assumed reinvestment rate, if any, for a series will be the highest
rate permitted by the relevant rating agency or a rate insured by means of a
surety bond, guaranteed investment contract, or other arrangement satisfactory
to the rating agency. If the assumed reinvestment rate is insured in this
manner, the related prospectus supplement will set forth the terms of the
relevant insurance arrangement.
PAYMENTS OF INTEREST
The securities of each class by their terms entitled to receive
interest will bear interest (which is generally calculated, on the basis of a
360 day year of twelve 30-day months) from the date and at the rate per annum
specified, or calculated in the method described, in the related prospectus
supplement. Interest on these securities will be payable on the distribution
date specified in the related prospectus supplement. If so specified in the
related prospectus supplement, the distribution date for the payment of interest
of a class may be different from, or occur more or less frequently than, the
distribution date for the payment of principal with respect to the class. The
rate of interest on securities of a series may be variable or may change with
changes in the annual percentage rates of the home equity loans included in the
related trust fund and/or as prepayments occur with respect to these home equity
loans. Principal Only Securities may not be entitled to receive any interest
distributions or may be entitled to receive only nominal interest distributions.
Any interest on Zero Coupon Securities that is not paid on the related
distribution date will accrue and be added to principal on the related
distribution date.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding the distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date, principal payments will be made to the
holders of securities on which principal is then payable, to the extent set
forth in the related prospectus supplement. These payments will be made in an
aggregate amount determined as specified in the related prospectus supplement
and will be allocated among the relevant classes in the manner, at the times and
in the priority set forth in the prospectus supplement. The holders of one or
more classes of securities may have the right to request that principal
distributions allocable to the applicable class of securities be distributed
directly to the holder. If the requests of holders exceed the amount of
principal to be distributed, the requests generally will be filled in the order
in which they were received. If the amount of principal to be distributed
exceeds the amount of requests, the trustee will select random lots of $1,000
each to receive the relevant principal distribution. Thus, some holders of the
applicable class of securities may receive no principal distributions or a
disproportionate amount of principal distributions. If specified in the related
prospectus supplement, the distribution date for the payment of principal of a
class may be different from, or occur more or less frequently than, the
distribution date for the payment of interest for the class.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of
notes is the date no later than the date on which principal will be fully paid.
The prospectus supplement may use the term "final payment date" or "final
maturity date" to refer to the final scheduled distribution date with respect to
a class of notes. With respect to each class of certificates, the final
scheduled distribution date will be the date on which the entire aggregate
principal balance is expected to be reduced to zero, in each case calculated on
the basis of the assumptions applicable to the relevant series described in the
related prospectus supplement. The final scheduled distribution date for each
class of a series will be specified in the related prospectus supplement. Since
payments on the home equity loans will be used to make distributions in
reduction of the outstanding principal amount of the
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securities, it is likely that the actual final distribution date of a class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, as a result of delinquencies, defaults and liquidations of the
home equity loans in the trust fund, the actual final distribution date of any
certificate may occur later than its final scheduled distribution date. No
assurance can be given as to the actual prepayment experience with respect to
a series. See "--Weighted Average Life of the Securities" below.
SPECIAL REDEMPTION
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
securities of the series may be subject to special redemption, in whole or in
part, on a special redemption date specified in the related prospectus
supplement if, as a consequence of prepayments on the home equity loans relating
to the securities or low yields then available for reinvestment, the entity
specified in the related prospectus supplement determines, based on assumptions
specified in the applicable agreement, that the amount available for the payment
of interest that will have accrued on the securities through the designated
interest accrual date specified in the related prospectus supplement is less
than the amount of interest that will have accrued on the securities. In this
event and as further described in the related prospectus supplement, the trustee
will redeem a principal amount of outstanding securities of the series as will
cause the amount available for payment of interest to equal the amount of
interest that will have accrued through the designated interest accrual date for
the series outstanding immediately after the special redemption has occurred.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. Generally, the weighted average
life of a class of securities will be influenced by the rate at which the
amount financed under the home equity loans included in the trust fund for a
series is paid, which may be in the form of scheduled amortization or
prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The prospectus supplement for a series of
securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the weighted average life of each class of
securities, and the percentage of the original principal amount of each class of
securities that would be outstanding on specified distribution dates for the
series, in each case based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the home equity loans
included in the related trust fund are made at rates corresponding to various
percentages of the prepayment standard or model specified in the prospectus
supplement.
There is, however, no assurance that prepayment of the home equity
loans included in the related trust fund will conform to any level of any
prepayment standard or model specified in the related prospectus supplement. The
rate of principal prepayments on pools of loans may be influenced by a variety
of factors, including job related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do other
borrowers. The deductibility of mortgage interest payments, and servicing
decisions also affect the rate of principal prepayments. As a result, there can
be no assurance as to the rate or timing of principal prepayments of the home
equity loans either from time to time or over the lives of the home equity
loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
home equity loans for a series, the loans are likely to prepay at rates higher
than if prevailing interest rates remain at or above the interest rates borne by
the loans. In this regard, it should be noted that the home equity loans for a
series may have different interest rates. In addition, the weighted average life
of the securities
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may be affected by the varying maturities of the home equity loans. If any
home equity loans for a series have actual terms-to-stated maturity of less
than those assumed in calculating the final scheduled distribution date of the
related securities, one or more classes of the series may be fully paid prior
to their respective final scheduled distribution date, even in the absence of
prepayments and a reinvestment return higher than the assumed reinvestment
rate for the series.
THE TRUST FUNDS
GENERAL
The notes of each series will be secured by the pledge of the assets of
the related trust fund, and the certificates of each series will represent
interests in the assets of the related trust fund. The trust fund of each series
will include:
- the home equity loans;
- amounts available from the reinvestment of payments on the
home equity loans at the Assumed Reinvestment Rate, if any,
specified in the related prospectus supplement;
- any credit enhancement or the rights to any credit
enhancement;
- any mortgaged property that secured a home equity loan but
which is acquired by foreclosure or deed in lieu of foreclosure
or repossession so as to become an REO property; and
- the amount, if any, initially deposited in the Prefunding
Account, Capitalized Interest Account, Collection Account,
Certificate Account or Distribution Account for a series as
specified in the related prospectus supplement.
The securities will be non-recourse obligations of the related trust
fund. The assets of the trust fund specified in the related prospectus
supplement for a series or class of securities, will serve as collateral only
for that series or class of securities unless the related prospectus supplement
specifies that the assets will serve as collateral for another series or class.
Holders of a series or class of notes, as applicable, may only proceed against
the collateral securing their series or class of notes in the case of a default
with respect to their series or class of notes and may not proceed against any
assets of the depositor, seller or the related trust fund not pledged to secure
their notes.
The home equity loans for a series will be transferred by the seller to
the depositor and from the depositor to the trust fund. Home equity loans
relating to a series will be master serviced by the servicer pursuant to a
pooling and servicing agreement, with respect to a series consisting of only
certificates or a sale and servicing agreement between the depositor, the
seller, the trust fund and the servicer, with respect to a series that includes
notes.
If specified in the related prospectus supplement, a trust fund
relating to a series of securities may be a business trust formed under the laws
of the state specified in the related prospectus supplement pursuant to a trust
agreement between the seller and the trustee of the trust fund specified in the
related prospectus supplement.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or liabilities.
No trust fund is expected to engage in any activities other than acquiring,
managing and holding the related home equity loans and other assets contemplated
in this prospectus and in the related prospectus supplement and proceeds of the
assets, issuing securities, making payments and distributions on the securities
and certain related activities. No trust fund is expected to have any source of
capital other than its assets and any related credit enhancement.
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An agreement may provide that additional home equity loans may be added to the
trust fund if:
- the home equity loans were originated by the seller in the
ordinary course of its business;
- the inclusion of the home equity loans will maintain or increase
the level of overcollateralization; and
- the inclusion of the home equity loans will not result in the
withdrawal or downgrading of the ratings then assigned to the
series.
In addition, an agreement may provide that home equity loans may be removed from
a trust fund from time to time if the actual level of overcollateralization
exceeds the amount of overcollateralization required to be maintained and
removal will not result in the withdrawal or downgrading of the ratings then
assigned to the securities of the related series.
THE HOME EQUITY LOANS
The home equity loans for a series may consist, in whole or in part, of
closed-end home equity loans secured by first or second mortgages primarily on
mortgaged properties, which may be subordinated to other mortgages on the same
mortgaged property. The home equity loans may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described below.
The full principal amount of a home equity loan is advanced at
origination of the loan and generally is repayable in equal (or substantially
equal) installments of an amount sufficient to fully amortize the loan at its
stated maturity. As more fully described in the related prospectus supplement,
interest on each home equity loan is calculated on the basis of the
outstanding principal balance of the loan multiplied by the applicable home
equity loan interest rate and, in the case of simple interest loans, further
multiplied by a fraction, the numerator of which is the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator is the number of days in the annual period for which interest
accrues on the loan. Interest on home equity loans also may be calculated on
an actuarial basis, in which case each monthly payment consists of a
decreasing amount of interest and an increasing amount of principal, and the
payment either earlier or later then the due date for each payment will not
affect the relative applications of principal and interest. The home equity
loans for a series may include home equity loans that do not amortize their
entire principal balance by their stated maturity in accordance with their
terms, and require a balloon payment of the remaining principal balance at
maturity, as specified in the related prospectus supplement. The original
terms to stated maturity of home equity loans will generally not exceed 360
months.
The mortgaged properties will include single family property, which
consists of one- to four-family attached or detached residential housing,
including condominium units and cooperative dwellings, and may include
mixed-use property. A condominium unit is an individual housing unit in a
multi-unit building, buildings, or group of buildings (whether or not attached
to each other), with respect to which the owner has exclusive ownership and
possession, and also includes the owner's individual interest in all common
areas of the building or buildings. By contrast, a cooperative dwelling is an
individual housing unit owned by a corporation owned by tenant-stockholders
who, through the ownership of stock, shares or membership securities in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units and which is described in Section
216 of the tax code. Mixed-use properties may consist of structures of no more
than three stories, which include one to four residential dwelling units and
space used for retail, professional or other commercial uses. These uses,
which may not involve more than 50% of the space in the structure, may include
doctor, dentist or law offices, real estate agencies, boutiques, newsstands,
convenience stores or other similar types of uses intended to cater to
individual customers as specified in the related prospectus supplement. The
properties may be located in suburban or metropolitan districts. Any
non-residential use must be in compliance with local zoning laws and
regulations. The mortgaged properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling
units. The mortgaged properties also may include module or manufactured homes
which are treated as real estate under local law. Except for
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condominium units and cooperative dwellings, each single family property must
be located on land owned in fee simple by the borrower or on land leased by
the borrower for a term at least as long as the term of the related home
equity loan. Attached dwellings may include owner-occupied structures where
each borrower owns the land upon which the unit is built, with the remaining
adjacent land owned in common or dwelling units subject to a proprietary lease
or occupancy agreement in a cooperatively owned apartment building. Mortgages
on cooperative dwellings consist of a lien on the shares issued by the
cooperative dwelling and the proprietary lease or occupancy agreement relating
to the cooperative dwelling.
The aggregate principal balance of home equity loans secured by
mortgaged properties that are owner-occupied will be disclosed in the related
prospectus supplement. The sole basis for determining that a given percentage of
the home equity loans are secured by single family property that is
owner-occupied will be either (1) the making of an oral representation by the
mortgagor at origination of the home equity loan either that the underlying
mortgaged property will be used by the mortgagor for a period of at least six
months every year or that the mortgagor intends to use the mortgaged property as
a primary residence, or (2) a finding that the address of the underlying
mortgaged property is the mortgagor's mailing address as reflected in the
servicer's or the applicable sub-servicer's records. The mortgaged properties
also may include non-owner occupied investment properties and vacation and
second homes.
ADDITIONAL INFORMATION
The related prospectus supplement for each series will provide
information with respect to the home equity loans that are home equity loans as
of the cut-off date, including, among other things, and to the extent relevant:
- the aggregate unpaid principal balance of the home equity loans;
- the range and weighted average home equity loan interest
rate on the home equity loans, and, in the case of adjustable
rate home equity loans, the range and weighted average of the
current home equity loan interest rates and any lifetime rate
caps;
- the range and average outstanding principal balance of the
home equity loans;
- the weighted average original and remaining term-to-stated
maturity of the home equity loans and the range of original and
remaining terms-to-stated maturity, if applicable;
- the range and weighted average of "combined loan-to-value
ratios" (defined below) for the home equity loans;
- the percentage (by outstanding principal balance as of the
cut-off date) of home equity loans that accrue interest at
adjustable or fixed interest rates;
- any special hazard insurance policy or bankruptcy bond or
other enhancement relating to the home equity loans;
- the geographic distribution of the mortgaged properties
securing the home equity loans;
- the percentage of home equity loans (by principal balance
as of the cut-off date) that are secured by single family
mortgaged properties, shares relating to cooperative dwellings,
condominium units, investment property and vacation or second
homes;
- the lien priority of the home equity loans; and
- the delinquency status and year of origination of the
home equity loans.
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The related prospectus supplement will also specify any other
limitations on the types or characteristics of home equity loans for a series.
No more than 5% of the aggregate home equity loans as they will be constituted
on the closing date will deviate in any respect from the home equity loan pool
characteristics that are described in the prospectus supplement.
The "combined loan-to-value ratio" with respect to a home equity loan
is the percentage equivalent of a fraction, the numerator of which is the sum of
(1) the original principal amount of the home equity loan at its date of
origination and (2) the outstanding principal amount of any senior loan on the
mortgaged property at the time of origination of the home equity loan, and the
denominator of which is the "appraised value" (defined below) of the mortgaged
property at the date of origination.
"Appraised value" means, with respect to property securing a home
equity loan, the lesser of the appraised valued determined in an appraisal
obtained at origination of the home equity loan or sales price of the property
at that time.
If information of the nature described above respecting the home equity
loans is not known to the seller at the time the securities are initially
offered, approximate or more general information of the nature described above
will be provided in the prospectus supplement and additional information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance of the related series and to be filed with the SEC within 15
days after the initial issuance of the securities.
ACCOUNTS
CERTIFICATE AND DISTRIBUTION ACCOUNTS
A separate Certificate Account will be established for each series of
securities for receipt of all amounts received on or with respect to the home
equity loans. Certain amounts on deposit in the Certificate Account and certain
amounts available pursuant to any credit enhancement, as provided in the related
prospectus supplement, will be deposited into one or more Distribution Accounts.
Funds in the Certificate and Distribution Accounts generally will be invested in
eligible investments maturing, with certain exceptions, not later, in the case
of funds in the Certificate Account, than the day preceding the date the funds
are due to be deposited in the Distribution Account or otherwise distributed
and, in the case of funds in the Distribution Account, than the day preceding
the next distribution date for the related series of securities. With respect to
an issuance of notes, the term "Collection Account" may be used in place of
"Certificate Account."
WE REFER YOU TO "--ELIGIBLE INVESTMENTS" BELOW FOR MORE DETAIL.
PREFUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related prospectus supplement, a trust fund will
include one or more Prefunding Accounts, that are segregated trust accounts
established and maintained with the trustee for the related series. If so
specified, on the closing date for the series, a prefunded amount representing a
portion of the proceeds of the sale of the securities limited to fifty percent
of the aggregate principal amount of the series may be deposited in the
Prefunding Account and may be used to purchase additional home equity loans
during a prefunding period limited to no more than six months specified in the
related prospectus supplement. Pending the purchase of additional home equity
loans, funds deposited in the Prefunding Account will be invested in eligible
investments. If any prefunded amount remains on deposit in the Prefunding
Account at the end of the prefunding period, this amount will be applied in the
manner specified in the related prospectus supplement to prepay the notes or the
certificates of the applicable series.
Each additional home equity loan must satisfy the eligibility
criteria specified in the related prospectus supplement and related
agreements. This eligibility criteria will be determined in consultation with
the relevant rating agencies, and any credit enhancer prior to the issuance of
the related series and are designed to ensure that if the additional home
equity loans were included as part of the initial home equity loans, the
credit quality of the assets as a whole would continue to be consistent with
the initial rating on the securities. The eligibility
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criteria will apply to the aggregate pool of home equity loans, including the
original and the additional home equity loans, and must include a minimum
weighted average interest rate, a maximum weighted average remaining term to
maturity and a maximum weighted average Combined Loan-to-Value Ratio.
Depending on the composition of the original home equity loans and the type of
credit enhancement, additional eligibility criteria such as a minimum interest
rate, a maximum principal balance, a limitation on geographic concentration
and a limit on certain types of home equity loans such as balloon loans or
loans secured by other than primary residences. The seller will certify to the
trustee that all conditions precedent to the transfer of the additional home
equity loans, including the satisfaction of the eligibility criteria to the
trust fund, have been satisfied. It is a condition to the transfer of any
additional home equity loans to the trust fund that no rating agency, after
receiving prior notice of the proposed transfer of the additional home equity
loans to the trust fund, advises the seller or the trustee or any credit
enhancer that the conveyance of the additional home equity loans will result
in a qualification, modification or withdrawal of its then current rating of
any class of notes or certificates of the series. Following the transfer of
additional home equity loans to the trust fund, the aggregate characteristics
of the home equity loans then held in the trust fund may vary from those of
the initial home equity loans. As a result, the additional home equity loans
may adversely affect the performance of the related securities.
If a Prefunding Account is established, one or more Capitalized
Interest Accounts, which must be segregated trust accounts, may be established
and maintained with the trustee for the related series. On the relevant
closing date, a portion of the proceeds of the sale of the securities will be
deposited in the Capitalized Interest Account and used to pay interest accrued
on the securities and, if specified in the related prospectus supplement,
certain fees or expenses (such as trustee fees and credit enhancement fees)
that are not covered by interest generated by the home equity loans in the
trust fund during the prefunding period and available to pay these amounts. If
specified in the related prospectus supplement, amounts on deposit in the
Capitalized Interest Account may be released to the seller prior to the end of
the prefunding period subject to the satisfaction of certain tests specified
in the related prospectus supplement. Any amounts on deposit in the
Capitalized Interest Account at the end of the prefunding period will be
distributed to the person specified in the related prospectus supplement.
ELIGIBLE INVESTMENTS
Each agreement generally will define eligible investments to include the
following:
- direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or
any agency or instrumentality of the United States, if these
obligations are backed by the full faith and credit of the United
States;
- purchase agreements on obligations specified in clause (1) above
maturing not more than three months from the date of acquisition,
if the short-term unsecured debt obligations of the party agreeing
to repurchase these obligations are at the time rated by each
rating agency in its highest short-term rating category;
- certificates of deposit, time deposits and bankers' acceptances of
any U.S. depository institution or trust company incorporated
under federal or state laws of the United States and subject to
supervision and examination by federal and/or state banking
authorities, if the unsecured short-term debt obligations of the
depository institution or trust company at the date of acquisition
have been rated by each rating agency in its highest unsecured
short-term debt rating category;
- commercial paper (having original maturities of not more than 90
days) of any corporation incorporated under federal or state laws
of the United States which, on the date of acquisition, has been
rated by each rating agency in its highest short-term rating
category;
- short-term investment funds sponsored by any trust company or
national banking association incorporated under federal or state
laws of the United States which, on the date of acquisition, have
been rated by each rating agency in its highest rating category
for long-term unsecured debt; and
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- interests in any money market fund which at the date of
acquisition and throughout the time as the interest is held in the
fund have a rating of "Aaa" by Moody's, either "AAAm" or "AAAm-G"
by Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc., to the extent Moody's or Standard & Poor's rates
the relevant series, or equivalent ratings of any other rating
agency that rates the series. However, no interest may evidence
the right to receive either only interest with respect to the
obligations underlying the interest or both principal and interest
payments derived from obligations underlying the interest and the
interest and principal payments with respect to the instrument
provided a yield to maturity at par greater than 120% of the yield
to maturity at par of the underlying obligations. In addition, no
interest may be purchased at a price greater than par if the
instrument may be prepaid or called at a price less than its
purchase price prior to its stated maturity.
To the extent any investment would require registration of the trust
fund as an investment company, that investment will not constitute an eligible
investment.
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related prospectus supplement so provides, there may be a
revolving period commencing on the date of issuance of a class or classes of
notes or certificates of a series and ending on the date set forth in the
related prospectus supplement during which limited or no principal payments will
be made to one or more classes of notes or certificates of the related series
identified in the prospectus supplement. Some or all collections of principal
otherwise allocated to these classes of notes or certificates may be:
- utilized during the revolving period to acquire additional home
equity loans which satisfy the criteria specified above and the
criteria set forth in the related prospectus supplement;
- held in an account and invested in eligible investments for later
distribution to securityholders;
- applied to those notes or certificates, if any, specified in the
related prospectus supplement that are in amortization; or
- otherwise applied as specified in the related prospectus
supplement.
An amortization period is a period during which an amount of principal
is payable to holders of a series which, during the revolving period, were not
entitled to payments or principal. If specified in the related prospectus
supplement, during an amortization period all or a portion of principal
collections on the home equity loans may be applied as specified above for a
revolving period and, to the extent not so applied, will be distributed to the
classes of notes or certificates specified in the related prospectus supplement
as then being entitled to payments of principal. In addition, if specified in
the related prospectus supplement, amounts deposited in certain accounts for the
benefit of one or more classes of notes or certificates may be released from
time to time or on a specified date and applied as a payment of principal on
those classes of notes or certificates. The related prospectus supplement will
set forth the circumstances which will result in the commencement of an
amortization period.
Each series which has a revolving period may also issue to the
depositor or one of its affiliates a Retained Interest Security, which is an
undivided beneficial interest in the series not represented by the other
securities issued by the depositor. As further described in the related
prospectus supplement, the value of the Retained Interest Security will
fluctuate as the outstanding amount of notes and certificates of the related
series is reduced.
ENHANCEMENT
The amounts and types of credit enhancement arrangements and the
provider of the credit enhancement, if applicable, with respect to a series or
any class of securities will be set forth in the related prospectus supplement.
If specified in the applicable prospectus supplement, credit enhancement for any
series
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of securities may cover one or more classes of notes or certificates, and
accordingly may be exhausted for the benefit of a particular class of notes or
certificates and afterwards be unavailable to other classes of notes or
certificates. Further information regarding any provider of credit
enhancement, including financial information when material, will be included
in the related prospectus supplement.
To the extent provided in the related prospectus supplement, credit
enhancement may include one or more of the following:
- a financial guaranty insurance policy, which will be issued
by a monoline insurance company and which, subject to the terms
of the policy, will guarantee timely payment of interest on, and
ultimate (as opposed to timely) payment of principal of, the
applicable class or classes of securities;
- overcollateralization, which will equal the excess of the
aggregate principal balance of the home equity loans over the
aggregate principal balance of the securities.
Overcollateralization may be created by the initial or subsequent
deposit of home equity loans or may build over time from the
application of certain excess cash amounts generated by the home
equity loans to accelerate the amortization of the applicable
class or classes of securities;
- a letter of credit, which will be issued by a bank or other
financial institution in a maximum amount which may be
permanently reduced as draws are made or may be replenished as
previous draws are repaid from certain excess cash amounts
generated by the home equity loans. Draws may be made to cover
shortfalls generally in collections, with respect to particular
types of shortfalls such as those due to particular types of
losses or with respect to specific situations such as shortfalls
in amounts necessary to pay current interest;
- a cash reserve fund which may be partially or fully funded
on the date of issuance or may be funded over time from certain
excess cash amounts generated by the home equity loans.
Withdrawals may be made in circumstances similar to those for
which draws may be made on a letter of credit;
- insurance policies, such as mortgage insurance, hazard
insurance and other insurance policies, which may insure a
portion of the home equity loans against credit losses,
bankruptcy losses, fraud losses or special hazard losses not
covered by typical homeowners insurance policies;
- subordinated securities, which will be subordinated in the
right to receive distributions to one or more other classes of
more senior securities of the same series, some or all of which
may themselves be subordinated to other classes in the series.
Subordination may be with respect to distributions of interest,
principal or both. In addition, all or portions of certain types
of losses on the home equity loans may be allocated to one or
more classes of subordinate securities prior to their allocation
to other classes to more senior securities in the applicable
series; or
- derivative products, which may include a swap to convert
floating or fixed rate payments, as applicable, on the home
equity loans into fixed or floating rate payments, as applicable,
on the securities or a cap or floor agreement intended to provide
protection against changes in floating rates of interest payable
on the home equity loans and/or the securities.
The presence of credit enhancement is intended to increase the
likelihood of receipt by the certificateholders and the noteholders of the full
amount of principal and interest due on their securities and to decrease the
likelihood that the certificateholders and the noteholders will experience
losses, or may be structured to provide protection against changes in interest
rates or against other risks, such as basis risk and liquidity risk, to the
extent and under the conditions specified in the related prospectus supplement.
Forms of credit enhancement may provide for one or more classes of securities to
be paid in foreign currencies. The credit enhancement for a class of securities
generally will not provide protection against all risks of loss and may not
guarantee repayment of all principal and interest on the securities. If losses
occur which exceed the amount covered by any credit enhancement or which are not
covered by any credit enhancement, securityholders will
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bear their allocable share of deficiencies. In addition, if a form of credit
enhancement covers more than one class of securities of a series,
securityholders of one class will be subject to the risk that the credit
enhancement will be exhausted by the claims of securityholders of other
classes.
THE AGREEMENTS
The following summaries describe the material provisions of the
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to, and qualified in their entirety by reference to
the provisions of the agreements. Where particular provisions or terms used in
the agreements are referred to, these provisions or terms are as specified in
the related agreements.
GENERAL
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the depositor and the depositor will transfer,
convey and assign to the trust fund all right, title and interest of the seller
and the depositor in the home equity loans and other property to be transferred
to the depositor and trust fund for a series. The assignment will include all
principal and interest due or received on or with respect to the home equity
loans after the cut-off date to the extent specified in the related prospectus
supplement (except for any retained interests). The trustee will, concurrently
with the assignment, execute and deliver the securities.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING HOME EQUITY LOANS
Pursuant to the related pooling and servicing agreement or sale and
servicing agreement, upon the discovery by the depositor, the seller, the credit
enhancer, if any, the servicer, any sub-servicer, any holder, the custodian (as
defined below) or the trustee that the representations and warranties are untrue
in any material respect as of the closing date with the result that the
interests of the holders or of the credit enhancer are materially and adversely
affected, the party discovering the breach is required to give prompt written
notice to the other parties.
Upon the earlier of the seller's discovery or receipt of notice of
breach of a representation or warranty made by it with respect to a home equity
loan from any of the other parties or the time that an existing untrue statement
results in a situation that materially and adversely affects the interests of
the holders or the credit enhancer, if any, in the home equity loan, the seller
will be required promptly to cure the breach in all material respects or the
seller will, on or prior to the second Monthly Remittance Date (defined below)
immediately succeeding the discovery, receipt of notice or applicable time:
- substitute each home equity loan which has given rise to
the requirement for action by the seller with a "Qualified
Replacement Mortgage" (as defined in the related pooling and
servicing agreement or sale and servicing agreement) and deliver
an amount equal to the excess, if any, of the outstanding
principal balance of the home equity loan being replaced over the
outstanding principal balance of the replacement home equity loan
plus accrued and unpaid interest and plus the amount of any
Delinquency Advance (defined below) and Servicing Advance (the
"Substitution Amount"), to the trustee (to be deemed part of the
collections remitted by the servicer on the applicable Monthly
Remittance Date); or
- purchase the home equity loan from the trust at a purchase
price equal to the applicable Loan Purchase Price (defined
below).
Despite any contradictory provision of the related pooling and
servicing agreement or sale and servicing agreement, no repurchase or
substitution of any home equity loan not in default or as to which no default is
reasonably foreseeable, may be repurchased or substituted unless the seller
obtains for the trustee and any credit enhancer, an opinion of counsel
experienced in ERISA and federal income tax matters and acceptable to the
trustee and the credit enhancer stating that a repurchase or substitution of
this kind would not constitute a "prohibited transaction" (within the meaning of
ERISA and the federal income tax code) for the REMIC or otherwise subject the
REMIC to tax and would not jeopardize the status of the REMIC as such (a "REMIC
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Opinion"), addressed to the trustee and any credit enhancer and acceptable to
the trustee and any credit enhancer. The seller will also deliver an Officer's
Certificate to the trustee and any credit enhancer concurrently with the
delivery of a Qualified Replacement Mortgage stating that the home equity loan
meets the requirements of a Qualified Replacement Mortgage and that all other
conditions to substitution of the Qualified Replacement Mortgage have been
satisfied.
Any home equity loan as to which repurchase or substitution was
delayed pursuant to the related pooling and servicing agreement or sale and
servicing agreement will be repurchased or substituted for (subject to
compliance with the provisions of the related pooling and servicing agreement
or sale and servicing agreement) upon the earlier of the occurrence of a
default or reasonably foreseeable default with respect to the home equity loan
and receipt by the trustee and the credit enhancer, if any, of a REMIC
Opinion. In connection with any breach of a representation, warranty or
covenant or defect in documentation giving rise to a repurchase or
substitution obligation, the seller agrees that it will, at its expense,
furnish the trustee and the credit enhancer, if any, either a REMIC Opinion or
an opinion of counsel rendered by independent counsel that the effects
described in a REMIC Opinion will not occur as a result of the repurchase or
substitution. The obligation of the seller to so substitute or repurchase any
home equity loan as to which a representation of warranty is untrue in any
material respect and has not been remedied constitutes the sole remedy
available to the holders and the trustee.
"Loan Purchase Price" means an amount equal to the aggregate principal
balance of a home equity loan as of the date of purchase (assuming that the
Monthly Remittance Amount remitted by the servicer on the applicable Monthly
Remittance Date has already been remitted), plus all accrued and unpaid interest
on the home equity loan at the coupon rate to but not including the Monthly
Remittance Date in the Remittance Period (defined below) of the purchase
together with (without duplication) the aggregate amount of (1) all unreimbursed
Delinquency Advances and Servicing Advances already made with respect to the
home equity loan, (2) all Delinquency Advances which the servicer has so far
failed to remit with respect to the home equity loan and (3) all reimbursed
Delinquency Advances and Servicing Advances to the extent that the reimbursement
is not made from the mortgagor.
"Monthly Remittance Amount" means as of any Monthly Remittance Date:
- all interest due during the related Remittance Period with
respect to the home equity loans;
- all Compensating Interest paid by the servicer on the Monthly
Remittance Date;
- the portion of the Loan Purchase Prices and Substitution Amount
relating to interest on the home equity loans by the seller or
the servicer on or prior to the Monthly Remittance Date;
- the interest portion of all Net Liquidation Proceeds actually
collected by the servicer with respect to the home equity loans
during the related Remittance Period;
- the principal actually collected by the servicer with respect to
home equity loans during the related Remittance Period;
- the outstanding principal balance of each home equity loan that
was purchased from the trustee on or prior to the Monthly
Remittance Date, to the extent the outstanding principal balance
was actually deposited in the Principal and Interest Account;
- any Substitution Amounts relating to principal delivered by the
seller in connection with a substitution of a home equity loan to
the extent these Substitution Amounts were actually deposited in
the Principal and Interest Account on or prior to the Monthly
Remittance Date;
- the principal portion of all Net Liquidation Proceeds actually
collected by the servicer with respect to the home equity loans
during the related Remittance Period (to the extent the Net
Liquidation Proceeds related to principal); and
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- investment losses required to be deposited on the Monthly
Remittance Date.
"Monthly Remittance Date" means the date specified in the related
prospectus supplement on which funds on deposit in the Principal and Interest
Account are remitted to the Certificate Account.
"Remittance Period" means with respect to any Monthly Remittance Date,
the calendar month preceding the Monthly Remittance Date. The term "Due Period"
may be used in place of the term "Remittance Period."
See "Advances; Compensating Interest" for a definition of what
constitutes a "Delinquency Advance" and a "Servicing Advance."
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" FOR A MORE DETAILED
DISCUSSION OF ERISA AND FEDERAL INCOME TAX IMPLICATIONS.
ASSIGNMENT OF HOME EQUITY LOANS
Pursuant to the related pooling and servicing agreement or related sale
and servicing agreement, the seller will transfer, assign, set over and
otherwise convey without recourse to the depositor and the depositor will
transfer, assign, set over and otherwise convey without recourse to the trustee
in trust for the benefit of the holders all right, title and interest of the
seller in and to each home equity loan and all its right, title and interest in
and to principal received and interest due on each home equity loan on and after
the cut-off date. However, the seller will reserve and retain all its right,
title and interest in and to principal received (including prepayments of the
home equity loans) and interest due on each home equity loan prior to the
cut-off date. As a protective measure only, the seller will also grant to the
depositor and the depositor will also grant to the trustee a security interest
in the trust fund in case the transfer of the home equity loans is considered by
a court of law or equity to be a loan and not a sale.
In connection with the transfer and assignment of the home equity
loans, the seller will be required to:
(i) deliver without recourse to the trustee or the custodian,
which may be an affiliate or agent of the trustee, on behalf of the
trustee on the date the home equity loans are assigned to the trust
fund, identified in a schedule of home equity loans in the relevant
agreement:
- the original notes, endorsed in blank or to the order
of the trustee;
- the original title insurance policy or a copy certified
by the issuer of the title insurance policy or, if not
available, the original title insurance commitment or a
copy certified as a true copy by the closing agent or
the seller, or, if not available in the applicable
state, the relevant attorney's opinion of title;
- subject to the next paragraph, originals or copies of
all intervening assignments, if any, certified as true
copies by the closing agent or the seller, showing a
complete chain of title from origination to the
trustee, including warehousing assignments, if
recorded;
- originals of all assumption and modification
agreements, if any;
- either the original mortgage, with evidence of
recording (if the original mortgage has been returned
to the seller from the applicable recording office), a
copy of the mortgage (if the original mortgage has not
been returned to the seller) certified as a true copy
by the closing attorney or officer of the seller or a
copy of the mortgage certified by the public recording
office in those instances where the original recorded
mortgage has been lost or retained by the recording
office; and
- the original assignments of mortgages in recordable
form;
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(ii) cause, within 60 days following the date, the home equity
loans to be assigned to the trust fund, assignments of the mortgages to
the trustee to be submitted for recording in the appropriate
jurisdictions, if the seller has not received the original recording
information. Alternatively, (except as provided in the related pooling
and servicing agreement or sale and servicing agreement) the seller may
furnish to the trustee, any credit enhancer and the rating agencies, by
the date that the home equity loans are assigned to the trust fund, at
the seller's expense, an opinion of counsel with respect to the
relevant jurisdiction that recording is not required to perfect the
trustee's interests in the related home equity loans (in form
satisfactory to the trustee, any credit enhancer and the rating
agencies); and
(iii) deliver the title insurance policy, the original
mortgages and the recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the custodian on behalf of the
trustee within 15 days of receipt by the seller, (unless original
recording information has not been made available to the seller, in
which case, the seller has one year after the date the home equity
loans are assigned to the trust fund).
The trustee will agree, for the benefit of the holders, to cause the
custodian to review each file with respect to the home equity loans within 45
days after the date that the home equity loans are assigned to the trust fund
(or the date of receipt of any documents delivered to the trustee after the
closing date), to ascertain that all required documents (or certified copies of
documents) have been executed and received.
If the custodian on behalf of the trustee during this 45-day period
finds any document constituting a part of a file which is not properly executed,
has not been received, or is unrelated to the home equity loans or that any home
equity loan does not conform in a material respect to the description as set
forth in the schedule of home equity loans in the relevant agreement, the
custodian will promptly notify the trustee, the depositor, the seller, the
holders and the credit enhancer, if any. The seller will agree in the related
pooling and servicing agreement or sale and servicing agreement to use
reasonable efforts to remedy a material defect in a document constituting part
of a file of which it is notified by the custodian on behalf of the trustee.
If, however, within 90 days after notice to it with respect to the
defect the seller has not remedied the defect and the defect materially and
adversely affects the interest in the related home equity loan of the holders or
any credit enhancer, the seller will be required on the next succeeding Monthly
Remittance Date to (or will cause an affiliate of the seller to) (1) substitute
in lieu of the home equity loan a Qualified Replacement Mortgage and deliver the
Substitution Amount to the trustee (to be deemed part of the collections
remitted by the servicer on the Monthly Remittance Date) or (2) purchase the
home equity loan at a purchase price equal to the applicable Loan Purchase
Price, which will be delivered to the trust along with the Monthly Remittance
Amount remitted by the servicer on the Monthly Remittance Date. However, this
substitution or purchase must occur within 90 days of the notice of defect if
the defect would prevent the home equity loan from being a Qualified Replacement
Mortgage, and no substitution or purchase of a home equity loan that is not in
default or as to which no default is reasonably foreseeable will be made unless
the seller obtains for the trustee and any credit enhancer a REMIC Opinion,
addressed to and acceptable to the trustee and any credit enhancer.
In addition, the custodian on behalf of the trustee has agreed to
undertake a review during the 12th month after the closing date a final
certification indicating the current status of the exceptions previously
indicated on the pool certification with respect to the applicable agreement.
After delivery of the final certification, the custodian, on behalf of the
trustee and the servicer will provide to the credit enhancer, if any, at least
monthly, updated certifications indicating the then current status of
exceptions, until all exceptions have been eliminated.
SERVICING AND SUB-SERVICING
Unless otherwise set forth in the related prospectus supplement, the
seller will also serve as the servicer of each home equity loan. The servicer
will be entitled to a periodic servicing fee as compensation in an amount
specified in the prospectus supplement. The servicer may not assign its
obligations under the related pooling and servicing agreement or sale and
servicing agreement, unless it first obtains the written consent of the trustee
and any credit enhancer (which may not be unreasonably withheld by them); and
the assignee meets the eligibility
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requirements for a successor servicer set forth in the related pooling and
servicing agreement or sale and servicing agreement.
The securities will not represent an interest in or obligation of, and
the home equity loans are not guaranteed by, the depositor, the trustee, the
owner trustee (if applicable), the seller, the servicer, or any of their
affiliates, except as described in this prospectus.
The servicer (other than a successor servicer) will be required to
service the home equity loans in accordance with the related pooling and
servicing agreement or sale and servicing agreement and the terms of the home
equity loans.
The servicer may retain the applicable servicing fee from the interest
portion of each monthly payment. In addition, the servicer will be entitled to
retain additional servicing compensation in the form of prepayment charges,
release fees, bad check charges, assumption fees, late payment charges,
prepayment penalties, any other servicing-related fees or Net Liquidation
Proceeds (defined below) not required to be deposited in the Principal and
Interest Account pursuant to the related pooling and servicing agreement or sale
and servicing agreement, and similar items.
The servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the home equity loans,
and, to the extent the procedures are consistent with the related pooling and
servicing agreement or sale and servicing agreement and the terms and provisions
of any applicable insurance policy, to follow collection procedures for all home
equity loans at least as rigorous as those described in Fannie Mae's Servicing
Guide. The servicer may in its discretion waive or permit to be waived (if the
waiver or permission is occasioned by the default or reasonable foreseeable
default of a home equity loan or is consistent with the continued treatment of
the homes equity loan as a Qualified Mortgage (as defined in the related pooling
and servicing agreement or sale and servicing agreement)) any late payment
charge, prepayment charge, assumption fee or any penalty interest in connection
with the prepayment of a home equity loan or any other fee or charge which the
servicer would be entitled to retain as additional servicing compensation. In
the event the servicer consents to the deferment of the due dates for payments
due on a home equity loan, the servicer must nevertheless pay any required
Delinquency Advances with respect to the interest payments extended by the
servicer as if the interest portion of the installment had not been deferred.
DEPOSITS TO PRINCIPAL AND INTEREST ACCOUNT AND CERTIFICATE ACCOUNT
Pursuant to the related pooling and servicing agreement or sale and
servicing agreement, the servicer will be required to create, or cause to be
created, a Principal and Interest Account in the name of the trustee, as a trust
account in the trust department of one or more depository institutions, which
may be affiliates of the servicer. All funds in the Principal and Interest
Account are required to be held uninvested or invested in eligible investments,
defined in the related pooling and servicing agreement or sale and servicing
agreement. Any investment of funds in the Principal and Interest Account must
mature or be withdrawable at par on or prior to the next Monthly Remittance
Date. Any investment earnings and losses on funds held in the Principal and
Interest Account are for the account of the servicer, and net losses must be
promptly replenished by the servicer.
Within two business days of receipt, the servicer will be required to
deposit, or cause to be deposited, to the Principal and Interest Account, all
principal received and interest due on the home equity loans on and after the
related cut-off date, including any prepayments of the home equity loans, the
proceeds of any liquidation of a home equity loan net of expenses and
unreimbursed Delinquency Advances ("Net Liquidation Proceeds") and, any income
from REO properties acquired on foreclosure or otherwise with respect to a
defaulted home equity loan and Delinquency Advances, but net of the following
daily collections ("Daily Collections"):
- Net Liquidation Proceeds to the extent that Net Liquidation
Proceeds exceed the sum of (a) the loan balance of the related
home equity loan immediately prior to liquidation, (b) accrued
and unpaid interest on the home equity loan (net of the servicing
fee) to the date of liquidation, (c) any
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realized losses during the related Remittance Period, and (d)
other reimbursements to the servicer (i.e., unreimbursed
servicing advances);
- principal (including prepayments of the home equity loans)
collected and interest due on the home equity loans prior to the
cut-off date;
- reimbursements for Delinquency Advances and Servicing Advances to
the extent provided below; and
- reimbursement for amounts deposited in the Principal and Interest
Account representing payments of principal and/or interest on a
home equity loan by a mortgagor which are subsequently returned
by a depository institution as unpaid.
The servicer may make withdrawals for its own account from the
Principal and Interest Account for the following purposes:
(i) on each Monthly Remittance Date, to pay itself the
servicing fee to the extent not otherwise retained;
(ii) to withdraw net investment earnings on amounts on deposit
in the Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the
Principal and Interest Account in error;
(iv) to reimburse itself for unrecoverable Delinquency
Advances and Servicing Advances (in each case, solely from amounts
recovered on the related home equity loan) and for any excess interest
collected from a mortgagor; and
(v) to clear and terminate the Principal and Interest Account
following the termination of the trust.
The servicer will remit to the trustee for deposit in the Certificate
Account the Daily Collections, Loan Purchase Price and Substitution Amounts
allocable to a Remittance Period not later than the related Monthly Remittance
Date.
ADVANCES; COMPENSATING INTEREST
DELINQUENCY ADVANCES. On each Monthly Remittance Date, the servicer
will be required to advance to the trustee for deposit to the Certificate
Account out of the servicer's own funds or from collections on any home equity
loans that are not required to be distributed on the distribution date occurring
during the month in which the advance is made (but which will be reimbursed by
the servicer on or before any subsequent Monthly Remittance Date on which the
collection used to make the advance are required to be part of the monthly
remittance amount) any delinquent payment of interest with respect to each
delinquent home equity loan, which was not received on or prior to the related
Monthly Remittance Date and was not already advanced by the servicer. Advances
out of the servicer's own funds are called "Delinquency Advances." The servicer
may reimburse itself on any business day (as defined in the related pooling and
servicing agreement or sale and servicing agreement) for any Delinquency
Advances paid from the servicer's own funds, from amounts recovered on the
related home equity loan or from the Certificate Account as provided in the
related pooling and servicing agreement or sale and servicing agreement.
In the event that the servicer determines in its reasonable business
judgment in accordance with the servicing standards of the related pooling and
servicing agreement or the sale and servicing agreement that any proposed
Delinquency Advance if made would not be recoverable, the servicer will not be
required to make a Delinquency Advance with respect to the home equity loan. To
the extent that the servicer previously has made
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Delinquency Advances with respect to a home equity loan that the servicer
subsequently determines to be nonrecoverable, the servicer will be entitled to
reimbursement for the Delinquency Advance.
SERVICING ADVANCES. Except to the extent that the servicer determines
they will not be recoverable, the servicer will be required to pay all "out of
pocket" costs and expenses incurred in the performance of its servicing
obligations, including:
- expenditures in connection with a foreclosed home equity loan
prior to its liquidation, including expenditures for real estate
property taxes, hazard insurance premiums, property restoration
or preservation;
- the cost of any enforcement or judicial proceedings, including
foreclosures; and
- the cost of the management and liquidation of REO property
(including broker's fees).
These costs and expenses are "Servicing Advances." The servicer may
recover a Servicing Advance to the extent permitted by the home equity loans or,
if not recovered from the mortgagor on whose behalf the Servicing Advance was
made, from liquidation proceeds realized upon the liquidation of the related
home equity loan or from certain amounts on deposit in the Certificate Account
as provided in the related pooling and servicing agreement or the sale and
servicing agreement. Except as provided above, the servicer may not recover
Servicing Advances from the principal and interest payments on any other home
equity loan.
COMPENSATING INTEREST. A full month's interest at the coupon rate will
be due on the outstanding loan balance of each home equity loan as of the
beginning of each Remittance Period. If a prepayment in full of a home equity
loan or a partial prepayment of at least six times a mortgagor's monthly payment
occurs during any calendar month, the servicer must deposit any difference
between the interest collected from the mortgagor in connection with the payoff
and the full month's interest at the coupon rate on the home equity loan that
would be due on the related due date for the home equity loan (the "Compensating
Interest") (but not in excess of the aggregate servicing fee for the related
Remittance Period), to the Principal and Interest Account on the next succeeding
Monthly Remittance Date. This Compensating Interest will be included in the
monthly remittance amount to be made available to the trustee on the next
Monthly Remittance Date.
OPTIONAL REPURCHASE OF DEFAULTED HOME EQUITY LOANS
Subject to certain limitations contained in the related pooling and
servicing agreement or sale and servicing agreement, the servicer will have the
right and the option, but not the obligation, to purchase for its own account
any home equity loan which becomes delinquent for the number of consecutive
monthly installments set forth in the related prospectus supplement or any home
equity loan as to which enforcement proceedings have been brought by the
servicer. However, the servicer may not purchase a home equity loan unless it
has delivered a REMIC Opinion to any credit enhancer and the trustee, at its own
expense. The purchase price for this home equity loan will be equal to the Loan
Purchase Price, which must be deposited in the Principal and Interest Account on
the next Montly Remittance Date.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
The servicer is required to have liquidated any home equity loan
relating to an REO property that has not been liquidated within 35 months of
effecting ownership at a price that the servicer deems necessary to comply with
this requirement, or within a period of time that, in the opinion of counsel
nationally recognized in federal income tax matters, is permitted under the
Code.
HAZARD INSURANCE
The servicer will be required to have hazard insurance maintained with
respect to mortgaged property and to advance sums on account of the premiums if
not paid by the mortgagor if permitted by the terms of the home equity loan.
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GENERAL SERVICING STANDARD
The servicer will have the right under the related pooling and
servicing agreement or sale and servicing agreement (upon receiving the prior
written consent of the credit enhancer, if any) to accept applications of
mortgagors for consent to partial releases of mortgages, alterations and
removal, demolition or division of mortgaged properties. No application for
approval may be considered by the servicer unless:
- the provisions of the related mortgage have been complied with;
- the loan-to-value ratio and debt-to-income ratio after any
release does not exceed the loan-to-value ratio and
debt-to-income ratio of the home equity loan on the cut-off date
or any later date that the home equity loan was acquired by the
trust;
- any increase in the loan-to-value ratio does not exceed 5% unless
approved in writing by the credit enhancer, if any; and
- the lien priority of the related mortgaged property is not
affected.
The servicer may not agree to any modification, waiver or amendment of
any provision of any home equity loan unless, in the servicer's good faith
judgment, the modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to the home equity loan and only in
the event of a payment default with respect to the home equity loan or if a
payment default with respect to the home equity loan is reasonably foreseeable
by the servicer. However, no modification, waiver or amendment may extend the
maturity date of the home equity loan beyond the last scheduled distribution
date of the home equity loans in the trust fund. Despite any conflicting
provisions in the related pooling and servicing agreement or sale and servicing
agreement, the servicer will be permitted to modify, waive or amend any
provision of a home equity loan if required by statute or a court of competent
jurisdiction to do so.
SUB-SERVICING ARRANGEMENTS
The servicer, with the prior written consent of any credit enhancer,
may under the related pooling and servicing agreement or sale and servicing
agreement enter into sub-servicing agreements with qualified sub-servicers for
any servicing and administration of home equity loans. A qualified sub-servicer
must be in compliance with the laws of each state necessary to enable it to
perform its obligations under the sub-servicing agreement, have experience
servicing home equity loans that are similar to the home equity loans and have
equity of not less than $5,000,000 (as determined in accordance with generally
accepted accounting principles).
The servicer will be required to provide notice of the appointment of
any sub-servicer to the trustee, securityholders, any credit enhancer and each
rating agency and to obtain confirmation from each rating agency that the
appointment of a sub-servicer will not result in any withdrawal or downgrade of
the then-current ratings on the securities (without giving effect to any credit
enhancement provided by the credit enhancer). A sub-servicing agreement will not
relieve the servicer of its obligations under the related pooling and servicing
agreement or sale and servicing agreement, and the servicer's obligations will
be the same as if it alone were servicing and administering the home equity
loans. The servicer will be entitled to enter into any agreement with a
sub-servicer for indemnification of the servicer by the sub-servicer and nothing
contained in the sub-servicing agreement will limit or modify the terms of the
related pooling and servicing agreement or sale and servicing agreement.
CERTAIN MATTERS REGARDING THE SERVICER
The servicer has agreed to indemnify and hold the trustee and any
credit enhancer harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the trustee and any credit enhancer may sustain in any way
related to the failure of the servicer to perform its duties and service the
home equity loans in compliance with the terms of the related
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pooling and servicing agreement or the sale and servicing agreement, except to
the extent limited in the related pooling and servicing agreement or the sale
and servicing agreement. The servicer must immediately notify the trustee and
any credit enhancer if a claim is made by a third party with respect to the
related pooling and servicing agreement or the sale and servicing agreement,
and the servicer must assume the defense of any claim and pay all expenses in
connection with the claim, including reasonable counsel fees. It must also
promptly pay, discharge and satisfy any judgment or decree that may be entered
against the servicer, the trustee and/or any credit enhancer with respect to
the claim. The trustee must reimburse the servicer from amounts otherwise
distributable on Residual Interest Securities for the related series for all
amounts advanced by it pursuant to the preceding sentence, except when a final
nonappealable adjudication determines that the claim relates directly to the
failure of the servicer to perform its duties in compliance with the related
pooling and servicing agreement or the sale and servicing agreement. The
indemnification provisions will survive the termination of the related pooling
and servicing agreement or the sale and servicing agreement and the payment of
the outstanding securities.
The servicer will be required to deliver to the trustee, the credit
enhancer, if any, and the rating agencies on or before July 31 of each year:
- an officers' certificate stating, as to each signatory, that (1)
a review of the activities of the servicer during the preceding
calendar year and of performance under the related pooling and
servicing agreement or the sale and servicing agreement has been
made under the officers' supervision, and (2) to the best of the
officers' knowledge, based on their review, the servicer has
fulfilled all its obligations under the related pooling and
servicing agreement or the sale and servicing agreement for the
year, or, if there has been a default in the fulfillment of all
the servicer's obligations, specifying each default known to the
officers and the nature and status of each default including the
steps being taken by the servicer to remedy the default; and
- a letter or letters of a firm of independent, nationally
recognized certified public accountants reasonably acceptable to
the credit enhancer, if any, stating that it has examined the
servicer's overall servicing operations in accordance with the
requirements of the Uniform Single Attestation Program for
Mortgage Bankers, and stating its conclusions relating to its
examination.
REMOVAL AND RESIGNATION OF SERVICER
The credit enhancer, if any, or the holders (with the consent of the
credit enhancer, if any) will have the right, pursuant to the related pooling
and servicing agreement or the sale and servicing agreement, to remove the
servicer upon the occurrence of certain Servicer Termination Events including:
- certain acts of bankruptcy or insolvency on the part of the
servicer;
- certain failures on the part of the servicer to perform its
obligations under the related pooling and servicing agreement or
the sale and servicing agreement (including certain performance
tests related to the delinquency rate and cumulative losses of
the home equity loans);
- failure to cure material breaches of the servicer's
representations in the related pooling and servicing agreement or
sale and servicing agreement; or
- certain other events specified in the related pooling and
servicing agreement or sale and servicing agreement.
The servicer is not permitted to resign from the obligations and
duties imposed on it under the related pooling and servicing agreement or the
sale and servicing agreement except upon determination that its duties are no
longer permissible under applicable law or are in material conflict by reason
of applicable law with any other activities carried on by it, as long as the
activities in question are of a type and nature carried on by the servicer on
the date of the related pooling and servicing agreement or sale and servicing
agreement. Any determination permitting the resignation of the servicer must
be evidenced by an opinion of counsel confirming these matters, which must be
delivered, and reasonably acceptable, to the trustee and any credit enhancer.
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Upon removal or resignation of the servicer, the trustee may solicit
bids for a successor servicer as described in the related pooling and servicing
agreement or the sale and servicing agreement. Until a successor servicer is
appointed pursuant to the terms of the related pooling and servicing agreement
or sale and servicing agreement, the servicer must serve in the capacity of
successor servicer. The credit enhancer, if any, may appoint any successor
servicer other than the trustee. If an credit enhancer does not appoint a
successor servicer, the trustee, if it is unable to obtain a qualifying bid and
is prevented by law from acting as servicer, will be required to appoint or
petition a court of competent jurisdiction to appoint any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved seller-servicer by Freddie Mac or Fannie Mae that has net equity of not
less than $5,000,000, and is acceptable to any credit enhancer, as the successor
to the servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the servicer.
No removal or resignation of the servicer will become effective until
the trustee or another successor servicer shall have assumed the servicer's
responsibilities and obligations in accordance with the related pooling and
servicing agreement or sale and servicing agreement.
THE TRUSTEE
Unless otherwise specified in the related prospectus supplement,
Norwest Bank Minnesota, National Association, which has its principal corporate
trust office at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479,
will be named as trustee under the related pooling and servicing agreement or
sale and servicing agreement.
REPORTING REQUIREMENTS
On each distribution date the trustee will be required to report in
writing (based on information provided to the trustee by the servicer) to each
holder, each rating agency and the credit enhancer, if any:
- the amount of the principal and interest distribution with
respect to each class of securities (based on a security in the
original principal amount of $1,000);
- the amount of the distribution allocable to principal on the home
equity loans, separately identifying the aggregate amount of any
prepayments in full or partial prepayments or other recoveries of
principal included in the principal amount paid on the home
equity loans (based on a security in the original principal
amount of $1,000) and any Subordination Increase Amount (as
defined in the related pooling and servicing agreement or sale
and servicing agreement);
- the amount of the distribution allocable to interest on the home
equity loans (based on a security in the original principal
amount of $1,000);
- if the distribution (net of any payment by any credit enhancer)
to the holders of any class of securities on the distribution
date was less than the amounts distributable to these holders on
the distribution date, the related Carry-Forward Amount (as
defined in the related pooling and servicing agreement or sale
and servicing agreement) resulting from the shortfall;
- the amount of any payment by any credit enhancer included in the
amounts distributed to the holders of class of securities on the
distribution date;
- the outstanding principal balance of each class of securities
(based on a security in the original principal amount of $1,000)
which will be outstanding after giving effect to any payment of
principal on the distribution date;
- the amount of any Subordinated Amount, Specified Subordinated
Amount or Subordination Deficit (each as defined in the relevant
sale and servicing agreement or pooling and servicing agreement),
remaining after giving effect to all distributions and transfers
on the distribution date;
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- the aggregate loan balance of all home equity loans and the
aggregate loan balance of the home equity loans in each home
equity loan pool, in each case after giving effect to any payment
of principal on the distribution date;
- the total of any Substitution Amount or Loan Purchase Price
amounts included in the distribution;
- the weighted average coupon rate of the home equity loans in each
home equity loan group (if applicable) and in the aggregate;
- other information that the credit enhancer or any beneficial
owner of securities may reasonably request with respect to
delinquent home equity loans;
- the largest home equity loan balance in each home equity loan
group (if applicable) and with respect to all home equity loans;
- the Pass-Through Rate (as defined in the relevant agreement) on
any securities subject to an available funds or weighted average
coupon limitation;
- during any funding period, the loan balance of any home equity
loans added to the trust during the related Remittance Period;
- during any prefunding period, the remaining amounts in the
Prefunding Accounts as of the last day of the Remittance Period;
and
- any other information specified in the related prospectus
supplement and/or related pooling and servicing agreement or sale
and servicing agreement.
Certain obligations of the trustee to provide information to the
holders are conditioned upon the trustee's having received the information from
the servicer.
In addition, on each distribution date the trustee will be required to
distribute to each holder, the credit enhancer, if any, and the rating agencies,
together with the information described above, the following information
prepared by the servicer and furnished to the trustee:
- the number and aggregate principal balances of home equity loans
(1) 30-59 days delinquent, 60-89 days delinquent, or 90 or more
days delinquent, as of the close of business on the last day of
the Remittance Period immediately preceding the distribution
date, (2) the number and aggregate loan balances of all home
equity loans, as of the close of business on the last day of the
Remittance Period immediately preceding the distribution date,
and (3) the percentage that each of the amounts specified in
clause (1) represent as a percentage of the amount specified in
clause (2);
- the status and the number and dollar amounts of all home equity
loans in foreclosure proceedings as of the close of business on
the last day of the Remittance Period immediately preceding the
distribution date;
- the number of mortgagors and the loan balances of the related
mortgages involved in bankruptcy proceedings as of the close of
business on the last day of the Remittance Period immediately
preceding the distribution date;
- home equity loans that are "balloon" loans as of the close of
business on the last day of the Remittance Period immediately
preceding the distribution date;
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- the existence and status of any mortgaged properties as to which
title has been taken in the name of, or on behalf of the trustee,
as of the close of business of the last day of the Remittance
Period immediately preceding the distribution date;
- the book value of any REO properties as of the close of business
on the last day of the Remittance Period immediately preceding
the distribution date;
- the realized losses incurred on home equity loans for the
Remittance Period and the cumulative realized losses incurred on
the home equity loans from the closing date to and including the
Remittance Period immediately preceding the distribution date;
and
- the amount of net liquidation proceeds realized on the home
equity loans during the Remittance Period immediately preceding
the distribution date.
REMOVAL OF TRUSTEE FOR CAUSE
The trustee may be removed upon the occurrence of any one of the
following events, whatever the reason for the event and whether it is voluntary
or involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body:
- failure by the trustee to make distributions of available
amounts;
- breaches of covenants and representations by the trustee;
- certain acts of bankruptcy or insolvency on the part of the
trustee; or
- failure to meet the standards of trustee eligibility as set forth
in the related pooling and servicing agreement or sale and
servicing agreement.
If any of these events occurs and is continuing, then the credit
enhancer, if any, or with the prior written consent of any credit enhancer
(which may not be unreasonably withheld), the depositor and the holders or, if
there are no securities then outstanding, by the Residual Interest Securities
may appoint a successor trustee.
GOVERNING LAW
The agreements and each security will be construed in accordance with
and governed by the laws of the State of New York applicable to agreements made
and to be performed in New York.
AMENDMENTS
The trustee, the depositor, the seller and the servicer, with the
consent of the trustee and the credit enhancer, if any, may, at any time and
from time to time and without notice to or the consent of the holders, amend the
pooling and servicing agreement or sale and servicing agreement in order to:
- if accompanied by a REMIC Opinion, remove the restriction against
the transfer of a Residual Interest Security to a "disqualified
organization" (as defined in the Code);
- comply with the requirements of the Code including any amendments
necessary to maintain REMIC status;
- cure any ambiguity;
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- correct or supplement any provision in the pooling and servicing
agreement or the sale and servicing agreement that is
inconsistent with any other provisions in the pooling and
servicing agreement or sale and servicing agreement, as
applicable; or
- for any other purpose, if the seller delivers an opinion of
counsel acceptable to the trustee that the amendment will not
adversely affect in any material respect the interest of the
holders and will not result in a withdrawal or reduction of the
rating of the securities of a series without regard to any
financial guaranty insurance policy.
In no event my the amendment change in any manner the amount of, or
delay the timing of, payments required to be distributed to any holder without
the consent of that holder, change the percentages required to consent to any
amendment, without the consent of the holders of all outstanding securities of
the class or classes affected or affect the terms or provisions of any financial
guaranty insurance policy.
The trustee will be required to furnish written notification of the
substance of any amendment to each holder in the manner set forth in the related
pooling and servicing agreement or sale and servicing agreement.
TERMINATION OF THE TRUST
Unless otherwise specified in the related prospectus supplement, the
related pooling and servicing agreement or sale and servicing agreement will
provide that the trust will terminate upon the payment to the holders from
amounts (other than those available under any financial guaranty insurance
policy) of all amounts required to be paid to the holders upon the later to
occur of:
- the final payment or other liquidation of the last home equity
loan (or any advance made with respect to the home equity loan);
- the disposition of all property acquired in respect of any home
equity loan remaining in the trust fund; and
- any time that a purchase by the servicer or any credit enhancer
as an optional termination of the trust is effected as described
below under "--Optional Termination."
To effect an optional termination, the holders must furnish the trustee
with an opinion of counsel experienced in federal income tax matters acceptable
to the credit enhancer, if any, and the trustee to the effect that the optional
termination constitutes a "qualified liquidation" under the Code.
OPTIONAL TERMINATION
BY SERVICER OR CREDIT ENHANCER. At its option, the servicer (or, if
specified in the related prospectus supplement, the credit enhancer, if any,
if the servicer fails to exercise its option) may effect an optional
termination of the trust (which may also be referred to as a clean up call) to
the extent specified in the related prospectus supplement either (1) on any
distribution date that the aggregate outstanding principal balance of the
securities is 10% or less or less than the initial aggregate outstanding
principal balance of the securities or (2) on any monthly remittance date when
the aggregate outstanding loan balance of the home equity loans is 10% or less
than the sum of the loan balances of all the home equity loans in the trust as
of the date the home equity loans were transferred to the trust. The servicer
may effect an optional termination of the trust by purchasing from the trust
fund all (but not fewer than all) remaining home equity loans, in whole only,
and other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the trust fund, and pay to the holders the portion
of the purchase price allocable to each class of securities, which will equal
an amount up to the sum of (a) 100% of the then outstanding principal balance
of the securities, plus (b) one month's interest on the then outstanding
principal balance of the securities at the then applicable Pass-Through Rate
for each class, plus any previously accrued but unpaid interest on the
securities in accordance with the payment priorities described under
"Description of the Certificates--Distributions" in the related prospectus
supplement and effect early retirement of the securities.
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TERMINATION UPON LOSS OF REMIC STATUS. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, from
which no appeal is taken within the permitted appeal period, or if any appeal is
taken, following a final determination with respect to the appeal from which no
further appeal can be taken, to the effect that the REMIC does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Code the credit
enhancer, if any, or the holders with the consent of the credit enhancer, if
any, may within 30 calendar days following the final determination, direct the
trustee on behalf of the trust fund to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code.
EVENTS OF DEFAULT; TERMINATION UNDER INDENTURE. Events of Default under
the indenture for each series of notes include:
- a default for 30 days or more in the payment of any principal of
or interest on any note;
- failure to perform any other covenant of the trust fund in the
indenture which continues for a period of 60 days after notice is
given in accordance with the procedures described in the related
prospectus supplement;
- any representation or warranty made with respect to or affecting
the series by the seller or the trust fund in the indenture or in
any certificate or other writing delivered pursuant to or in
connection with the indenture having been incorrect in any
material respect as of the time made, and the breach is not cured
within 60 days after notice is given in accordance with the
procedures described in the related prospectus supplement;
- certain events of bankruptcy, insolvency, receivership or
liquidation of the seller or the trust fund; or
- any other event of default provided with respect to the notes.
If an Event of Default with respect to any outstanding notes occurs and
is continuing, either the trustee or the holders of a majority of the then
aggregate outstanding amount of the notes with, if specified in the related
prospectus supplement, the consent of the credit enhancer, may declare the
principal amount (or, if the notes are Zero Coupon Securities, the portion of
the principal amount specified in the terms of that series, as provided in the
related prospectus supplement) of all the notes to be due and payable
immediately. This declaration may, under certain circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
notes.
If, following an Event of Default with respect to any series of notes,
the notes have been declared to be due and payable, the trustee may, in its
discretion, elect to maintain possession of the collateral securing the notes
and to continue to apply distributions on the collateral as if there had been no
declaration of acceleration, if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes as they would
have become due if there had not been any acceleration of payment. In addition,
the trustee may not sell or otherwise liquidate the collateral securing the
notes of a series following an Event of Default other than a default in the
payment of any principal or interest on any note for 30 days or more, unless:
- the holders of 100% of the then aggregate outstanding amount of
the notes consent to the sale;
- the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest due and unpaid on the
outstanding notes at the date of the sale; or
- the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes
as those payments would have become due if the notes had not been
accelerated, and the trustee obtains the consent of the holders
of 66 2/3% of the then aggregate outstanding amount of the notes.
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In the event that the trustee liquidates the collateral in connection
with an Event of Default involving a default for 30 days or more in the payment
of principal of or interest on the notes, the indenture provides that the
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of the Event of Default, the
amount available for distribution to the noteholders may be less than would
otherwise be the case. However, the trustee may not institute a proceeding for
the enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the Event of Default.
In the event that the principal of the notes of a series is declared
due and payable as described above, the holders of any notes issued at a
discount from par may be entitled to receive no more than an amount equal to the
unpaid principal amount of their notes less the amount of the discount which is
unamortized.
Subject to the provisions of the indenture relating to the duties of
the trustee, even if an event of default has occurred and is continuing with
respect to a series of notes, the 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 notes of the series, unless the holders have
offered to the trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
the request or direction of the holders. Subject to these provisions for
indemnification and certain other limitations contained in the indenture, the
holders of a majority of the then aggregate outstanding amount of the notes of
the series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee with respect to the notes. The
holders of a majority of the then aggregate outstanding amount of the notes may,
in certain cases, waive any default with respect to the notes, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding notes affected.
The indenture will be discharged with respect to a series of notes
(except with respect to certain continuing rights specified in the indenture)
upon the delivery to the trustee for cancellation of all the notes of the series
or, with certain limitations, upon deposit with the trustee of funds sufficient
for the payment in full of all of the notes of the series.
In addition to this discharge, with certain limitations, the indenture
will provide that, if specified with respect to the notes of any series, the
related trust fund will be discharged from any and all obligations with respect
to the notes of the series (except for certain obligations relating to temporary
notes and exchange of notes, to register the transfer of or exchange notes of
the series, to replace stolen, lost or mutilated notes of the series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and each installment of
interest on the notes on the final scheduled distribution date for the notes and
any installment of interest on the notes in accordance with the terms of the
indenture and the notes. In the event of any resulting defeasance and discharge
of the notes, holders of notes would be able to look only to this money and/or
direct obligations for all further payment of principal and interest, if any, on
their notes.
REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the trust fund may be performed by a REMIC administrator, who may be
the seller or an affiliate of the seller.
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CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS
The following discussion contains summaries of certain legal aspects of
home equity loans which are general in nature. Because certain of these legal
aspects are governed by applicable state law (which may differ substantially
from state to state), the summaries do not purport to be complete or to reflect
the laws of any particular state, or to encompass the laws of all states in
which the properties securing the home equity loans are situated.
HOME EQUITY LOANS
The home equity loans for a series will be secured by either mortgages,
deeds of trust, deeds to secure debt or similar security instruments, depending
upon the prevailing practice in the state in which the property subject to a
home equity loan is located. The filing of a mortgage, deed of trust, deed to
secure debt or similar security instrument creates a lien or title interest upon
the real property covered and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. The priority of
the liens is important because, among other things, the foreclosure of a senior
lien will extinguish a junior lien, and because the holder of a senior lien
generally will have a right to receive insurance, condemnation or other proceeds
before the holder of a junior lien.
Priority between mortgages and deeds of trust (or other instruments of
record) generally depends in the first instance on the order of filing with the
appropriate government records office. Priority also may be affected by the
express terms of the mortgage or the deed of trust and any subordination
agreement among the lenders.
Although priority among liens on the same property generally depends in
the first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. A deed of trust or mortgage generally is not prior to any
liens for real estate taxes and assessments, certain federal liens (including
certain federal criminal liens, environmental liens and tax liens), certain
mechanics and materialmen's liens, and other liens given priority by applicable
law.
There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a home equity loan, the borrower executes a
separate undertaking to make payments on the mortgage note. Under a deed of
trust or similar security instrument, the homeowner or borrower, called the
"grantor," grants the security property to a third-party grantee, called the
"trustee," for the benefit of the lender, called the "beneficiary." The deed of
trust gives the trustee the authority, if the borrower defaults and upon the
instructions of the beneficiary, to sell the security property in a
"foreclosure" or "trustee's sale" and to apply the sale proceeds to the secured
debt. The mortgagee's authority under a mortgage and the trustee's authority
under a deed of trust are governed by the law of the state in which the real
property is located, the express provisions of the mortgage or deed of trust,
and, in some cases, particularly in deed of trust transactions, the directions
of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial
action, and foreclosure of a deed of trust may be accomplished by judicial
action. Generally, the action is initiated by the service of legal pleadings
upon all parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
effecting service on necessary parties defendant. When the mortgagee's right
to foreclosure is contested, the legal proceedings necessary to resolve the
issue can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In
some states, mortgages may also be foreclosed by advertisement or pursuant to
a power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
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If a borrower defaults under a loan secured by a deed of trust, the
lender generally may bring suit against the borrower. The lender generally also
may attempt to collect the loan by causing the deed of trust to be enforced
against the property it encumbers. Enforcement of a deed of trust is
accomplished in most cases by a trustee's sale in which the trustee, upon
default of the grantor, and subject to the expiration of applicable cure
periods, sells the security property at a public sale under the terms of the
loan documents and subject to the applicable procedural provisions of state law.
In certain states, the lender must exhaust the security through foreclosure
(either judicially or non-judicially) prior to other efforts to collect the
balance of the promissory note. Whether a lender may thereafter collect on the
unpaid balance of the loan is governed by the anti-deficiency statute in the
applicable state governing the collectibility of deficiency balances.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located. At
the sale, the trustee generally requires a bidder to deposit with the trustee a
set amount or a percentage of the full amount of the bidder's final bid in cash
(or an equivalent satisfactory to the trustee) prior to and as a condition to
recognizing the bid, and may conditionally accept and hold these amounts for the
duration of the sale. The beneficiary of the deed of trust generally need not
bid cash at the sale, but may instead make a "credit bid" up to the extent of
the total amount due under the deed of trust, including costs and expenses
actually incurred in enforcing the deed of trust, as well as the trustee's fees
and expenses. The trustee will sell the security property to the highest proper
bidder at the sale.
A sale conducted in accordance with the terms of the power of sale
contained in the deed of trust generally is presumed to be conducted regularly
and fairly, and, on a conveyance of the property by trustee's deed, confers
absolute legal title to the property to the purchaser, free of all junior deeds
of trust and free of all other liens and claims subordinate to the deed of trust
under which the sale is made. The purchaser's title, however, is subject to all
senior liens and other senior claims. Thus, if the deed of trust being enforced
is a junior deed of trust, the trustee will convey title to the property to the
purchaser subject to the first deed of trust and any other prior liens and
claims. A trustee's sale or judicial foreclosure under a junior deed of trust
generally has no effect on the first deed of trust, with the possible exception
of the right of a senior beneficiary to accelerate its indebtedness under a
default clause or a "due-on-sale" clause contained in the senior deed of trust.
WE REFER YOU TO "--DUE-ON-SALE CLAUSES IN HOME EQUITY LOANS" BELOW FOR
MORE DETAIL.
Because a potential buyer at the sale may find it difficult to
determine the exact status of title and other facts about the security property,
and because the physical condition of the security property may have
deteriorated, it generally is more common for the lender, rather than an
unrelated third party, to purchase the security property at a trustee's sale or
judicial foreclosure sale. The lender (or other purchaser at the judicial
foreclosure or trustee's sale) will be subject to the burdens of ownership,
including the obligations to service any senior mortgage or deed of trust, to
obtain hazard insurance and to make any repairs at its own expense necessary to
render the security property suitable for resale. The lender commonly will
attempt to resell the security property and obtain the services of a real estate
broker and agree to pay the broker a commission in connection with the resale.
Depending upon market conditions, the ultimate proceeds of the resale of the
security property may not be high enough to equal the lender's investment.
The proceeds received by the trustee from the sale generally are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the deed of trust under which the sale was
conducted. Any remaining proceeds generally are payable to the holders of junior
deeds of trust and other liens and claims in order of their priority. Any
balance remaining generally is payable to the grantor. Following the sale, if
there are insufficient proceeds to repay the secured debt, the beneficiary under
the foreclosed lien generally may obtain a deficiency judgment against the
grantor. See "--Deficiency Judgments" below.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's
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equitable powers. Generally, a mortgagor is bound by the terms of the related
mortgage note and the mortgage as made and cannot be relieved from his default
if the mortgagee has exercised his rights in a commercially reasonable manner.
However, since a foreclosure action is equitable in nature, the court may
exercise equitable powers to relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that either the mortgagor's default was
excusable or the mortgagee's action established a waiver, fraud, bad faith, or
oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a
court of equity may relieve the mortgagor from an entirely technical default
where the default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is relatively uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is more common for the lender to
purchase the property from the trustee or referee for an amount which may be
equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where a deficiency judgment can
be obtained. Afterward, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making any repairs at its own expense necessary to render the property suitable
for sale. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a statutory or
non-statutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest, expenses of foreclosure and reasonable
expenses incurred in maintaining the property. In other states, redemption may
be authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
will defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to foreclosure. Consequently the
practical effect of a right of redemption is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has
run. In many states, there is no right to redeem property after a trustee's
sale under a deed of trust, unless a deficiency judgment is sought by the
lender.
When the lender under a junior mortgage or deed of trust cures the
default and reinstates or redeems the senior mortgage or deed of trust, the
amount paid by the lender for the cure generally becomes a part of the
indebtedness secured by the junior deed of trust.
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JUNIOR HOME EQUITY LOANS; RIGHTS OF SENIOR HOME EQUITY LOANS
The home equity loans comprising or underlying the home equity loans
included in the trust fund for a series will be secured by mortgages or deeds of
trust which may be junior to one or more other mortgages or deeds of trust held
by other lenders or institutional investors. The rights of the trust fund (and
therefore the holders), as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the home equity loan to be sold upon default of
the mortgagor, thus extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior home equity loan in full and, in some
states, may cure the default and bring the senior home equity loan current, in
either event adding the amounts expended to the balance due on the junior home
equity loan. In some states, absent a provision in the mortgage or deed of
trust, no notice of default is required to be given to a junior mortgagee. In
addition, as described above, the rights of the trust fund may be or become
subject to liens for real estate taxes and other obligations. Although the
seller generally does not cure defaults under a senior deed of trust or other
lien, it is the seller's standard practice to protect its interest by monitoring
any sale of which it is aware and bidding for property if it determines that it
is in the seller's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that used by the seller, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy required to be maintained by the borrower and all awards made
in connection with condemnation proceedings. The lender generally has the right,
subject to the specific provisions of the mortgage or deed of trust securing its
home equity loan, to apply any proceeds and awards to repair of any damage to
the security property or to payment of any indebtedness secured by the mortgage
or deed of trust, in any order that the mortgagee or beneficiary may determine.
Thus, in the event improvements on the property are damaged or destroyed by fire
or other casualty, or in the event the property is taken by condemnation, the
mortgagee or beneficiary under underlying senior mortgages will have the prior
right to collect any insurance proceeds payable under a hazard insurance policy
and any award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgages or deeds of trust. If
available, proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, will be applied to the junior indebtedness.
Another provision typically found in the form of the mortgage or deed
of trust used by institutional lenders obligates the grantor or mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee or beneficiary under the mortgage.
Upon a failure of the grantor or mortgagor to perform any of these obligations,
the mortgagee or beneficiary is given the right to perform the obligation
itself, at its election, with the mortgagor or grantor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the mortgagor or grantor. The mortgage or deed of trust typically
provides that all sums so expended by the mortgagee or beneficiary become part
of the indebtedness secured by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. However, some states calculate the deficiency as the difference between
the outstanding indebtedness and the greater of the fair market value of the
property and the sales price of the property. Other states require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states,
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the lender has the option of bringing a personal action against the borrower
on the debt without first exhausting its security; however, in some of these
states, the lender, following judgment on its personal action, may be deemed
to have elected a remedy and may be precluded from exercising remedies with
respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first
against the security rather than bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Federal Soldiers' and Sailors' Civil Relief Act and state laws affording relief
to debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Foreclosure is
permitted during the pendency of this proceeding only with court permission
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a Chapter 13 rehabilitative plan under the federal bankruptcy code to
cure a monetary default with respect to a loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon its security (as long as no sale of the property
has yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a home equity loan may be modified if the borrower has filed a
petition under Chapter 13. These courts have suggested that modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the home equity loan. Federal bankruptcy law and limited
case law indicate that the foregoing modifications cannot be applied to the
terms of a home equity loan secured by property that is the principal residence
of the debtor. In all cases, the secured creditor is entitled to the value of
its security plus post-petition interest, attorney's fees and costs to the
extent the value of the security exceeds the debt.
In a Chapter 11 case under the federal bankruptcy code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The federal bankruptcy code provides priority to certain tax liens
over the lender's security. This may delay or interfere with the enforcement
of rights in respect of a defaulted home equity loan. In addition, substantive
requirements are imposed upon lenders in connection with the origination and
the servicing of home equity loans by numerous federal and some state consumer
protection laws. The laws include the federal Truth-in-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail
to comply with the provisions of the law. In most cases, this liability will
affect assignees of the loans.
DUE-ON-SALE CLAUSES IN HOME EQUITY LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of
the home equity loan if the borrower sells or transfers, whether voluntarily
or involuntarily, all or part of the real property securing the loan without
the lender's prior written consent. The enforceability of these clauses has
been the subject of legislation or
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litigation in many states, and in some cases, typically involving single
family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses
and permits lenders to enforce these clauses in accordance with their terms,
subject to certain exceptions. As a result, due-on-sale clauses have become
generally enforceable except in those states whose legislatures exercised
their authority to regulate the enforceability of due-on-sale clauses with
respect to home equity that were originated or assumed during the "window
period" under the Garn-St Germain Act which ended in all cases not later than
October 15, 1982, and that were originated by lenders other than national
banks, federal savings institutions and federal credit unions. Freddie Mac has
taken the position in its published mortgage servicing standards that, out of
a total of eleven "window period states," five states (Arizona, Michigan,
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of window period loans. Also, the
Garn-St Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of
the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from the bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon its security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that, in cases involving the sale by a trustee under
a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protections to the
borrower.
Most conventional single-family home equity loans may be prepaid in
full or in part without penalty. A mortgagee to whom a prepayment in full has
been tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to home equity loans having higher
mortgage rates, may increase the likelihood of refinancing or other early
retirements of these home equity loans.
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APPLICABILITY OF USURY LAWS
Many states have usury laws which limit the interest and other amounts
that may be charged under certain loans. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations will not apply to certain types of
residential first home equity loans originated by certain lenders after March
31, 1980. Similar federal statutes were in effect with respect to home equity
loans made during the first three months of 1980. Title V authorizes any state
to reimpose interest rate limits by adopting, before April 1, 1983, a state law,
or by certifying that the voters of the state have voted in favor of any
provision, constitutional or otherwise, which expressly rejects an application
of the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on home equity loans covered by Title V. State laws apply to residential
second mortgages; however, some state usury limitations do not apply to
residential second mortgages.
ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response,
Compensation, and Liability Act, and a growing number of state laws impose a
statutory lien for associated costs on property that is the subject of a cleanup
action on account of hazardous wastes or hazardous substances released or
disposed of on the property. A lien of this type generally will have priority
over all subsequent liens on the property and, in certain of these states, will
have priority over prior recorded liens, including the lien of a mortgage or
deed of trust. The priority of the environmental lien under federal law depends
on the time of perfection of the federal lien compared to the time of perfection
of any competing liens under applicable state law. In addition, under federal
environmental legislation and possibly under state law in a number of states, a
secured party that takes a deed in lieu of foreclosure or acquires a property at
a foreclosure sale may be liable for the costs of cleaning up a contaminated
site. Although these costs could be substantial, they would probably not be
imposed on a secured lender (such as the applicable trust fund) if it promptly
marketed the foreclosed property for resale. In the event that a trust fund
acquired title to a property securing a home equity loan and cleanup costs were
incurred in respect of the property, the holders of the securities might incur a
delay in the payment if the costs were required to be paid by the trust fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service:
- are entitled to have interest rates reduced and capped at 6% per
annum, on obligations (including home equity loans) incurred
prior to the commencement of military service for the duration of
military service;
- may be entitled to a stay of proceedings on any kind of
foreclosure or repossession action in the case of defaults on
obligations entered into prior to military service for the
duration of military service; and
- may have the maturity of obligations incurred prior to military
service extended, the payments lowered and the payment schedule
readjusted for a period of time after the completion of military
service.
However, these benefits are subject to challenge by creditors. If, in
the opinion of the court, the ability of a person to comply with these
obligations has not been materially impaired by military service, the court
may apply equitable principles accordingly. If a borrower's obligation to
repay amounts otherwise due on a home equity loan included in a trust fund for
a series is relieved pursuant to the Soldiers' and Sailors' Civil Relief Act
of 1940, none of the trust fund, the servicer, the seller, the trustee or the
owner trustee (if applicable) will be required to advance these amounts, and
any resulting loss may reduce the amounts available to be paid to the holders
of the securities of the series. Any shortfalls in interest collections on
home equity loans included in a
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trust fund for a series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each class of
securities of the series that is entitled to receive interest in respect of
the home equity loans in proportion to the interest that each class of
securities would have otherwise been entitled to receive in respect of the
home equity loans had the interest shortfall not occurred, unless the related
prospectus supplement allocates these shortfalls to particular classes.
USE OF PROCEEDS
The depositor will apply all or substantially all of the net proceeds
from the sale of each series of securities for one or more of the following
purposes:
- to establish any reserve fund, Prefunding Account or Capitalized
Interest Account;
- to pay costs of structuring and issuing the securities, including
the costs of obtaining credit enhancement; and
- to acquire the home equity loans from the seller, who in turn
will use the proceeds for general corporate purposes.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section sets forth certain federal income tax opinions of Stroock
& Stroock & Lavan LLP, special counsel to the seller ("Federal Tax Counsel") and
a summary, based on the advice of Federal Tax Counsel, of the material federal
income tax consequences of the purchase, ownership and disposition of
securities. The summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"), but much of the discussion is applicable to other investors as
well. Because tax consequences may vary based on the status or tax attributes of
the owner of a security, prospective investors are advised to consult their own
tax advisers concerning the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the securities. For
purposes of this tax discussion (except with respect to information reporting,
or where the context indicates otherwise), any reference to the "holder" means
the beneficial owner of a security.
The summary is based upon the provisions of and the regulations
promulgated under the Code including, where applicable, proposed regulations,
and the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and a change could apply retroactively.
The federal income tax consequences to holders will vary depending on
whether:
- the securities of a series are classified as indebtedness for
federal income tax purposes;
- an election is made to treat the trust fund (or certain assets of
the trust fund) relating to a particular series of securities as
a real estate mortgage investment conduit (REMIC) under the Code;
- the securities represent an ownership interest for federal income
tax purposes in some or all of the assets included in the trust
fund for a series; or
- for federal income tax purposes the trust fund relating to a
particular series of securities is classified as a partnership or
is disregarded as an entity separate from its owner.
The prospectus supplement for each series of securities will specify
how the securities will be treated for federal income tax purposes and will
discuss whether a REMIC election, if any, will be made with respect to the
series.
OPINIONS
Federal Tax Counsel is of the opinion that:
(i) if a prospectus supplement indicates that one or more
classes of non-REMIC securities of the related series are to be treated
as indebtedness for federal income tax purposes, assuming that all of
the provisions of the applicable agreement are complied with, the
securities so designated will be considered indebtedness for federal
income tax purposes and, for federal income tax purposes, the related
trust fund will not be an association, publicly traded partnership, or
taxable mortgage pool taxable as a corporation;
(ii) if a prospectus supplement indicates that one or more
REMIC elections will be made with respect to the related trust fund,
assuming that these elections are timely made and all of the provisions
of the applicable agreement are complied with:
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- each segregated pool of assets specified as a REMIC in the
agreement will constitute a REMIC for federal income tax
purposes;
- the class or classes of securities of the related series which
are designated as "regular interests" in the prospectus
supplement will be considered "regular interests" in a REMIC for
federal income tax purposes; and
- the class of securities of the related series which is designated
as the "residual interest" in the prospectus supplement will be
considered the sole class of "residual interests" in the
applicable REMIC for federal income tax purposes; and
(iii) if a prospectus supplement indicates that a trust fund
will be treated as a grantor trust for federal income tax purposes,
assuming compliance with all of the provisions of the applicable
agreement, the trust fund will be a grantor trust under Subpart E, Part
I of Subchapter J of the Code and will not be an association taxable as
a corporation, and a holder of the related certificates will be treated
for federal income tax purposes as the owner of an undivided interest
in the home equity loans included in the trust fund.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service ("IRS") or any
third-party.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
INTEREST AND ACQUISITION DISCOUNT. Securities representing regular
interest in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the holder's normal accounting method. Interest (other than original issue
discount ("OID")) on securities (other than Regular Interest Securities) that
are characterized as indebtedness for federal income tax purposes will be
includible in income by holders in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities are referred to in this section collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain
of the other Debt Securities may, be issued with OID. The following discussion
is based in part on the rules governing OID which are set forth in Sections
1271-1275 of the Code and the Treasury regulations issued under these provisions
of the Code (the "OID Regulations"). A holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include the OID in gross income as ordinary interest income
as it accrues under a prescribed method which takes into account an economic
accrual of the discount. In general, OID must be included in income in advance
of the receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code. The issue price of a Debt Security is the first price
at which a substantial amount of Debt Securities of that class are sold to the
public (excluding bond houses, brokers, underwriters or wholesalers). If less
than a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the closing date, the issue price for that class will be
treated as the fair market value of the class on the closing date. The stated
redemption price at maturity of a Debt Security includes the original principal
amount of the Debt Security, but generally will not include distributions of
interest if the distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be qualified
stated interest unless the interest payments are "unconditionally payable."
The OID Regulations state that interest is unconditionally payable if
reasonable legal remedies exist to compel timely payment or the debt
instrument otherwise provides terms and conditions that make the likelihood of
late payment of interest (other than late payment that occurs within a
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reasonable grace period) or nonpayment of interest a remote contingency. It is
unclear whether the terms and conditions of the debt instruments underlying
the Debt Securities or of the Debt Securities themselves are determinative of
whether the likelihood of late payment or non-payment is a remote contingency.
Accordingly, Federal Tax Counsel is unable to opine whether the interest with
respect to a Debt Security is qualified stated interest, and consequently
whether a Debt Security has OID as a result of the failure of the interest to
be treated as qualified stated interest.
Certain Debt Securities will provide for distributions of interest
based on a period that is the same length as the interval between distribution
dates but ends prior to each distribution date. Any interest that accrues prior
to the closing date may be treated under the OID Regulations either as part of
the issue price and the stated redemption price at maturity of the Debt
Securities or as not included in the issue price or stated redemption price. The
OID Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In these cases, for the sole purpose of determining whether
OID is de minimis, the OID Regulations provide that the stated redemption price
is equal to the instrument's issue price plus the greater of the amount of
foregone interest or the excess (if any) of the instrument's stated principal
amount over its issue price. The term "interest period" may also be used to
refer to the "accrual period" with respect to interest on a class of notes or
certificates.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security. For this purpose, the weighted average maturity of the
Debt Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. holders generally must report de minimis OID pro rata as
principal payments are received, and the income will be capital gain if the Debt
Security is held as a capital asset. However, accrual method holders may elect
to accrue all de minimis OID as well as market discount under a constant
interest method. See "--Election to Treat All Interest as Original Issue
Discount."
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds the Debt
Security, the sum of the 'daily portions' of the OID. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the OID that accrued during the
relevant accrual period. In the case of a Debt Security that is not a Regular
Interest Security and the principal payments on which are not subject to
acceleration resulting from prepayments on the home equity loans, the amount of
OID includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to the Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing these debt
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments
is to be determined on the basis of three factors: (1) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding
at the end of each accrual period and properly adjusted for the length of the
accrual period), (2) events which have occurred before the end of the accrual
period and (3) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase the portions of
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OID required to be included in income by a holder to take into account
prepayments with respect to the home equity loans at a rate that exceeds the
Prepayment Assumption, and to decrease (but not below zero for any period) the
portions of OID required to be included in income by a holder of a Pay-Through
Security to take into account prepayments with respect to the home equity
loans at a rate that is slower than the Prepayment Assumption. Although OID
will be reported to holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to holders that home equity loans will
be prepaid at that rate or at any other rate.
The seller may adjust the accrual of OID on a class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the home equity loans,
although the OID Regulations do not provide for these adjustments. If the IRS
were to require that OID be accrued without these adjustments, the rate of
accrual of OID for a class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless the applicable prospectus
supplement specifies otherwise, the trustee intends, based on the OID
Regulations, to calculate OID on these securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but a holder who purchases a Debt Security for an amount
that exceeds its adjusted issue price will be entitled (as will an initial
holder who pays more than a Debt Security's issue price) to offset OID by
comparable economic accruals of portions of excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders will be required to
report income with respect to its securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the home equity loans, except possibly to the extent
that it can be established that these amounts are uncollectible. As a result,
the amount of income (including OID) reported by a holder in any period could
significantly exceed the amount of cash distributed to the holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the securities is reduced as a result of a home equity loan
default. However, the timing and character of these losses or reductions in
income are uncertain and, accordingly, holders of securities should consult
their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be
accrued on Debt Securities the payments on which consist solely or primarily of
a specified portion of the interest payments on qualified mortgages held by the
REMIC or on home equity loans underlying Pass-Through Securities ("Interest
Weighted Securities"). The trust fund intends to take the position that all of
the income derived from an Interest Weighted Security should be treated as OID
and that the amount and rate of accrual of the OID should be calculated by
treating the Interest Weighted Security as a Compound Interest Security.
However, in the case of Interest Weighted Securities that are entitled to some
payments of principal and that are Regular Interest Securities the IRS could
assert that income derived from an Interest Weighted Security should be
calculated as if the security were purchased at a premium equal to the excess of
the price paid by the holder for the security over its stated principal amount,
if any. Under this approach, a holder would be entitled to amortize this premium
amount, if any. Under this approach, a holder would be entitled to amortize the
premium only if it has in effect an election under Section 171 of the Code with
respect to all taxable debt instruments held by the holder, as described below.
VARIABLE RATE DEBT SECURITIES. Under the OID Regulations, Debt
Securities paying interest at a variable rate (a "Variable Rate Debt Security")
are subject to special rules. A Variable Rate Debt Security will qualify as a
"variable rate debt instrument" if:
- its issue price does not exceed the total noncontingent principal
payments due under the Variable Rate Debt Security by more than a
specified de minimis amount;
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- it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a
single objective rate or (d) a single fixed rate and a single
objective rate that is a qualified inverse floating rate; and
- it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except the de
minimis amount specified above.
A "qualified floating rate" is any variable rate where the rate
variations can reasonably be expected to measure contemporaneous variations in
the cost of newly borrowed funds in the currency in which the Variable Rate Debt
Security is denominated. A multiple of a qualified floating rate will generally
not itself constitute a qualified floating rate for purposes of the OID
Regulations. However, a variable rate equal to (1) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (2) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate will constitute a qualified floating rate for purposes of the OID
Regulations.
In addition, under the OID Regulations, two or more qualified floating
rates that can reasonably be expected to have approximately the same values
throughout the term of the Variable Rate Debt Security will be treated as a
single qualified floating rate (a "Presumed Single Qualified Floating Rate").
Two or more qualified floating rates with values within 25 basis points of each
other as determined on the Variable Rate Debt Security's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Nevertheless, a variable rate that would otherwise constitute a qualified
floating rate but which is subject to one or more restrictions such as a cap or
floor, will not be a qualified floating rate for purposes of the OID Regulations
unless the restriction is fixed throughout the term of the Variable Rate Debt
Security or the restriction will not significantly affect the yield of the
Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the IRS in the future. Nevertheless, a variable rate of interest
on a Variable Rate Debt Security will not constitute an objective rate if it is
reasonably expected that the average value of the variable rate during the first
half of the Variable Rate Debt Security's term will be either significantly less
than or significantly greater than the average value of the rate during the
final half of the Variable Rate Debt Security's term. Further, an objective rate
does not include a rate that is based on information that is within the control
of or unique to the circumstances of the issuer or a party related to the
issuer. An objective rate will qualify as a "qualified inverse floating rate" if
the objective rate is equal to a fixed rate minus a qualified floating rate and
variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate.
The OID Regulations also provide that if a Variable Rate Debt Security
provides for stated interest at a fixed rate for an initial period of less than
one year followed by a variable rate that is either a qualified floating rate or
an objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), OID is computed as described above
based on the following:
- stated interest on the Single Variable Rate Debt Security which
is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually will constitute
qualified stated interest;
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- by assuming that the variable rate on the Single Variable Debt
Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a
qualified inverse floating rate, the value, as of the issue date,
of the qualified floating rate or the qualified inverse floating
rate or (b) in the case of a Single Variable Rate Debt Security
with an objective rate (other than a qualified inverse floating
rate), a fixed rate which reflects the reasonably expected yield
for the Single Variable Debt Security; and
- the qualified stated interest allocable to an accrual period is
increased (or decreased) if the interest actually paid during an
accrual period exceeds (or is less than) the interest assumed to
be paid under the assumed fixed rate described above.
In general, any Variable Rate Debt Security other than a Single
Variable Rate Debt Security (a "Multiple Variable Rate Debt Security") that
qualifies as a "variable rate debt instrument" will be converted into an
"equivalent" fixed rate debt instrument for purposes of determining the amount
and accrual of OID and qualified stated interest on the Multiple Variable Rate
Debt Security. The OID Regulations generally require that the Multiple Variable
Rate Debt Security be converted into an "equivalent" fixed rate debt instrument
by substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate Debt Security with a
fixed rate equal to the value of the qualified floating rate or qualified
inverse floating rate, as the case may be, as of the Multiple Variable Rate Debt
Security's issue date. Any objective rate (other than a qualified inverse
floating rate) provided for under the terms of the Multiple Variable Rate Debt
Security is converted into a fixed rate that reflects the yield that is
reasonably expected for the Multiple Variable Rate Debt Security.
In the case of a Multiple Variable Rate Debt Security that qualifies as
a "variable rate debt instrument" and provides for stated interest at a fixed
rate in addition to either one or more qualified floating rates or a qualified
inverse floating rate, the fixed rate is initially converted into a qualified
floating rate (or a qualified inverse floating rate, if the Multiple Variable
Rate Debt Security provides for a qualified inverse floating rate). Under these
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate Debt Security as of the Multiple Variable Rate Debt
Security's issue date is approximately the same as the fair market value of an
otherwise identical debt instrument that provides for either the qualified
floating rate or qualified inverse floating rate rather than the fixed rate.
Subsequent to converting the fixed rate into either a qualified floating rate or
a qualified inverse floating rate, the Multiple Variable Rate Debt Security is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of OID and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the OID rules to the
"equivalent" fixed rate debt instrument in the manner described above. A holder
of the Multiple Variable Rate Debt Security will account for this OID and
qualified stated interest as if the holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or OID assumed to have been accrued or paid
with respect to the "equivalent" fixed rate debt instrument in the event that
these amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate
debt instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if the Debt
Security were treated as a contingent payment debt obligation.
The IRS has issued final regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply however to debt
instruments to which Code Section 1272(a)(6) is applicable, such as a
Pay-Through Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the Treasury
issues guidelines to the contrary, the trustee intends to base its computation
of OID on Pay-
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Through Securities as described in this prospectus. However, because no
regulatory guidance exists under Code Section 1272(a)(6), there can be no
assurance that this methodology represents the correct manner of calculating
OID.
MARKET DISCOUNT. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the securities are sold, the gain realized. This market discount would
accrue in a manner to be provided in Treasury regulations but, until the
regulations are issued, the market discount would in general accrue either (1)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (2) in the ratio of (a) in the case of
securities (or in the case of a Pass-Through Security, as set forth below, the
home equity loans underlying the Security) not originally issued with OID,
stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
securities (or, in the case of a Pass-Through Security, as described below, the
home equity loans underlying the Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the home
equity loans), the excess of interest paid or accrued to purchase or carry a
security (or, in the case of a Pass-Through Security, as described below, the
underlying home equity loans) with market discount over interest received on the
security is allowed as a current deduction only to the extent the excess is
greater than the market discount that accrued during the taxable year in which
the interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when the market discount is included in
income, including upon the sale, disposition, or repayment of the Debt Security
(or in the case of a Pass-Through Security, an underlying home equity loan). A
holder may elect to include market discount in income currently as it accrues,
on all market discount obligations acquired by the holder during the taxable
year the election is made and thereafter, in which case the interest deferral
rule will not apply.
PREMIUM. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on the security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the Tax Reform Act of 1986 indicates that premium is to
be accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be calculated
using the prepayment assumption used in pricing the class. If a holder makes an
election to amortize premium on a Debt Security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
afterwards by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
Current treasury regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium specifically do not apply
to prepayable debt instruments subject to Code Section 1272(a)(6) such as the
Pay-Through Securities. Absent further guidance from the IRS, the trustee
intends to account for amortizable bond premium in the manner described above.
Prospective purchasers of the securities should consult their tax advisors
regarding the possible application of the Amortizable Bond Premium Regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or OID) and premium in income as interest,
based on a constant yield method for Debt Securities acquired on or after April
4, 1994. If an election were to be made with respect to a Debt Security with
market discount, the holder of the Debt Security
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would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount
that the holder of the Debt Security acquires during the year of the election
or thereafter. Similarly, a holder of a Debt Security 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 holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Debt Security is irrevocable.
SALE OR EXCHANGE. A holder's tax basis in its Debt Security is the
price the holder pays for a Debt Security, plus amounts of OID or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Debt Security, measured by
the difference between the amount realized and the Debt Security's basis as so
adjusted, will generally be capital gain or loss, assuming that the Debt
Security is held as a capital asset. In the case of a Debt Security held by a
bank, thrift, or similar institution described in Section 582 of the Code,
however, gain or loss realized on the sale or exchange of a Debt Security will
be taxable as ordinary income or loss. In addition, gain from the disposition of
a Regular Interest Security that might otherwise be capital gain will be treated
as ordinary income to the extent of the excess, if any, of (1) the amount that
would have been includible in the holder's income if the yield on the Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of the holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to the Regular Interest Security.
TAXATION OF THE REMIC AND ITS HOLDERS
STATUS OF REGULAR INTEREST SECURITIES. Regular Interest Securities and
securities representing a residual interest in a REMIC (both types of securities
collectively referred to as "REMIC Securities") will be "real estate assets" for
purposes of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets" to the extent
that the REMIC's assets are qualifying assets). However, if at least 95 percent
of the REMIC's assets are qualifying assets, then 100 percent of the REMIC
Securities will be qualifying assets. Similarly, income on the REMIC Securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to home equity loans,
the REMIC's assets will include payments on home equity loans held pending
distribution to holders of REMIC Securities, amounts in reserve accounts (if
any), other credit enhancements (if any) and possibly buydown funds ("Buydown
Funds"). The home equity loans generally will be qualifying assets under both of
the foregoing sections of the Code. However, home equity loans that are not
secured by residential real property or real property used primarily for church
purposes may not constitute qualifying assets under Section 7701(a)(19)(C)(v) of
the Code. In addition, to the extent that the principal amount of a home equity
loan exceeds the value of the property securing the home equity loan, it is
unclear and Federal Tax Counsel is unable to opine whether the home equity loans
will be qualifying assets. The regulations under Sections 860A through 860G of
the Code (the "REMIC Regulations") treat credit enhancements as part of the
mortgage or pool of mortgages to which they relate, and therefore credit
enhancements generally should be qualifying assets. Regulations issued in
conjunction with the REMIC Regulations provide that amounts paid on loans and
held pending distribution to holders of Regular Interest Securities ("cash flow
investments") will be treated as qualifying assets. It is unclear whether
reserve funds or Buydown Funds would also constitute qualifying assets under
either of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a
"single class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each holder on that day. In the
case of a holder of a Regular Interest Security who is an individual or a
"pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), these expenses will be
deductible only to the extent that these expenses, plus other "miscellaneous
itemized deductions" of the holder, exceed 2% of the holder's adjusted gross
income and the holder may not be able to deduct these fees and
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expenses to any extent in computing its alternative minimum tax liability. In
addition, the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds the
applicable amount will be reduced by the lesser of (1) 3% of the excess of
adjusted gross income over the applicable amount, or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. For taxable
years beginning after December 31, 1997, in the case of a partnership that has
100 or more partners and elects to be treated as an "electing large
partnership," 70% of the partnership's miscellaneous itemized deductions will
be disallowed, although the remaining deductions will generally be allowed at
the partnership level and will not be subject to the 2% floor that would
otherwise be applicable to individual partners. The reduction or disallowance
of this deduction may have a significant impact on the yield of the Regular
Interest Security to this type of holder. In general terms, a single class
REMIC is one that either (1) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (2) is similar to such a trust and which is structured
with the principal purpose of avoiding the single class REMIC rules. Unless
otherwise stated in the applicable prospectus supplement, the expenses of the
REMIC will be allocated to holders of the related Residual Interest Securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
TIERED REMIC STRUCTURES. For certain series of securities, two or more
separate elections may be made to treat designated portions of the related trust
fund as REMICs ("Tiered REMICs") for federal income tax purposes. Solely for
purposes of determining whether the REMIC certificates will be "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on these certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
CALCULATION OF REMIC INCOME. The taxable income or net loss of a REMIC
is determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (1) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (2) deductions, including stated interest and OID
accrued on Regular Interest Securities, amortization of any premium with respect
to home equity loans, and servicing fees and other expenses of the REMIC.
A holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but
not including real estate investment trusts) will be unable to deduct
servicing fees payable on the home equity loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that these
expenses, when aggregated with the holder's other miscellaneous itemized
deductions for that year, do not exceed 2% of the holder's adjusted gross
income and the holder may not be able to deduct these fees and expenses to any
extent in computing its alternative minimum tax liability. For taxable years
beginning after December 31, 1997, in the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70% of the partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be
applicable to individual partners.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). This aggregate basis will be allocated among the assets of the REMIC
in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984. Subject to possible application of the de minimis
rules, the method of accrual by the REMIC of OID income on
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these loans will be equivalent to the method under which holders of
Pay-Through Securities accrue OID (i.e., under the constant yield method
taking into account the Prepayment Assumption). The REMIC will deduct OID on
the Regular Interest Securities in the same manner that the holders of the
Regular Interest Securities include this discount in income, but without
regard to the de minimis rules.
WE REFER YOU TO "TAXATION OF DEBT SECURITIES (INCLUDING REGULAR
INTEREST SECURITIES)" ABOVE FOR MORE DETAIL.
A REMIC that acquires loans at a market discount must include the
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before this date, it is
possible that the premium may be recovered in proportion to payments of loan
principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include:
- subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
- subject to a limited exception, the sale or other disposition of a
cash flow investment;
- the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
- the receipt of any fees or other compensation for services rendered
by the REMIC.
It is anticipated that a REMIC will not engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, subject to a number of exceptions, a tax is imposed at the rate of
100% on amounts contributed to a REMIC after the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any of these taxes imposed on the REMIC. To the extent not paid by these holders
or otherwise, however, these taxes will be paid out of the trust fund and will
be allocated pro rata to all outstanding classes of securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Residual Interest Security will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which the holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for the quarter, and by allocating that amount among the holders (on
that day) of the Residual Interest Securities in proportion to their
respective holdings on that day.
The holder of a Residual Interest Security must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to this income or
loss. The reporting of taxable income without corresponding distributions
could occur, for example, in certain REMIC issues in which the home equity
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interest Securities issued without any discount or
at an insubstantial discount. (If this occurs, it is likely that cash
distributions will exceed taxable income in later years.) Taxable income may
also be greater in earlier years of certain REMIC issues as a result
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of the fact that interest expense deductions, as a percentage of outstanding
principal on REMIC Regular Interest Securities, will typically increase over
time as lower yielding securities are paid, whereas interest income with
respect to loans will generally remain constant over time as a percentage of
loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of a corporate
bond or stripped instrument.
LIMITATION ON LOSSES. The amount of the REMIC's net loss that a holder
may take into account currently is limited to the holder's adjusted basis at the
end of the calendar quarter in which the loss arises. A holder's basis in a
Residual Interest Security will initially equal the holder's purchase price, and
will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which holders should consult their
tax advisers.
DISTRIBUTIONS. Distributions on a Residual Interest Security (whether
at their scheduled times or as a result of prepayments) will generally not
result in any additional taxable income or loss to a holder of a Residual
Interest Security. If the amount of the payment exceeds a holder's adjusted
basis in the Residual Interest Security, however, the holder will recognize gain
(treated as gain from the sale of the Residual Interest Security) to the extent
of the excess.
SALE OR EXCHANGE. A holder of a Residual Interest Security will
recognize gain or loss on the sale or exchange of a Residual Interest Security
equal to the difference, if any, between the amount realized and the holder's
adjusted basis in the Residual Interest Security at the time of the sale or
exchange. Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after the disposition.
EXCESS INCLUSIONS. The portion of the REMIC taxable income of a holder
of a Residual Interest Security consisting of "excess inclusion" income may not
be offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the holder's excess inclusion income will be
treated as unrelated business taxable income of the holder. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust, a
regulated investment company, a common trust fund, or certain cooperatives were
to own a Residual Interest Security, a portion of dividends (or
WE REFER YOU TO "TAX TREATMENT OF FOREIGN INVESTORS" FOR MORE DETAIL.
The Small Business Job Protection Act of 1996 eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates held by thrift institutions since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative
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minimum taxable income for the residual holder is determined without regard to
the special rule that taxable income cannot be less than excess inclusions.
Second, a residual holder's alternative minimum income for a tax year cannot
be less than excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual holder elects to have the
rules apply only to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for the quarterly
period of (1) 120% of the long term applicable federal rate on the Startup Date
multiplied by (2) the adjusted issue price of the Residual Interest Security at
the beginning of the quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded.
WE REFER YOU TO "--RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL
INTEREST SECURITIES" AND "TAX TREATMENT OF FOREIGN INVESTORS" BELOW FOR MORE
DETAIL.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "disqualified
organization." Disqualified organizations include the United States, any State
or political subdivision of the United States, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by Sections
1-1399 of the Code, if the entity is not subject to tax on its unrelated
business income. Accordingly, the applicable agreement will prohibit
disqualified organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee has furnished to the trustee an affidavit representing
and warranting that it is neither a disqualified organization nor an agent or
nominee acting on behalf of a disqualified organization.
If a Residual Interest Security is transferred to a disqualified
organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of the Residual Interest Security at the
time of the transfer. In addition, if a disqualified organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any
person holding as nominee an interest in a pass-through entity), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
For taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of
the tax imposed on pass-through entities if these electing large partnerships
hold residual interests in a REMIC. However, the electing large partnership
would be entitled to exclude the excess inclusion income from gross income for
purposes of determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic
residual interest" will be disregarded for all federal income tax purposes
unless impeding the assessment or collection of tax was not a significant
purpose of the transfer. A residual interest will be treated as a "noneconomic
residual interest" unless, at the time of the transfer:
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- the present value of the expected future distributions on the
residual interest at least equals the product of (x) the present
value of all anticipated excess inclusions with respect to the
residual interest and (y) the highest corporate tax rate,
currently 35 percent; and
- the transferor reasonably expects that for each anticipated
excess inclusion, the transferee will receive distributions from
the REMIC, at or after the time at which taxes on this excess
inclusion accrue, sufficient to pay these taxes.
A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if:
- the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor
finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the
transferee will not continue to pay its debts as they come due in
the future; and
- the transferee represents to the transferor that the transferee
understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and intends
to pay the taxes associated with owning the residual interest as
they come due.
A different formulation of this rule applies to transfers of Residual
Interest Security by or to foreign transferees.
WE REFER YOU TO "TAX TREATMENT OF FOREIGN INVESTORS" FOR MORE DETAIL.
MARK TO MARKET RULES. Treasury regulations provide that any REMIC
Residual Interest acquired after January 3, 1995 is not a security and cannot be
marked to market under Section 475.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. As further described below, each holder of a security issued
by a grantor trust (a "Pass-Through Security") must report on its federal income
tax return the gross income from the portion of the home equity loans that is
allocable to its Pass-Through Security and may deduct the portion of the
expenses incurred or accrued by the trust fund that is allocable to its
Pass-Through Security, at the same time and to the same extent as these items
would be reported by the holder if it had purchased and held directly this
interest in the home equity loans and received or accrued directly its share of
the payments on the home equity loans and incurred or accrued directly its share
of expenses incurred or accrued by the trust fund when those amounts are
received, incurred or accrued by the trust fund.
A holder of a Pass-Through Security that is an individual, estate, or
trust will be allowed deductions for these expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds 2% of the holder's adjusted gross income. Further, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds a prescribed amount will be reduced by the
lesser of (1) 3% of the excess of adjusted gross income over the prescribed
amount, or (2) 80% of the amount of itemized deductions otherwise allowable for
the taxable year. For taxable years beginning after December 31, 1997, in the
case of a partnership that has 100 or more partners and elects to
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be treated as an "electing large partnership," 70% of the partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2% floor that would otherwise be applicable to individual
partners. Moreover, a holder of a Pass-Through Security that is not a
corporation cannot deduct these expenses for purposes of the alternative
minimum tax (if applicable). These deductions will include servicing,
guarantee and administrative fees paid to the servicer of the home equity
loans. As a result, the trust fund will report additional taxable income to
holders of Pass-Through Securities in an amount equal to their allocable share
of these deductions, and certain holders of Pass-Through Securities may have
taxable income in excess of the cash received.
STATUS OF THE PASS-THROUGH SECURITIES. The Pass-Through Securities will
be "real estate assets" for purposes of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the trust fund's assets are qualifying assets. The Pass-Through Securities
may not be qualifying assets under any of the foregoing sections of the Code to
the extent that the trust fund's assets include Buydown Funds, reserve funds, or
payments on mortgages held pending distribution to certificateholders. Further,
the Pass-Through Securities may not be "real estate assets" to the extent loans
held by the trust are not secured by real property, and may not be "loans
secured by an interest in real property" to the extent loans held by the trust
are not secured by residential real property or real property used primarily for
church purposes. In addition, to the extent that the principal amount of a loan
exceeds the value of the property securing the loan, it is unclear and Federal
Tax Counsel is unable to opine whether the loans will be qualifying assets.
TAXATION OF PASS-THROUGH SECURITIES UNDER STRIPPED BOND RULES. The
federal income tax treatment of the Pass-Through securities will depend on
whether they are securities ("Stripped Securities") subject to the "stripped
bond" rules of section 1286 of the Code. The Pass-Through Securities will be
Stripped Securities if stripped interest-only certificates are issued. In
addition, whether or not stripped interest-only certificates are issued, the IRS
may contend that the stripped bond rules apply on the ground that the servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the servicer
or its affiliates, as specified in the applicable prospectus supplement,
represent greater than an arm's length consideration for servicing the home
equity loans and should be characterized for federal income tax purposes as an
ownership interest in the home equity loans. The IRS has taken the position in
Revenue Ruling 91-46 that a retained interest in excess of reasonable
compensation for servicing is treated as a "stripped coupon" under the rules of
Code Section 1286.
If interest retained for the servicer's servicing fee or other
interest is treated as a "stripped coupon," the Pass-Through Securities will
either be subject to the OID rules or the market discount rules. A holder of a
Pass-Through Security will account for any discount on the Pass-Through
Security as market discount rather than OID if either (1) the amount of OID
with respect to the Pass-Through Security was treated as zero under the OID de
minimis rule when the Pass-Through Security was stripped or (2) no more than
100 basis points (including any amount of servicing in excess of reasonable
servicing) is stripped off from the home equity loans. If neither of the above
exceptions applies, the OID rules will apply to the Pass-Through Securities.
If the OID rules apply, the holder of a Pass-Through Security
(whether a cash or accrual method taxpayer) will be required to report
interest income from the Pass-Through Security in each taxable year equal to
the income that accrues on the Pass-Through Security in that year calculated
under a constant yield method based on the yield of the Pass-Through Security
(or, possibly, the yield of each mortgage underlying the Pass-Through
Security) to the holder. This yield would be computed at the rate (assuming
monthly compounding) that, if used in discounting the holder's share of the
payments on the mortgages, would cause the present value of those payments to
equal the price at which the holder purchased the Pass-Through Security. With
respect to certain categories of debt instruments including "any pool of debt
instruments the yield on which may be affected by reason of prepayments (or to
the extent provided in regulations, by reason of other events)," Section
1272(a)(6) of the Code requires that OID be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. If
required to report interest income on the Pass-Through Securities to the IRS
under the stripped bond rules, it is anticipated that the trustee will
calculate the yield of the Pass-Through Securities based on a representative
initial offering price of the Pass-Through Securities and a reasonable assumed
rate of prepayment of the home equity loans (although the yield may differ
from the yield to
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any particular holder that would be used in calculating the interest income of
the holder). The prospectus supplement for each series of Pass-Through
Securities will describe the prepayment assumption that will be used for this
purpose, but no representation is made that the home equity loans will prepay
at that rate or at any other rate.
If a home equity loan is prepaid in full, the holder of a Pass-Through
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the home equity loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
"Sales of Pass-Through Securities" below) that is allocable to the home equity
loan. It is not clear whether any other adjustments would be required to reflect
differences between the prepayment rate that was assumed in calculating yield
and the actual rate of prepayments.
TAXATION OF PASS-THROUGH SECURITIES IF STRIPPED BOND RULES DO NOT
APPLY. If the stripped bond rules do not apply to a Pass-Through Security, then
the holder will be required to include in income its share of the interest
payments on the home equity loans in accordance with its tax accounting method.
In addition, if the holder purchased the Pass-Through Security at a discount or
premium, the holder will be required to account for this discount or premium in
the manner described below. The treatment of any discount will depend on whether
the discount is OID as defined in the Code and, in the case of discount other
than OID, whether this other discount exceeds a de minimis amount. In the case
of OID, the holder (whether a cash or accrual method taxpayer) will be required
to report as additional interest income in each month the portion of this
discount that accrues in that month, calculated based on a constant yield
method. In general it is not anticipated that the amount of OID to be accrued in
each month, if any, will be significant relative to the interest paid currently
on the home equity loans. However, OID could arise with respect to a home equity
loan ("ARM") that provides for interest at a rate equal to the sum of an index
of market interest rates and a fixed number. The OID for ARMs generally will be
determined under the principles discussed in "Taxation of Debt Securities
(Including Regular Interest Securities)--Variable Rate Debt Securities."
The Taxpayer Relief Act of 1997 amended the OID provisions of the Code
to provide that for "any pool of debt instruments, the yield on which may be
affected by reason of prepayments," OID is to be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. The
prospectus supplement for each series of Pass-Through Securities will describe
the prepayment assumption that will be used for this purpose, but no
representation is made regarding the actual rate at which prepayments will
occur.
If discount other than OID exceeds a de minimis amount (described
below), the holder will also generally be required to include in income in each
month the amount of the discount accrued through this month and not previously
included in income, but limited, with respect to the portion of the discount
allocable to any home equity loan, to the amount of principal on the home equity
loan received by the trust fund in that month. Because the home equity loans
will provide for monthly principal payments, this discount may be required to be
included in income at a rate that is not significantly slower than the rate at
which the discount accrues (and therefore at a rate not significantly slower
than the rate at which the discount would be included in income if it were OID).
The holder may elect to accrue the discount under a constant yield method based
on the yield of the Pass-Through Security to the holder (or possibly based on
the yields of each home equity loan). In the absence of such an election, it may
be necessary to accrue the discount under a more rapid straight-line method.
Under the de minimis rule, market discount with respect to a Pass-Through
Security will be considered to be zero if it is less than the product of (1)
0.25% of the principal amount of the home equity loans allocable to the
Pass-Through Security and (2) the weighted average life (in complete years) of
the home equity loans remaining at the time of purchase of the Pass-Through
Security.
If a holder purchases a Pass-Through Security at a premium, the holder
may elect under Section 171 of the Code to amortize the portion of the premium
that is allocable to a home equity loan under a constant yield method based on
the yield of the home equity loan to the holder, provided that the home equity
loan was originated after September 27, 1985. Premium allocable to a home equity
loan originated on or before that date
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should be allocated among the principal payments on the home equity loan and
allowed as an ordinary deduction as principal payments are made or, perhaps,
upon termination.
It is not clear whether the foregoing adjustments for market discount
or premium would be made based on the scheduled payments on the home equity
loans or taking account of a reasonable prepayment assumption, and Federal Tax
Counsel is unable to opine on this issue.
If a home equity loan is prepaid in full, the holder of a Pass-Through
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the home equity loan that is allocable to the Pass-Through Security and the
portion of the adjusted basis of the Pass-Through Security (see "Sales of
Pass-Through Securities" below) that is allocable to the home equity loan.
Adjustments might be required to reflect differences between the prepayment rate
that was assumed in accounting for discount or premium and the actual rate of
prepayments.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. A holder, other than a holder of a Residual
Interest Security, may, under certain circumstances, be subject to "backup
withholding" at a rate of 31% with respect to distributions or the proceeds of a
sale of securities to or through brokers that represent interest or OID on the
securities. This withholding generally applies if the holder of a security:
- fails to furnish the trustee with its taxpayer identification
number ("TIN");
- furnishes the trustee an incorrect TIN;
- fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
- under certain circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain foreign investors, that is, investors
that for United States federal income tax purposes are treated as:
- corporations or partnerships created outside of the United States;
- individuals that are not citizens or residents of the United States;
or
- foreign estates or trusts within the meaning of Internal Revenue
Code section 7701.
Holders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining the exemption.
Treasury regulations (the "Final Withholding Regulations"), which are
generally effective with respect to payments made after December 31, 2000,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisers regarding
the application of the Final Withholding Regulations.
The trustee will report to the holders and to the servicer for each
calendar year the amount of any "reportable payments" during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
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TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to trust funds which
are treated as partnerships for federal income tax purposes unless interest
(including OID) paid on a security (other than a Residual Interest Security)
is considered to be "effectively connected" with a trade or business
conducted in the United States by a foreign investor, the interest will
normally qualify as portfolio interest (except where the recipient is a
holder, directly or by attribution, of 10% or more of the capital or profits
interest in the issuer, or a controlled foreign corporation to which the
issuer is a related person) and will be exempt from federal income tax.
See "--Tax Consequences to holders of the Certificates Issued by a
Partnership--Tax Consequences to Foreign Certificateholders." Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from these interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless the rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
foreign investors. Holders of Pass-Through Securities however, may be subject to
withholding to the extent that the home equity loans were originated on or
before July 18, 1984.
Interest and OID of a foreign investor are not subject to withholding
if they are effectively connected with a United States business conducted by the
holder and the holder timely provides an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a non-United States person may
claim exemption from United States federal income tax withholding. All foreign
investors should consult their tax advisors regarding the application of the
Final Withholding Regulations, which are generally effective with respect to
payments made after December 31, 2000.
Payments to holders of Residual Interest Securities who are foreign
investors will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
this income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed (or when the Residual Interest Security is disposed of).
The Treasury has statutory authority, however, to promulgate regulations which
would require these amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. These regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value.
Under the REMIC Regulations, if a Residual Interest Security has tax
avoidance potential, a transfer of a Residual Interest Security to a foreign
investor will be disregarded for all federal tax purposes. A Residual Interest
Security has tax avoidance potential unless, at the time of the transfer the
transferor reasonably expects that the REMIC will distribute to the transferee
residual interest holder amounts that will equal at least 30% of each excess
inclusion, and that these amounts will be distributed at or after the time at
which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a foreign investor transfers a
Residual Interest Security to a United States person (that is, a person that
is not a foreign investor), and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of
the Code.
WE REFER YOU TO "TAXATION OF HOLDERS OF RESIDUAL INTEREST
SECURITIES--EXCESS INCLUSIONS" FOR MORE DETAIL.
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Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (1) this gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (2) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP OR DIVISION
If a trust fund is intended to be a partnership for federal income tax
purposes the applicable agreements will provide that the nature of the income of
the trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates
will be structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation, and that no action will be taken that is inconsistent with the
treatment of the trust fund as a partnership (such as election to treat the
trust fund as a corporation for federal income tax purposes). If, however, the
trust fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the trust fund as a corporation for federal income tax
purposes.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements:
(1) the entity is not a REMIC (or, after September 1,
1997, a FASIT);
(2) substantially all of the assets of the entity are debt
obligations, and more than 50 percent of these debt obligations
consists of real estate mortgages (or interests in real estate
mortgages);
(3) the entity is the obligor under debt obligations with two
or more maturities; and
(4) payments on the debt obligations on which the entity is
the obligor bear a relationship to the payments on the debt obligations
which the entity holds as assets.
With respect to requirement (3), the Code authorizes the IRS to
provide by regulations that equity interests may be treated as debt for
purposes of determining whether there are two or more maturities. If the trust
fund were treated as a taxable mortgage pool, it would be ineligible to file
consolidated returns with any other corporation and could be liable for
corporate tax. Treasury regulations do not provide for the recharacterization
of equity as debt for purposes of determining whether an entity has issued
debt with two maturities, except in the case of transactions structured to
avoid the taxable mortgage pool rules. Federal Tax Counsel will deliver its
opinion for a trust fund which is intended to be a partnership for federal
income tax purposes, as specified in the related prospectus supplement,
generally to the effect that the trust fund will not be a taxable mortgage
pool. This opinion will be based on the assumption that the terms of the
agreements and related documents will be complied with, and on Federal Tax
Counsel's conclusion that either the number of classes of debt obligations
issued be the trust fund, or the nature of the assets held by the trust fund
will exempt the trust fund from treatment as a taxable mortgage pool.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The trust fund will agree,
and the noteholders will agree by their purchase of notes, to treat the notes
as debt for federal income tax purposes. Except as otherwise provided in the
related prospectus supplement, Federal Tax Counsel will advise the seller that
the notes will be classified as debt for federal income tax purposes.
Consequently, holders of notes will be subject to taxation as described in
"Taxation of Debt Securities (Including Regular Interest Securities)" above
for Debt securities which are not Regular Interest securities.
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POSSIBLE ALTERNATIVE TREATMENT OF THE NOTES. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or more
of the notes did not represent debt for federal income tax purposes, the notes
might be treated as equity interests in the trust fund. If so treated, the trust
fund would likely be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain holders. For
example, income to foreign investors generally would be subject to U.S. federal
income tax and U.S. federal income tax return filing and withholding
requirements, income to certain tax-exempt entities would be "unrelated business
taxable income," and individual holders might be subject to certain limitations
on their ability to deduct their share of the trust fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. In the case of a trust
fund intended to qualify as a partnership for federal income tax purposes, the
trust fund and the seller will agree, and the certificateholders will agree by
their purchase of certificates, to treat the trust fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the trust fund, the partners of the partnership being the
certificateholders, and the notes, if any, being debt of the partnership, or if
there is a single certificateholder for federal income tax purposes, to
disregard the trust fund as an entity separate from the certificateholder.
However, the proper characterization of the arrangement involving the
certificates, the notes, the trust fund and the servicer is not clear because
there is no authority on transactions closely comparable to that contemplated in
this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Generally, provided
the certificates are issued at or close to face value, any characterization
would not result in materially adverse tax consequences to certificateholders
as compared to the consequences from treatment of the certificates as equity
in a partnership, described below. The following discussion assumes that the
certificates represent equity interests in a partnership. The following
discussion also assumes that all payments on the certificates are denominated
in U.S. dollars, none of the certificates have interest rates which would
qualify as contingent interest under the OID regulations, and that a series of
securities includes a single class of certificates. If these conditions are
not satisfied with respect to any given series of certificates, additional tax
considerations with respect to these certificates will be disclosed in the
applicable prospectus supplement.
PARTNERSHIP TAXATION. As a partnership, the trust fund will not be
subject to federal income tax. Rather, each certificateholder will be required
to separately take into account its allocated share of income, gains, losses,
deductions and credits of the trust fund. The trust fund's income will consist
primarily of interest and finance charges earned on the home equity loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of home equity loans. The trust
fund's deductions will consist primarily of interest and OID accruing with
respect to the notes, servicing and other fees, and losses or deductions upon
collection or disposition of home equity loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the trust agreement and related documents). The trust agreement will
provide, in general, that the certificateholders will be allocated taxable
income of the trust fund for each month equal to the sum of:
(1) the interest that accrues on the certificates in
accordance with their terms for that month, including interest accruing
at the Pass-Through Rate for that month and interest on amounts
previously due on the certificates but not yet distributed;
(1) any trust fund income attributable to discount on the home
equity loans that corresponds to any excess of the principal amount of
the certificates over their initial issue price;
(2) prepayment premium payable to the certificateholders for
the applicable month; and
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(3) any other amounts of income payable to the
certificateholders for the applicable month.
This allocation will be reduced by any amortization by the trust fund
of premium on home equity loans that corresponds to any excess of the issue
price of certificates over their principal amount. All remaining taxable income
of the trust fund will be allocated to the seller. Based on the economic
arrangement of the parties, this approach for allocating trust fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to certificateholders. Moreover, even under the foregoing method
of allocation, certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the trust
fund might not have sufficient cash to make current cash distributions of this
amount. Thus, cash basis holders will in effect be required to report income
from the certificates on the accrual basis and certificateholders may become
liable for taxes on trust fund income even if they have not received cash from
the trust fund to pay these taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all certificateholders but
certificateholders may be purchasing certificates at different times and at
different prices, certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the trust fund.
If notes are also issued, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the trust fund (including
fees to the servicer but not interest expense) would be miscellaneous itemized
deductions. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust fund.
The trust fund intends to make all tax calculations relating to income
and allocations to certificateholders on an aggregate basis. If the IRS were to
require that these calculations be made separately for each home equity loan,
the trust fund might be required to incur additional expense but it is believed
that there would not be a material adverse effect on certificateholders.
DISCOUNT AND PREMIUM. It is believed that the home equity loans will
not have been issued with OID and, therefore, the trust should not have OID
income. However, the purchase price paid by the trust fund for the home equity
loans may be greater or less than the remaining principal balance of the home
equity loans at the time of purchase. If so, the home equity loan will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
trust fund will make this calculation on an aggregate basis, but might be
required to recompute it on a home equity loan by home equity loan basis.)
If the trust fund acquires the home equity loans at a market discount
or premium, the trust fund will elect to include this discount in income
currently as it accrues over the life of the home equity loans or to offset the
premium against interest income on the home equity loans. As indicated above, a
portion of the market discount income or premium deduction may be allocated to
certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the trust fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the trust fund are sold or exchanged within
a 12-month period. If a termination occurs, the trust fund will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the trust fund as a new partnership. The trust
fund will not comply with certain technical requirements that might apply when a
constructive termination occurs. As a result, the trust fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the trust fund might not be able to
comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's
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share of trust fund income (includible in income) and decreased by any
distributions received with respect to the related certificate. In addition,
both the tax basis in the certificates and the amount realized on a sale of a
certificate would include the holder's share of the notes and other
liabilities of the trust fund. A holder acquiring certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
those certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the home equity loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The trust fund does not expect to have any
other assets that would give rise to special reporting requirements. Thus, to
avoid those special reporting requirements, the trust fund will elect to include
market discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect to those certificates, this excess will
generally give rise to a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN SELLERS AND TRANSFEREES. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of the applicable month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund 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 fund currently does not
intend to make an election. As a result, certificateholders might be allocated a
greater or lesser amount of trust fund income than would be appropriate based on
their own purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the trust fund. These books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal year
of the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-1 information to nominees that fail to provide
the trust fund with the information statement described below and these nominees
will be required to forward the information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. This information includes (1) the name,
address and taxpayer identification number of the nominee and (2) as to each
beneficial owner:
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- the name, address and identification number of the relevant
person;
- whether this person is a United States person, a tax-exempt
entity or a foreign government, an international
organization, or any wholly owned agency or instrumentality
of either of the foregoing; and
- certain information on certificates that were held, bought
or sold on behalf of this person throughout the year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
information statement to the trust fund. The information referred to above for
any calendar year must be furnished to the trust fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the trust fund with the information described above may be subject to penalties.
The seller will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders 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 fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear
whether the trust fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to foreign investors 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 fund would be engaged
in a trade or business in the United States for these purposes, the trust fund
will withhold as if it were so engaged in order to protect the trust fund from
possible adverse consequences of a failure to withhold. The trust fund expects
to withhold pursuant to Section 1446 of the Code on the portion of its taxable
income that is allocable to certificateholders that are foreign investors, as
if the income were effectively connected to a U.S. trade or business, at a
rate of 35% for foreign holders that are taxable as corporations and 39.6% for
all other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the trust fund to
change its withholding procedures.
Each certificateholder that is a foreign investor 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 fund's income.
A foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the trust fund taking the position that
no taxes were due because the trust fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a certificateholder
who is a foreign investor generally will be considered guaranteed payments to
the extent the payments are determined without regard to the income of the trust
fund. If these interest payments are properly characterized as guaranteed
payments, then the interest probably will not be considered "portfolio
interest." As a result, certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable treaty. In this case, a foreign investor
would only be entitled to claim a refund for that portion of the taxes, if any,
in excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code and, if necessary, adequately demonstrates
this status.
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STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"FEDERAL INCOME TAX CONSEQUENCES," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the securities.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan subject to Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of the
plan's assets in the securities. Accordingly, among other factors, the fiduciary
should consider:
(1) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries;
(2) whether the investment satisfies the diversification
requirements of Section 404 of ERISA;
(3) whether the investment is in accordance with the documents and
instruments governing the plan; and
(4) whether the investment is prudent, considering the nature of the
investment.
Fiduciaries of these plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, fiduciaries of employee benefit plans subject to Title I
of ERISA, as well as certain plans or other retirement arrangements not subject
to ERISA, but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or
partners), or any entity (including an insurance company general account) whose
underlying assets include plan assets by reason of a plan or account investing
in this type of entity (collectively, "Plans(s)") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). These transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon these persons by Section 4975 of the Code. The seller, the related trustee
and any underwriter of the offered securities and certain of their affiliates
might be considered "parties in interest" or "disqualified persons" with respect
to a Plan. If so, the acquisition, holding or transfer of securities by, or on
behalf of, the Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless a regulatory
exception or administrative exemption is available. In addition, the Department
of Labor ("DOL") has issued a regulation (29 C.F.R. Section 2510.3-101) (the
"Plan Assets Regulation") concerning the definition of what constitutes the
assets of a Plan, which provides that, as a general rule, the underlying assets
and properties of corporations, partnerships, trusts and certain other entities
in which a Plan makes an "equity" investment will be deemed for purposes of
ERISA to be assets of the investing Plan unless certain exceptions apply. If an
investing Plan's assets were deemed to include an interest in the trust fund and
not merely an interest in the securities, transactions occurring in connection
with the servicing, management and operation of the trust fund between the
seller, the related trustee, the servicer (or any other servicer), any insurer
or any of their respective affiliates might constitute prohibited transactions,
and the assets of the trust fund would become subject to the fiduciary
investment standards of ERISA, unless a regulatory exception or administrative
exemption applies.
With respect to offered securities which are certificates, the DOL
has issued to a number of underwriters of pass-through certificates, similar
to the certificates, administrative exemptions (collectively, the
"Exemption"), which generally exempt from the application of the prohibited
transaction provisions of Section
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406(a), Section 406(b)(1) and Section 406(b)(2) of ERISA, and the excise taxes
imposed pursuant to Section 4975(a) and (b) of the Code, the initial purchase,
holding and subsequent resale of mortgage-backed or asset-backed pass-through
certificates representing a beneficial undivided interest in certain fixed
pools of assets held in a trust (as defined in paragraph III. B of Section III
of the Exemption), along with certain transactions relating to the servicing
and operation of the asset pools, provided that certain conditions set forth
in the Exemption are satisfied. Paragraph III. B of Section III of the
Exemption provides in part that a trust means an investment pool the corpus of
which is held in trust and consists solely of:
(1) secured consumer receivables;
(2) secured credit instruments;
(3) obligations secured by residential or commercial real
property;
(4) obligations secured by motor vehicles or equipment or
qualified motor vehicle leases;
(5) guaranteed governmental mortgage pool certificates; or
(6) an undivided fractional interest in any of the
obligations listed in clauses (1) to (5) above.
If the general conditions of Section II of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code) in connection with the direct or indirect sale, exchange or transfer
of certificates by Plans in the initial issue of certificates, the holding of
certificates by Plans or the direct or indirect acquisition or disposition in
the secondary market of certificates by Plans. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a certificate on behalf of an 'Excluded Plan' by
any person who has discretionary authority or renders investment advice with
respect to the assets of the Excluded Plan. For purposes of the certificates, an
Excluded Plan is a Plan sponsored by the following (the "Restricted Group"):
(1) an underwriter which has been granted an Exemption, or
certain specified entities affiliated or associated with such an
underwriter ("Underwriter");
(2) the seller;
(3) the servicer (or any other servicer);
(4) the related trustee;
(5) any obligor with respect to home equity loans constituting
more than 5 percent of the aggregate unamortized principal balance of
the home equity loans as of the date of initial issuance;
(6) any insurer; and
(7) any affiliate or successor of a person described in (1)
to (6) above.
If the specific conditions of paragraph I.B of Section I of the
Exemption are also satisfied, the Exemption may provide an exemption from the
restrictions imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(I)(E) of the Code in connection with (1) the direct or indirect sale,
exchange or transfer of certificates in the initial issuance of certificates
between the seller or Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in certificates is (a) an obligor with respect to 5
percent or less of the fair market value of the home equity loans or (b) an
affiliate of such a person,
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(2) the direct or indirect acquisition or disposition in the secondary market
of certificates by Plans and (3) the holding of certificates by Plans.
If the specified conditions of paragraph I.C of Section I of the
Exemption are satisfied, the Exemption may provide an exemption from the
restrictions imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code for transactions in connection with the servicing,
management and operation of the trust fund and the assets of the trust fund.
The Exemption may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if the restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" or a "disqualified person" with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
the Plan's ownership of certificates.
The Exemption sets forth the following seven general conditions which
must be satisfied for a transaction to be eligible for exemptive relief:
(1) The acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) The rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other securities issued by the trust fund;
(3) The certificates acquired by the Plan have received a
rating at the time of acquisition that is one of the three highest
generic rating categories from a national credit rating agency, which
consists of Standard & Poor's, Moody's, Duff & Phelps or Fitch;
(4) The trustee is not an affiliate of any other member of
the Restricted Group (as defined above);
(5) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of certificates
represents not more than reasonable compensation for underwriting the
certificates. The sum of all payments made and retained by the seller
pursuant to the assignment of the loans to the trust fund represents
not more than the fair market value of these loans. The sum of all
payments made to and retained by the servicer or any other servicer
represents not more than reasonable compensation for that person's
services under the pooling and servicing agreement and reimbursement of
that person's reasonable expenses in connection with that person's
services under the pooling and servicing agreement; and
(6) The Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D under the
Securities Act of 1933. The seller assumes that only Plans which are
accredited investors under the federal securities laws will be
permitted to purchase the certificates.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of
assets of the type that have been included in other investment
pools;
(ii) certificates in other investment pools must have been
rated in one of the three highest rating categories of one of
the national credit rating agencies for at least one year
prior to the Plan's acquisition of certificates; and
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(iii) certificates evidencing interests in other
investment pools must have been purchased by investors other
than Plans for at least one year prior to any Plan's
acquisition of certificates.
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using Prefunding
Accounts for trusts issuing pass-through certificates. With respect to the
certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to certificateholders and having a
principal amount equal to no more than 25% of the total principal amount of the
certificates to be transferred to the trust within a 90-day or three-month
prefunding period following the closing date ("Prefunding Period"), instead of
requiring that all these Loans be either identified or transferred on or before
the closing date. The relief is effective for transactions occurring on or after
May 23, 1997, provided that the following conditions are met:
(1) The ratio of the amount allocated to the Prefunding Account to the
total principal amount of the certificates being offered ("Prefunding Limit")
must not exceed twenty-five percent (25%).
(2) All Loans transferred after the closing date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original Loans
used to create the trust fund, which terms and conditions have been approved by
each rating agency.
(3) The transfer of Additional Loans to the trust fund during the
prefunding period must not result in the certificates receiving a lower credit
rating from any rating agency upon termination of the prefunding period than the
ratings that were obtained at the time of the initial issuance of the
certificates by the trust fund.
(4) Solely as a result of the use of prefunding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the trust fund at the end of the prefunding period must not be more
than 100 basis points lower than the average interest rate for the Loans which
were transferred to the trust fund on the closing date.
(5) Either: (a) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is independent of
the seller; or (b) an independent accountant retained by the seller must provide
the seller with a letter (with copies provided to each rating agency, the
Underwriter and the trustee) stating whether or not the characteristics of the
Additional Loans conform to the characteristics described in the prospectus,
prospectus supplement and/or Private Placement Memorandum ("Offering Documents")
and/or pooling and servicing agreement. In preparing the letter, the independent
accountant must use the same type of procedures as were applicable to the Loans
which were transferred as of the closing date.
(6) The prefunding period must end no later than three months or 90
days after the closing date or earlier, in certain circumstances, if the amount
on deposit in the Prefunding Account is reduced below the minimum level
specified in the pooling and servicing agreement or an event of default occurs
under the pooling and servicing agreement.
(7) Amounts transferred to any Prefunding Account and/or Capitalized
Interest Account used in connection with the prefunding may be invested only in
investments which are permitted by each rating agency and (a) are direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality of
the United States (provided that these obligations are backed by the full faith
and credit of the United States); or (b) have been rated (or the obligor has
been rated) in one of the three highest generic rating categories by each rating
agency ("Permitted Investments").
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(8) The Offering Documents must describe:
- any Prefunding Account and/or Capitalized Interest Account used
in connection with a Prefunding Account;
- the duration of the prefunding period;
- the percentage and/or dollar amount of the Prefunding Limit for
the trust fund; and
- that the amounts remaining in the Prefunding Account at the end
of the prefunding period will be remitted to certificateholders
as repayments of principal.
(9) The pooling and servicing agreement must describe the Permitted
Investments for the Prefunding Account and Capitalized Interest Account and, if
not disclosed in the Offering Documents, the terms and conditions for
eligibility of the Additional Loans.
The Exemption may apply to a Plan's purchase, holding and transfer of
certificates and the operation, management and servicing of the trust fund and
the assets of the trust fund as specified in the related prospectus supplement.
In addition, in the event the Exemption is not available, certain exemptions
from the prohibited transaction rules may be applicable depending on the type
and circumstances of the plan fiduciary making the decision to acquire a
certificate. Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 91-38 regarding investments by bank collective
investment funds PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
Certain transactions involving the purchase of securities which are
notes might be deemed to constitute prohibited transactions under ERISA and the
Code if the assets of the trust fund were deemed to be assets of a Plan. Under
the Plan Assets Regulation, the assets of the trust fund would be treated as
plan assets of a Plan for the purposes of ERISA and the Code only if the Plan
acquires an "Equity Interest" in the trust fund and none of the exceptions
contained in the Plan Assets Regulation is applicable. An equity interest is
defined under the Plan Assets Regulation as an interest other than an instrument
which is treated as indebtedness under applicable local law and which has no
substantial equity features. The seller believes that the notes should be
treated as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation. In addition, even in the event that the notes are deemed
to be an Equity Interest in the trust fund, the Exemption may be applicable to
both a Plan's purchase, holding and transfer of notes (which in this situation
are considered certificates for purposes of the Exemption) and the operation,
management and servicing of the trust fund and the assets of the trust fund, if
so specified in the related prospectus supplement.
Without regard to whether the notes are characterized as Equity
Interests, the acquisition, transfer or holding of notes by or on behalf of a
Plan could be considered to give rise to a prohibited transaction if the trust
fund, the related trustee or any of their respective affiliates is or becomes a
party in interest or a disqualified person with respect to the Plan or in the
event that a note is purchased in the secondary market and the purchase
constitutes a sale or exchange between a Plan and a party in interest or
disqualified person with respect to the Plan. In this case, PTCE 90-1, PTCE
91-38, PTCE 95-60, PTCE 96-23 and PTCE 84-14 may be applicable depending on the
type and circumstances of the plan fiduciary making the decision to acquire a
note.
Any Plan fiduciary considering the purchase of securities should
consult with its counsel with respect to the potential applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to its investment.
LEGAL INVESTMENT
The securities will not constitute "mortgage-related securities" within
the meaning of the Secondary Mortgage Market Enhancement Act of 1984 unless the
related prospectus supplement specifies that the
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securities will constitute "mortgage related securities." Accordingly,
investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and the extent to which
the securities constitute legal investments for them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to each trust fund, the depositor will agree to sell to each of the
underwriters named in the agreement and in the related prospectus supplement,
and each of these underwriters will severally agree to purchase from the
depositor, the principal amount of each class of securities of the related
series set forth in the underwriting agreement and in the related prospectus
supplement.
In each underwriting agreement, the several underwriters will agree,
subject to the terms and conditions set forth in the agreement, to purchase all
of the securities described in the underwriting agreement that are offered
pursuant to the related prospectus supplement if any of the securities are
purchased. In the event of a default by any underwriter, each underwriting
agreement will provide that, in certain circumstances, purchase commitments of
the nondefaulting underwriters may be increased, or the underwriting agreement
may be terminated.
Each prospectus supplement will either (1) set forth the price at which
each class of securities being offered will be offered to the public and any
concessions that may be offered to certain dealers participating in the offering
of the securities or (2) specify that the related securities are to be resold by
the underwriters in negotiated transactions at varying prices to be determined
at the time of each sale. After the initial public offering of any securities,
the public offering price and the concessions may be changed.
Each underwriting agreement will provide that the depositor will
indemnify underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
Under each underwriting agreement, the closing of the sale of any class
of securities subject to the underwriting agreement will be conditioned on the
closing of the sale of all other classes subject to the underwriting agreement.
The place and time of delivery for the securities with respect to which
this prospectus is delivered will be set forth in the related prospectus
supplement.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement,
certain legal matters in connection with the securities will be passed upon for
the seller by Stroock & Stroock & Lavan LLP, New York, New York.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred in
connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions:
<TABLE>
<S> <C>
Registration Fee $264.00
Printing and Engraving Expenses *
Trustee's Fees and Expenses *
Legal Fees and Expenses *
Accountant's Fees and Expenses *
Rating Agency Fees *
Miscellaneous *
Total $264.00
</TABLE>
* To be filed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
CHEC Funding, LLC
Indemnification. Under the Delaware Limited Liability Company Act,subject to
such standards and restrictions, if any, as are set forth in its limited
liability company agreement, a limited liability company may, and shall have the
power to, indemnify and hold harmless any memeber or manager or other person
from and against any and all claims and demands whatsover.
Section 20 of the Limited Liability Company Agreement provides for the
indemnification of any person who is or was a member, special member,
independent manager, officer, employee or agent of CHEC Funding, LLC or any
employee, representative, agent or affiliate of CHEC Funding, LLC, the member or
the special member with respect to actions taken or omitted by such person in
good faith on behalf of CHEC Funding, LLC and in a manner reasonably believed to
be within the scope of the authority conferred on such person. Reference is made
to the Limited Liability Company Agreement filed as an exhibit to this
Registration Statement for the complete text of Section 20 of the Limited
Liability Company Agreement.
The Registrant or one of its affiliates maintains liability insurance policies
such that each of the directors and officers of the Registrant is insured
against certain liabilities which they might incur in their capacity as a
director or officer.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
indemnification by the Underwriters of the Registrant and its directors,
officers and controlling persons for certain liabilities arising under the
Securities Act of 1933 or otherwise.
The general effect of any statute, charter provision, by-law, contract or other
arrangement under which any controlling person, director or officer of the
Registrant is insured or indemnified against liability
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when acting on behalf of the Registrant is to reduce the deterrent effect for
such indemnified individuals for violating the Securities Act of 1933.
The Registrant is aware that the Securities and Exchange Commission takes the
position that indemnification of directors and officers is against public policy
and is therefore unenforceable.
ITEM 16. EXHIBITS
1.1 Form of Underwriting Agreement.*
2.1 Limited Liability Company Agreement of CHEC Funding, LLC*
4.1 Form of Trust Agreement*
4.2 Form of Indenture*
4.3 Form of Pooling and Servicing Agreement, among CHEC Funding, LLC, as
depositor, Centex Credit Corporation, as seller and servicer and the
Trustee*
4.4 Form of Sale and Servicing Agreement, among CHEC Funding, LLC, as
depositor, Centex Credit Corporation, as seller and servicer and the
Trust*
5.1 Opinion of Stroock & Stroock & Lavan LLP as to legality*
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to federal income
tax matters. (contained in Exhibit 5.1)*
23.1 Consent of Stroock & Stroock & Lavan LLP (contained in Exhibit 5.1)*
24.1 Powers of Attorney (included as part of signature page)
25.1 Statement of Eligibility and Qualification of Indenture Trustee (Form
T-1)*
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) Undertakings pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(1) To file, during any period which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
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(2) For the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Undertaking as to documents subsequently filed that are
incorporated by reference.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(c) Undertaking as to equity offerings of nonreporting registrants.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(d) Undertaking as to request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of 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) Undertaking as to registration statement permitted by Rule 430A
under the Securities Act of 1933.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it
was declared effective.
II-3
<PAGE>
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE
offering thereof.
(f) Undertaking as to trust indentures under the Trust Indenture Act of
1939 for delayed offerings.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, CHEC
Funding, LLC certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3, it believes that the securities
rating requirement for use of Form S-3 will be met by the time of sale of the
securities and it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the State of
Delaware, on this 21st day of December 1999.
CHEC Funding, LLC
(Registrant)
By Centex Credit Corporation
d/b/a Centex Home
Equity Corporation
By: /s/ Anthony H. Barone
----------------------------
Name: Anthony H. Barone
Title: President and CEO
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
/s/ Anthony H. Barone President of Centex Credit December 17, 1999
- --------------------- Corporation d/b/a Centex Home
Equity Corporation (Principal
Executive Officer)
/s/ Bill Cukr Vice President of Centex Credit December 17, 1999
- ------------- Corporation d/b/a Centex Home
Equity Corporation (Principal
Financial Officer and Principal
Accounting Officer)
/s/ Anthony H. Barone Director December 17, 1999
- ---------------------
</TABLE>
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<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Anthony H. Barone such person's true and lawful attorney-in-fact with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to cause the same to be filed,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
and agents, and each of them, full power and authority; to do and perform each
and every act and thing whatsoever requisite or desirable to be done in and
about the premises, as fully to all intents and confirming all acts and things
that said attorneys-in-fact and agents, or either of them, or their substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
/s/ Anthony H. Barone President and Chief Executive December 17, 1999
- ------------------------ Officer of Centex Credit
Anthony H. Barone Corporation d/b/a Centex Home
Equity Corporation (Principal
Executive Officer)
/s/ Bill Cukr Vice President of Centex Credit December 17, 1999
- ------------- Corporation d/b/a Centex Home
Bill Cukr Equity Corporation (Principal
Financial Officer and Principal
Accounting Officer)
/s/ Anthony H. Barone Director December 17, 1999
- ---------------------
Anthony H. Barone
*By: /s/ Anthony H. Barone
---------------------
Anthony H. Barone
Attorney-in-fact
December 17, 1999
</TABLE>
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<PAGE>
EXHIBIT INDEX
1.1 Form of Underwriting Agreement.*
2.1 Limited Liability Company Agreement of CHEC Funding, LLC*
4.1 Form of Trust Agreement*
4.2 Form of Indenture*
4.3 Form of Pooling and Servicing Agreement, among CHEC Funding, LLC, as
depositor, Centex Credit Corporation, as seller and servicer and the
Trustee*
4.4 Form of Sale and Servicing Agreement, among CHEC Funding, LLC, as
depositor, Centex Credit Corporation, as seller and servicer and the
Trust*
5.1 Opinion of Stroock & Stroock & Lavan LLP as to legality*
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to federal income
tax matters. (contained in Exhibit 5.1)*
23.1 Consent of Stroock & Stroock & Lavan LLP (contained in Exhibit 5.1)*
24.1 Powers of Attorney (included as part of signature page)
25.1 Statement of Eligibility and Qualification of Indenture Trustee (Form
T-1)*
* To be filed by amendment.
II-7
