<PAGE>
FILE PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-93255
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 7, 2000)
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<S> <C> <C>
$350,000,000
(APPROXIMATE)
CENTEX HOME EQUITY LOAN TRUST 2000-B
Centex Home Equity Loan Asset-Backed Certificates,
[LOGO] Series 2000-B
Centex Credit Corporation
d/b/a Centex Home Equity Corporation
Originator and Servicer
CHEC Funding, LLC
Depositor
</TABLE>
Consider carefully
the risk factors
beginning on page
S-10 in this
prospectus
supplement.
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.
The Trust will issue pursuant to this Prospectus Supplement and the accompanying
Prospectus:
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CLASS A PRINCIPAL FINAL SCHEDULED
CERTIFICATES BALANCE* CERTIFICATE RATE DISTRIBUTION DATE
---------------------------------------------------------------------------------------------------
Class A-1 $76,000,000 8.03% October 25, 2017
---------------------------------------------------------------------------------------------------
Class A-2 $14,000,000 7.90% March 25, 2020
---------------------------------------------------------------------------------------------------
Class A-3 $48,000,000 8.03% July 25, 2026
---------------------------------------------------------------------------------------------------
Class A-4 $27,000,000 8.24% August 25, 2028
---------------------------------------------------------------------------------------------------
Class A-5 $27,600,000 8.48%, subject to an interest rate cap. July 25, 2031
---------------------------------------------------------------------------------------------------
Class A-6 $21,400,000 7.97%, subject to an interest rate cap. July 25, 2031
---------------------------------------------------------------------------------------------------
Class A-7 $136,000,000 One-Month LIBOR plus 0.24% (or One-Month June 25, 2031
LIBOR plus 0.48% for each interest period
after an affiliate of the servicer first
fails to exercise its clean-up call
option), subject to an available funds
cap.
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</TABLE>
* Principal balances subject to variance of plus or minus 5%.
THE CERTIFICATES
- Interest and principal on the certificates are scheduled to be paid monthly on
the 25(th) day of the month or, if the 25(th) is not a business day, on the
next business day. The first scheduled distribution date is July 25, 2000.
- 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 an irrevocable and
unconditional financial guaranty insurance policy issued by Financial Security
Assurance Inc., as certificate insurer, guaranteeing timely payment of
interest and ultimate payment of principal to the holders of the Class A
certificates.
[LOGO]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING 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 $349,006,113, excluding accrued
interest, and before deducting issuance expenses payable by the depositor,
estimated to be $600,000. We expect that delivery of the Class A certificates
will be made in book-entry form through the facilities of The Depository Trust
Company, Clearstream Banking, societe anonyme and the Euroclear System on or
about June 15, 2000.
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
SALOMON SMITH BARNEY
June 7, 2000
<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 September 5, 2000.
TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
---------------------
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CAPTION PAGE
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Summary............................... S-3
Risk Factors.......................... S-10
Description of the Home Equity
Loans............................... S-21
Prepayment and Yield Considerations... S-43
Formation of the Trust and Trust
Property............................ S-55
Description of the Certificates....... S-56
The Policy and the Certificate
Insurer............................. S-70
Use of Proceeds....................... S-75
Certain Federal Income Tax
Considerations...................... S-75
Certain State Tax Considerations...... S-77
ERISA Considerations.................. S-77
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............................... I-1
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PROSPECTUS
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CAPTION PAGE
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Prospectus Supplement................. 2
Reports to Holders.................... 2
Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 3
Introduction.......................... 4
The Depositor......................... 4
The Seller and the Servicer........... 4
Description of the Securities......... 12
The Trust Funds....................... 20
Accounts.............................. 23
Enhancement........................... 26
The Agreements........................ 27
Certain Legal Aspects of the Home
Equity Loans........................ 43
Use of Proceeds....................... 51
Federal Income Tax Consequences....... 52
State Tax Consequences................ 76
ERISA Considerations.................. 76
Legal Investment...................... 81
Plan of Distribution.................. 81
Legal Matters......................... 81
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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-82 in this Prospectus Supplement.
ISSUER
- Centex Home Equity Loan Trust 2000-B.
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.
- All of the home equity loans have been originated by the Originator, by an
affiliate of the Originator or by a broker for simultaneous assignment to the
Originator or were acquired by the Originator from correspondent lenders and
reunderwritten to comply with the Originator's underwriting standards.
- The Originator will sometimes be referred to in this Prospectus Supplement as
"CHEC".
SELLERS
- Centex Credit Corporation d/b/a Centex Home Equity Corporation.
- CHEC Conduit Funding, LLC, which is a limited purpose entity and an affiliate
of Centex Credit Corporation d/b/a Centex Home Equity Corporation.
SERVICER
- Centex Credit Corporation d/b/a Centex Home Equity Corporation.
CERTIFICATE INSURER
- Financial Security Assurance Inc., a New York monoline insurance company.
TRUSTEE
- Bank One, National Association.
STATISTICAL CALCULATION DATE
- The close of business on May 15, 2000.
- 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 June 1, 2000.
- 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
June 15, 2000.
DISTRIBUTION DATE
The 25(th) day of each month, or if the 25(th) day is not a business day, then
the next succeeding business day. The first distribution date will be July 25,
2000.
RECORD DATE
- With respect to any distribution date and each class of fixed rate
certificates, the last business day of the month immediately preceding the
S-3
<PAGE>
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 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 in book-entry form
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.
S-4
<PAGE>
INTEREST
FIXED RATE CERTIFICATE INTEREST
The interest rate on any distribution date for a fixed rate certificate will be
the applicable interest rate set forth on the cover page of this Prospectus
Supplement.
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 August 25, 2000, the interest
period would be the month of July 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 in the case of the
Class A-5 and Class A-6 certificates, an interest rate cap.
PB = the principal balance of your fixed rate certificate immediately prior to
any distributions on the 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.
The interest rate cap is the weighted average net coupon rate of the Group I
home equity loans related to the applicable distribution date.
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 owed 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 applicable 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 an affiliate of 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. However, if
the clean-up call option is exercised or the home equity loans are sold in the
auction, each as described in this prospectus supplement, you will generally not
be entitled to receive these amounts upon termination of the trust, except if
and to the extent that amounts would otherwise
S-5
<PAGE>
be available to make distributions in respect of the non-offered certificates.
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
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 we will distribute principal 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 July 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 July 2003. 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, security deeds or mortgages on one-to four-family residential
properties transferred to the trust on the closing date;
- a pool of closed-end adjustable rate home equity loans secured by first deeds
of trust, security deeds 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 Class A certificates will also have the benefit of a financial guaranty
insurance policy issued by Financial Security Assurance Inc.
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
S-6
<PAGE>
or a broker for simultaneous assignment to CHEC or were acquired by CHEC from
correspondent lenders and reunderwritten to comply with CHEC's underwriting
standards.
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 loans is insured by a primary mortgage
insurance policy.
The statistical information presented in this Prospectus Supplement is, with
respect to 4,352 home equity loans, of which 3,166 are fixed-rate home equity
loans and 1,186 are adjustable-rate home equity loans, in each case 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.
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 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 of the related home equity
loan 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 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 liquidation proceeds realized upon the liquidation of the
related home equity loan prior to any distributions to you. The servicer is also
entitled to be reimbursed by the trust for any servicing advances from all the
home equity loans of the related home equity loan group to the extent funds are
available after making other required distributions on the related distribution
date.
S-7
<PAGE>
CREDIT ENHANCEMENT
CERTIFICATE INSURANCE POLICY
Financial Security Assurance Inc. will issue a financial guaranty insurance
policy for the benefit of the Class A certificates.
The policy 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 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 policy. In
addition, the policy will guarantee the full payment of the principal balance of
each class of Class A certificates on their respective final scheduled
distribution dates.
The policy will not guarantee:
- any shortfalls related to the Soldiers' and Sailors' Civil Relief Act of 1940;
or
- any shortfalls resulting from the application of any interest rate cap or
available funds cap.
If for any reason the certificate insurer does not make the payments required by
the 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
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 AN AFFILIATE OF THE SERVICER; AUCTION SALE; ADDITIONAL
PRINCIPAL DISTRIBUTIONS
An affiliate of the servicer may, at its option, terminate the trust by
purchasing all of the home equity loans on any distribution date on or after the
date on which the aggregate outstanding principal balance of the home equity
S-8
<PAGE>
loans in both groups is less than 20% of the aggregate outstanding principal
balance of the home equity loans in both groups on the cut-off date.
If the affiliate of the servicer does not exercise this clean-up call option
when it first could have been exercised, then on the next distribution date
after such date, the trustee will begin an auction process to sell the home
equity loans and the other trust assets. It is a condition to the sale of the
trust assets that the proceeds of the auction are at least sufficient to pay the
aggregate unpaid principal balance of the Class A certificates, all accrued and
unpaid interest thereon (other than any interest accrued in excess of the
Class A-7 available funds cap) and any amounts due the certificate insurer. If
the first auction of the trust property is not successful because the highest
bid received does not satisfy the minimum purchase price condition, then the
trustee will conduct an auction of the home equity loans every third month
thereafter, unless and until a bid satisfying the minimum purchase price
condition is received for the trust property. Certain affiliates of the servicer
may bid in the auction.
If the clean-up call option is not exercised on the date upon which it first
could have been exercised, then on the third distribution date following such
date and on each distribution date thereafter, the amounts that otherwise would
have been payable to the non-offered certificates will be paid to the Class A
certificates as an additional principal distribution amount. The additional
principal distribution amount for the related Class A certificates will be
applied in the same order of priority as distributions of principal for the
related home equity loan group.
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
As of the closing date, the Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 and Class A-6 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-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
certificates. The Class A-7 certificates will constitute "mortgage related
securities." You should consult your own counsel as to whether and to what
extent the Class A certificates constitute legal investments for you.
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-9
<PAGE>
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.
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<S> <C>
YOU MAY HAVE DIFFICULTY SELLING YOUR The Class A certificates will not be listed on any
CERTIFICATES securities exchange. As a result, if you wish to sell
your certificates, you will have to find a purchaser
that is willing to purchase your certificates. The
underwriters intend to make a secondary market for the
Class A certificates. The underwriters may do so by
offering to buy the Class A certificates from investors
that wish to sell. However, the underwriters will not be
obligated to make offers to buy the Class A certificates
and may stop making offers at any time. In addition, the
prices offered, if any, may not reflect prices that
other potential purchasers, were they to be given the
opportunity, would be willing to pay. There have been
times in the past where there have been very few buyers
of similar asset backed securities, and there may be
similar times in the future. As a result, you may not be
able to sell your certificates when you wish to do so or
you may not be able to obtain the price you wish to
receive.
THE BORROWERS HAVE LESS THAN PERFECT CHEC underwriting standards generally are less stringent
CREDIT 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 high 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 Approximately 99.83% of the home equity loans as of the
DEFAULT statistical calculation date were originated within
twelve months prior to this 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 302 months and 359
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.
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THE RATE OF RETURN OF PRINCIPAL IS OVERVIEW. Generally, if prevailing interest rates fall
UNCERTAIN DUE TO PREPAYMENTS 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)
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 38.01% of the Group I home
equity loans and approximately 20.42% 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 home
equity loan.
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2/28 ADJUSTABLE RATE LOANS. Approximately 87.13% 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. We refer to
these loans in this Prospectus Supplement as the 2/28
adjustable rate loans. As with home equity loans
generally, 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 Group II home
equity loans, although the other Group II home equity
loans also have adjustable interest rates. 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.
YOU MAY BE UNABLE TO REINVEST Asset backed securities, like the Class A certificates,
DISTRIBUTIONS IN COMPARABLE INVESTMENTS usually produce more returns of principal to investors
when market interest rates fall below the interest rates
on the mortgage loans and produce less returns of
principal when market interest rates rise above the
interest rates on the mortgage loans. If borrowers
refinance their mortgage loans as a result of lower
interest rates, you will receive an unanticipated
payment of principal. As a result, you are likely to
receive more money to reinvest at a time when other
investments generally are producing a lower yield than
that on the Class A certificates, and are likely to
receive less money to reinvest when other investments
generally are producing a higher yield than that on the
Class A certificates. You will bear the risk that the
timing and amount of distributions on your Class A
certificates will prevent you from attaining your
desired yield.
EFFECT OF HOME EQUITY LOAN YIELD ON Approximately 12.87% of the Group II home equity loans,
CERTIFICATE RATE OF CLASS A-7 as of the statistical calculation date, adjust
CERTIFICATES; BASIS RISK 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
87.13% 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.
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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 your interest
payment because of the Class A-7 available funds cap, we
cannot assure you that excess funds will be available to
make these payments. Moreover, if the clean-up call
option is exercised or the home equity loans are sold in
the auction, you will generally not be entitled to
receive those amounts upon termination of the trust,
except if and to the extent that amounts would otherwise
be available to make distributions in respect of the
non-offered certificates.
In addition, the 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.
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.
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EFFECT OF PREPAYMENTS OF GROUP I HOME The Class A-5 and A-6 certificates are subject to an
EQUITY LOANS ON CERTIFICATE RATES OF interest rate cap based on the weighted average net
CLASS A-5 AND A-6 CERTIFICATES; INTEREST coupon rate of the Group I home equity loans as of the
RATE RISK 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. You will not receive any additional funds on future
distribution dates to compensate you for any reduction
in the amount of interest owed to you on a prior
distribution date because of the effect of 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.
THE CERTIFICATE INSURANCE POLICY DOES NOT Payments of interest on the Class A certificates are
COVER SHORTFALLS IN INTEREST PAYMENTS subject to an available funds cap or interest rate cap,
RESULTING FROM APPLICATION OF AN depending on the class of certificates. The insurance
AVAILABLE FUNDS OR INTEREST RATE CAP, OR policy guarantees payments of interest on the Class A
CERTAIN OTHER REDUCTIONS IN AVAILABLE certificates only up to the amount of any available
INTEREST DISTRIBUTIONS REQUIRED BY LAW funds cap or interest rate cap. In addition, the
certificate insurance policy does not cover reductions
in available interest distributions required by the
Soldiers' and Sailors' Civil Relief Act of 1940. As a
result, you may realize a lower than anticipated yield
on your investments.
YIELD CONSIDERATIONS RELATING TO EXCESS If the Class A certificates are overcollateralized by
CASH the related 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 distributions 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
distributions 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;
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- 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;
- adjustments in the certificate rate on the Class
A-7 certificates;
- an increase in the certificate rate of the Class
A-7 certificates if an affiliate of the servicer
first fails to exercise the clean-up call option;
and
- the failure of an affiliate of the servicer to
exercise the clean-up call on the first date upon
which such clean-up call could have been
exercised.
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. 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
may 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.
LIQUIDATION OF HOME EQUITY LOANS COULD OVERVIEW. Even assuming that the mortgaged properties
CAUSE PAYMENT DELAYS AND/OR LOSSES 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 policy. 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 policy.
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SECOND LIENS. As of the statistical calculation date,
approximately 90.51% of the aggregate principal balance
of the Group I home equity loans are secured by first
liens on the related properties, and approximately 9.49%
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 judgment cannot be obtained or is not
realized upon, which may affect the yield and weighted
average life of your certificates.
HOME EQUITY LOANS TRANSFERRED TO THE TRUST Following the transfer of the home equity loans to the
MAY HAVE CHARACTERISTICS THAT DIFFER trust on the closing date, the characteristics of the
FROM THOSE OF THE HOME EQUITY LOANS home equity loans in either loan group, or in both loan
PRESENTED IN THIS PROSPECTUS SUPPLEMENT, groups, may differ from the information presented in
WHICH MAY REDUCE YOUR YIELD TO MATURITY this Prospectus Supplement. The characteristics that may
differ include, among others, the composition of the
home equity loans and of the borrowers, 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. 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 5%.
THERE COULD BE DELAYS IN DISTRIBUTIONS ON The sale of the home equity loans from the sellers to
YOUR CERTIFICATES IF THE TRANSFER OF the depositor and from the depositor to the trust will
HOME EQUITY LOANS TO THE TRUST IS NOT be treated by the sellers, the depositor and the trust
CONSIDERED A SALE IN THE EVENT OF as a sale of the home equity loans. In the event of an
BANKRUPTCY insolvency of either seller or the depositor, 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 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.
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PREPAYMENT INTEREST SHORTFALLS MAY RESULT When a full principal prepayment is made on a home
IN LOSS OF INTEREST 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.
Prepayment interest shortfalls, after application of the
servicing fee as described above, will be covered by the
policy. Neither the servicer nor the policy will cover
any shortfalls in interest collections on the home
equity loans that are attributable to the Soldiers' and
Sailors' Civil Relief Act of 1940.
GEOGRAPHIC CONCENTRATION MAY AFFECT As of the statistical calculation date, approximately
PERFORMANCE 15.04%, 7.48% and 5.74% of the Group I home equity loans
are located in Texas, Florida and Tennessee,
respectively, and approximately 9.70%, 8.81%, 7.20%,
6.33% and 5.08% of the Group II home equity loans are
located in California, Ohio, North Carolina, Texas and
New York, respectively. To the extent that those 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 in those regions
may be expected to increase the foregoing risks to the
trust. 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.
In addition, 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.
BALLOON LOANS MAY HAVE HIGHER RATES OF Based on the principal balances of the home equity loans
DEFAULT WHICH MAY CAUSE LOSSES on the statistical calculation date, approximately 8.06%
of the Group I home equity loans and none of the Group
II home equity loans are balloon loans. A balloon loan
has monthly payments that will not fully pay off the
loan balance by the maturity date. As a result, the
borrower usually will have to refinance the balloon loan
in order to pay the amount due. The borrower may not be
able to refinance the balloon loan for any number of
reasons, including the level of available mortgage
rates, the value of the property or the borrower's
payment or credit history. The trust will not have any
funds to refinance a balloon loan, and the seller is not
obligated to do so. If the borrower is unable to
refinance the balloon loan, the trust may suffer a loss.
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VIOLATIONS OF CONSUMER PROTECTION LAWS MAY Applicable state laws generally regulate interest rates
RESULT IN LOSSES and other charges and require specific 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 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 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
promulgated under the Truth in Lending Act, which
require particular disclosures to the borrowers
regarding the terms of the loans;
(2) the Equal Credit Opportunity Act and regulation B
promulgated under the Equal Credit Opportunity 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.
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Violations of particular 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 loans
and in addition could subject the trust fund to damages
and administrative enforcement. Approximately 4.34% of
the aggregate principal balance of the home equity loans
on the statistical calculation date 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 Home Ownership and Equity
Protection Act. The Home Ownership and Equity Protection
Act requires additional disclosures, specifies the
timing of these disclosures and limits or prohibits
inclusion of some provisions in mortgages subject to the
Home Ownership and Equity Protection Act. The Home
Ownership and Equity Protection Act also provides that
any purchaser or assignee of a mortgage covered by the
Home Ownership and Equity Protection 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 Home Ownership and
Equity Protection Act from an assignee are the remaining
amount of indebtedness plus the total amount paid by the
borrower in connection with the loans. If the trust fund
includes loans subject to the Home Ownership and Equity
Protection Act, the trust will be subject to all of the
claims and defenses which the borrower could assert
against the original lender. Any violation of the Home
Ownership and Equity Protection Act which would result
in liability would be a breach of either seller's
representations and warranties, and CHEC would be
obligated to cure the breach or repurchase or, if
permitted by the agreement, substitute for the home
equity loan in question. In addition, 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 loans and
also would affect the interests of the securityholders
in these loans if the applicable laws result in the
loans being uncollectible.
REDUCTION IN CERTIFICATE RATING COULD HAVE The rating of the Class A certificates will depend
AN ADVERSE EFFECT ON THE VALUE OF YOUR primarily on an assessment of the claims-paying ability
CERTIFICATES 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.
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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. We
cannot assure you 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 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.
POTENTIAL LIABILITY FOR ENVIRONMENTAL Real property pledged as security to a lender may be
CONDITIONS subject to environmental risks. Under the laws of some
states, contamination of a property may give rise to a
lien on the property to assure the payment of costs of
clean-up. In several states, this type of lien has
priority over the lien of an existing mortgage or
owner's interest against real 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 liability on foreclosure of
the mortgaged property.
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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 2000-B (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
May 15, 2000 (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 (defined below) 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 (defined below) 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 II
(the "Group II Home Equity Loans") will bear interest at adjustable interest
rates. 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 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, by an
affiliate of CHEC or by a broker for simultaneous assignment to CHEC or were
acquired by CHEC from correspondent lenders and reunderwritten to comply with
CHEC's underwriting standards. All of the Home Equity Loans will be serviced by
CHEC in its capacity as servicer (the "Servicer"). As of the Statistical
Calculation Date, these Home Equity Loans will have the following general
characteristics:
- 4,352 total Home Equity Loans
- 3,166 fixed rate Home Equity Loans
- 1,186 floating rate Home Equity Loans
- all of the Home Equity Loans were originated no earlier than January 23,
1997
- located in 47 states and the District of Columbia
S-21
<PAGE>
- Group I Home Equity Loans:
- $173,963,136.54 aggregate outstanding loan balance
- 60.73% of total loan balance of all Home Equity Loans
- Group II Home Equity Loans:
- $112,478,382.97 aggregate outstanding loan balance
- 39.27% of total loan balance of all Home Equity Loans
The Original Loan-to-Value Ratios and 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 Original Loan-to-Value Ratios and Original Combined
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 and the "Original
Loan-to-Value Ratio" of a Home Equity Loan is the ratio, expressed as a
percentage, equal to 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 mortgages, to become equal to or greater than the values
of the related Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
S-22
<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 Balance............... $54,947.30 $3,045.00 to $660,755.38
Wtd. Avg. Coupon Rate (approximate).............. 12.163% 7.690% to 18.200%
Wtd. Avg. Original Combined Loan-to-Value Ratio
(approximate).................................. 79.42% 7.00% to 99.89%
Wtd. Avg. Remaining Term to Maturity
(approximate).................................. 302 months 57 to 360 months
Wtd. Avg. Original Term to Maturity
(approximate).................................. 304 months 60 to 360 months
Maximum Seasoning................................ 40 months
Ratio of First to Second Liens................... 90.51%/9.49%
Outstanding Principal Balance of Loans Secured by
First Liens
SINGLE-FAMILY PROPERTIES....................... $139,109,578.60
TWO-TO FOUR-FAMILY PROPERTIES.................. $4,593,953.26
Outstanding Principal Balance of Loans Secured by
Second Liens
SINGLE-FAMILY PROPERTIES....................... $14,959,728.13
TWO-TO FOUR-FAMILY PROPERTIES.................. $464,257.33
Balloon Payments (as a percent of the aggregate
outstanding loan balance)...................... 8.06%
Latest Maturity Date............................. June 1, 2030
30 to 59 day Delinquencies (as a percent of the
aggregate outstanding loan balance)(1)......... 1.01%
</TABLE>
------------------------
(1) Approximately 75.00% of the outstanding loan balance of the Group I Home
Equity Loans had first monthly payments due on or after April 15, 2000, so
that it was not possible for these loans to be 30 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-23
<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.................................................... 45 $ 2,874,697.21 1.65%
Arkansas................................................... 75 3,541,672.67 2.04
California................................................. 30 2,689,273.46 1.55
Colorado................................................... 46 2,956,607.70 1.70
Connecticut................................................ 21 1,377,591.79 0.79
Delaware................................................... 2 63,439.82 0.04
District of Columbia....................................... 5 378,792.53 0.22
Florida.................................................... 213 13,004,781.68 7.48
Georgia.................................................... 52 5,004,383.43 2.88
Idaho...................................................... 12 622,299.10 0.36
Illinois................................................... 95 4,522,519.11 2.60
Indiana.................................................... 76 4,599,493.90 2.64
Iowa....................................................... 71 3,313,471.14 1.90
Kansas..................................................... 81 3,092,224.95 1.78
Kentucky................................................... 47 2,719,521.78 1.56
Louisiana.................................................. 124 6,119,354.63 3.52
Maine...................................................... 26 1,851,405.24 1.06
Maryland................................................... 19 890,956.98 0.51
Massachusetts.............................................. 61 2,796,972.13 1.61
Michigan................................................... 85 4,668,898.45 2.68
Minnesota.................................................. 41 2,188,560.89 1.26
Mississippi................................................ 122 6,242,123.02 3.59
Missouri................................................... 152 6,968,597.37 4.01
Montana.................................................... 1 62,250.85 0.04
Nebraska................................................... 49 2,902,477.04 1.67
Nevada..................................................... 10 545,941.00 0.31
New Hampshire.............................................. 9 375,234.65 0.22
New Jersey................................................. 55 3,050,984.38 1.75
New Mexico................................................. 21 1,265,244.96 0.73
New York................................................... 81 4,113,704.23 2.36
North Carolina............................................. 134 8,412,726.42 4.84
North Dakota............................................... 1 13,431.45 0.01
Ohio....................................................... 115 6,833,783.19 3.93
Oklahoma................................................... 79 3,636,166.49 2.09
Oregon..................................................... 10 569,574.16 0.33
Pennsylvania............................................... 143 6,800,099.36 3.91
Rhode Island............................................... 5 217,521.80 0.13
South Carolina............................................. 82 4,615,054.59 2.65
Tennessee.................................................. 155 9,991,324.10 5.74
Texas...................................................... 508 26,168,552.91 15.04
Utah....................................................... 12 1,017,651.47 0.58
Vermont.................................................... 1 50,940.53 0.03
Virginia................................................... 60 3,571,052.30 2.05
Washington................................................. 51 2,658,767.28 1.53
West Virginia.............................................. 11 512,721.92 0.29
Wisconsin.................................................. 66 3,903,482.34 2.24
Wyoming.................................................... 6 186,810.14 0.11
----- ---------------- ------
TOTAL:..................................................... 3,166 $ 173,963,136.54 100.00%
===== ================ ======
</TABLE>
--------------------------
(1) Determined by property address designated as such in the related mortgage.
S-24
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE RATIOS (%) HOME EQUITY LOANS BALANCE BALANCE
--------------------------------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
Less than or equal to 10.00....................... 4 $ 55,172.43 0.03%
10.01 - 15.00..................................... 9 203,092.74 0.12
15.01 - 20.00..................................... 14 255,876.50 0.15
20.01 - 25.00..................................... 15 347,317.34 0.20
25.01 - 30.00..................................... 18 458,768.79 0.26
30.01 - 35.00..................................... 20 703,630.82 0.40
35.01 - 40.00..................................... 36 1,111,275.30 0.64
40.01 - 45.00..................................... 45 1,345,308.03 0.77
45.01 - 50.00..................................... 50 1,806,218.01 1.04
50.01 - 55.00..................................... 54 2,125,965.17 1.22
55.01 - 60.00..................................... 101 3,808,950.88 2.19
60.01 - 65.00..................................... 129 5,231,669.64 3.01
65.01 - 70.00..................................... 221 11,645,786.52 6.69
70.01 - 75.00..................................... 346 17,580,475.64 10.11
75.01 - 80.00..................................... 771 42,021,981.66 24.16
80.01 - 85.00..................................... 569 31,163,352.15 17.91
85.01 - 90.00..................................... 583 42,717,621.14 24.56
90.01 - 95.00..................................... 130 8,334,865.54 4.79
95.01 - 100.00.................................... 51 3,045,808.24 1.75
----- --------------- ------
TOTAL:............................................ 3,166 $173,963,136.54 100.00%
===== =============== ======
</TABLE>
S-25
<PAGE>
COUPON RATES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF COUPON RATES (%) HOME EQUITY LOANS BALANCE BALANCE
------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
7.501 - 8.000.................................... 2 $ 151,422.01 0.09%
8.001 - 8.500.................................... 8 915,335.94 0.53
8.501 - 9.000.................................... 15 1,065,713.11 0.61
9.001 - 9.500.................................... 65 4,564,771.14 2.62
9.501 - 10.000................................... 122 9,393,958.36 5.40
10.001 - 10.500.................................. 115 7,601,671.18 4.37
10.501 - 11.000.................................. 272 17,775,773.00 10.22
11.001 - 11.500.................................. 253 15,609,277.34 8.97
11.501 - 12.000.................................. 427 27,832,188.57 16.00
12.001 - 12.500.................................. 354 20,900,318.76 12.01
12.501 - 13.000.................................. 533 28,929,520.14 16.63
13.001 - 13.500.................................. 249 11,674,291.26 6.71
13.501 - 14.000.................................. 282 11,947,486.87 6.87
14.001 - 14.500.................................. 161 6,105,377.22 3.51
14.501 - 15.000.................................. 140 4,777,459.84 2.75
15.001 - 15.500.................................. 69 2,164,394.76 1.24
15.501 - 16.000.................................. 49 1,247,013.39 0.72
16.001 - 16.500.................................. 19 562,256.09 0.32
16.501 - 17.000.................................. 17 408,748.53 0.23
17.001 - 17.500.................................. 7 143,407.07 0.08
17.501 - 18.000.................................. 6 169,953.50 0.10
18.001 - 18.500.................................. 1 22,798.46 0.01
----- --------------- -------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== =======
</TABLE>
S-26
<PAGE>
LOAN BALANCES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF LOAN BALANCES ($) HOME EQUITY LOANS BALANCE BALANCE
-------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
0.01 - 5,000.00.................................. 2 $ 6,405.01 0.00%
5,000.01 - 10,000.00............................. 20 192,745.81 0.11
10,000.01 - 15,000.00............................ 120 1,581,582.75 0.91
15,000.01 - 20,000.00............................ 170 3,018,225.49 1.73
20,000.01 - 25,000.00............................ 222 5,065,339.60 2.91
25,000.01 - 30,000.00............................ 281 7,741,250.89 4.45
30,000.01 - 35,000.00............................ 259 8,478,174.88 4.87
35,000.01 - 40,000.00............................ 275 10,384,536.39 5.97
40,000.01 - 45,000.00............................ 242 10,341,721.94 5.94
45,000.01 - 50,000.00............................ 206 9,822,377.13 5.65
50,000.01 - 55,000.00............................ 199 10,449,738.41 6.01
55,000.01 - 60,000.00............................ 189 10,866,470.26 6.25
60,000.01 - 65,000.00............................ 143 8,970,084.73 5.16
65,000.01 - 70,000.00............................ 108 7,273,614.53 4.18
70,000.01 - 75,000.00............................ 101 7,295,513.08 4.19
75,000.01 - 80,000.00............................ 86 6,664,611.00 3.83
80,000.01 - 85,000.00............................ 71 5,872,539.33 3.38
85,000.01 - 90,000.00............................ 60 5,249,226.20 3.02
90,000.01 - 95,000.00............................ 45 4,166,510.17 2.40
95,000.01 - 100,000.00........................... 55 5,370,805.72 3.09
100,000.01 - 105,000.00.......................... 35 3,599,180.98 2.07
105,000.01 - 110,000.00.......................... 32 3,438,911.82 1.98
110,000.01 - 115,000.00.......................... 33 3,714,508.83 2.14
115,000.01 - 120,000.00.......................... 22 2,583,753.48 1.49
120,000.01 - 125,000.00.......................... 17 2,087,945.52 1.20
125,000.01 - 130,000.00.......................... 19 2,430,385.35 1.40
130,000.01 - 135,000.00.......................... 22 2,930,858.84 1.68
135,000.01 - 140,000.00.......................... 11 1,512,496.03 0.87
140,000.01 - 145,000.00.......................... 8 1,150,543.28 0.66
145,000.01 - 150,000.00.......................... 12 1,772,818.17 1.02
150,000.01 - 200,000.00.......................... 72 12,051,573.76 6.93
200,000.01 - 250,000.00.......................... 17 3,801,251.61 2.19
250,000.01 - 300,000.00.......................... 7 1,880,439.55 1.08
300,000.01 - 350,000.00.......................... 1 345,245.83 0.20
350,000.01 - 400,000.00.......................... 2 753,499.00 0.43
400,000.01 - 450,000,00.......................... 1 437,495.79 0.25
450,000.01 - 700,000.00.......................... 1 660,755.38 0.38
----- --------------- -------
TOTAL............................................ 3,166 $173,963,136.54 100.00%
===== =============== =======
</TABLE>
S-27
<PAGE>
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.................................... 2,847 $154,069,306.73 88.56%
PUD.............................................. 84 8,004,426.69 4.60
Two- to Four-Family.............................. 99 5,058,210.59 2.91
Townhouse........................................ 48 2,428,594.86 1.40
Manufactured Housing............................. 64 3,330,078.54 1.91
Condominium...................................... 24 1,072,519.13 0.62
----- --------------- -------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== =======
</TABLE>
ORIGINAL TERMS 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>
0 - 60........................................... 48 $ 919,078.07 0.53%
61 - 120......................................... 212 6,189,698.52 3.56
121 - 180........................................ 803 34,951,218.87 20.09
181 - 240........................................ 298 13,653,695.73 7.85
241 - 300........................................ 26 1,418,184.08 0.82
301 - 360........................................ 1,779 116,831,261.27 67.16
----- --------------- ------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== ======
</TABLE>
REMAINING TERMS 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> <C>
0 - 60........................................... 48 $ 919,078.07 0.53%
61 - 120......................................... 212 6,189,698.52 3.56
121 - 180........................................ 803 34,951,218.87 20.09
181 - 240........................................ 298 13,653,695.73 7.85
241 - 300........................................ 26 1,418,184.08 0.82
301 - 360........................................ 1,779 116,831,261.27 67.16
----- --------------- ------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== ======
</TABLE>
S-28
<PAGE>
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
------------------ ----------------- --------------- -----------
<S> <C> <C> <C>
0................................................ 1,038 $ 57,853,382.16 33.26%
1 - 6............................................ 2,107 114,962,901.78 66.08
7 - 12........................................... 12 872,339.35 0.50
13 - 18.......................................... 2 68,038.44 0.04
19 - 24.......................................... 3 83,402.43 0.05
25 - 30.......................................... 2 64,840.21 0.04
31 - 42.......................................... 2 58,232.17 0.03
----- --------------- ------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== ======
</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>
Primary Home..................................... 2,999 $166,946,962.71 95.97%
Investment Property.............................. 142 5,792,317.70 3.33
Second Home...................................... 25 1,223,856.13 0.70
----- --------------- ------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== ======
</TABLE>
LIEN POSITIONS 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>
1st lien......................................... 2,628 $157,449,087.86 90.51%
2nd lien......................................... 538 16,514,048.68 9.49
----- --------------- ------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== ======
</TABLE>
S-29
<PAGE>
DOCUMENTATION TYPES 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............................... 2,841 $153,294,785.24 88.12%
Stated Income.................................... 233 13,992,215.55 8.04
Limited Documentation............................ 92 6,676,135.75 3.84
----- --------------- ------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== ======
</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 GRADES OF GROUP I HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
CREDIT GRADE (1) HOME EQUITY LOANS BALANCE BALANCE
---------------- ----------------- --------------- -----------
<S> <C> <C> <C>
A+............................................... 150 $ 8,439,636.03 4.85%
A-1.............................................. 678 40,521,972.81 23.29
A-2.............................................. 1,121 65,475,035.05 37.63
B................................................ 574 30,377,711.59 17.46
C-1.............................................. 412 18,811,727.94 10.81
C-2.............................................. 132 5,550,861.36 3.19
D................................................ 99 4,786,191.76 2.75
----- --------------- ------
TOTAL:........................................... 3,166 $173,963,136.54 100.00%
===== =============== ======
</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-30
<PAGE>
SECOND MORTGAGE RATIOS 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 or equal to 10.00....................... 19 $ 249,858.91 1.51%
10.01 - 15.00..................................... 68 1,304,689.96 7.90
15.01 - 20.00..................................... 110 2,539,850.95 15.38
20.01 - 25.00..................................... 103 3,025,788.08 18.32
25.01 - 30.00..................................... 77 2,481,394.30 15.03
30.01 - 35.00..................................... 62 2,296,338.96 13.91
35.01 - 40.00..................................... 33 1,309,318.99 7.93
40.01 - 45.00..................................... 15 684,227.01 4.14
45.01 - 50.00..................................... 19 931,572.76 5.64
50.01 - 55.00..................................... 10 575,017.97 3.48
55.01 - 60.00..................................... 11 676,800.24 4.10
60.01 - 70.00..................................... 4 153,937.79 0.93
70.01 - 75.00..................................... 2 72,408.72 0.44
75.01 - 80.00..................................... 2 75,994.04 0.46
80.01 - 85.00..................................... 2 114,350.00 0.69
85.01 - 100.00.................................... 1 22,500.00 0.14
--- -------------- ------
TOTAL:............................................ 538 $16,514,048.68 100.00%
=== ============== ======
</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-31
<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 Balance.......................... $94,838.43 $17,062.56 to $484,778.47
Wtd. Avg. Coupon Rate (approximate)......................... 11.47% 7.25% to 15.65%
Wtd. Avg. Gross Margin (approximate)........................ 6.35% 2.05% to 10.15%
Wtd. Avg. Maximum Rate (approximate)(1)..................... 18.46% 14.25% to 22.65%
Wtd. Avg. Minimum Rate (approximate)(1)..................... 11.47% 7.25% to 15.65%
Wtd. Avg. Original Loan-to-Value Ratio (approximate)........ 83.36% 16.92% to 99.00%
Wtd. Avg. Remaining Term to Maturity (approximate).......... 359 months 118 to 360 months
Wtd. Avg. Original Term to Maturity (approximate)........... 360 months 120 to 360 months
Maximum Seasoning........................................... 12 months
Ratio of First to Second Liens.............................. 100% / 0.00%
Outstanding Principal Balance of Loans Secured by First
Liens
SINGLE-FAMILY PROPERTIES................................ $89,129,476.44
TWO-TO FOUR-FAMILY PROPERTIES........................... $5,235,560.87
Balloon Payments (as a percent of the aggregate outstanding 0.00%
loan balance).............................................
Latest Maturity Date........................................ May 15, 2030
30 to 59 day Delinquencies (as a percent of the aggregate 0.92%
outstanding loan balance)(2)..............................
Six-Month Adjustable Rate Loans (3)
PERCENTAGE OF AGGREGATE OUTSTANDING GROUP II PRINCIPAL 12.87%
LOAN BALANCE..........................................
WTD. AVG. REMAINING PERIOD TO COUPON RATE ADJUSTMENT 5 months
(APPROXIMATE).........................................
WTD. AVG. INITIAL INTEREST RATE ADJUSTMENT CAP 1.00%
(APPROXIMATE)(4)......................................
WTD. AVG. SEMI-ANNUAL INTEREST RATE ADJUSTMENT CAP 1.00%
(APPROXIMATE)(4)......................................
WTD. AVG. LIFETIME INTEREST RATE ADJUSTMENT CAP 17.85%
(APPROXIMATE)(5)......................................
2/28 Adjustable Rate Loans (6)
PERCENTAGE OF AGGREGATE OUTSTANDING GROUP II PRINCIPAL 87.13%
LOAN BALANCE..........................................
WTD. AVG. REMAINING PERIOD TO COUPON RATE 23 months
ADJUSTMENT(APPROXIMATE)...............................
WTD. AVG. INITIAL INTEREST RATE ADJUSTMENT CAP 2.00%
(APPROXIMATE)(4)......................................
WTD. AVG. SEMI-ANNUAL INTEREST RATE ADJUSTMENT CAP 1.00%
(APPROXIMATE) (4).....................................
WTD. AVG. LIFETIME INTEREST RATE ADJUSTMENT CAP 18.55%
(APPROXIMATE) (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 88.09% of the outstanding loan balance of the Group II Home
Equity Loans had first monthly payments due on or after April 15, 2000, so
that it was not possible for these loans to be 30 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 adjust 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.
(6) "2/28 Adjustable Rate Loans" have their first adjustment date two years
after the date of origination, and adjust semiannually thereafter, based on
six-month LIBOR plus a margin, subject to certain limitations.
The tables set forth below contain 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-32
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP II 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................................................. 53 $ 4,636,453.03 4.12%
Arkansas................................................ 4 364,126.53 0.32
California.............................................. 64 10,907,595.78 9.70
Colorado................................................ 24 3,022,078.50 2.69
Connecticut............................................. 15 1,835,041.59 1.63
Delaware................................................ 1 70,800.00 0.06
District of Columbia.................................... 1 160,200.00 0.14
Florida................................................. 48 4,856,335.58 4.32
Georgia................................................. 44 4,009,916.47 3.57
Idaho................................................... 7 918,741.97 0.82
Illinois................................................ 39 3,923,678.63 3.49
Indiana................................................. 32 2,104,166.03 1.87
Iowa.................................................... 10 567,801.23 0.50
Kansas.................................................. 9 689,273.02 0.61
Kentucky................................................ 21 2,000,421.36 1.78
Louisiana............................................... 12 1,165,768.05 1.04
Maine................................................... 11 1,180,592.06 1.05
Maryland................................................ 7 995,226.36 0.88
Massachusetts........................................... 10 1,076,742.75 0.96
Michigan................................................ 63 4,608,148.34 4.10
Minnesota............................................... 12 1,030,068.29 0.92
Mississippi............................................. 14 743,552.92 0.66
Missouri................................................ 30 1,955,912.27 1.74
Nebraska................................................ 2 94,807.91 0.08
Nevada.................................................. 10 1,233,537.32 1.10
New Hampshire........................................... 5 555,274.50 0.49
New Jersey.............................................. 20 2,611,059.69 2.32
New Mexico.............................................. 5 520,860.26 0.46
New York................................................ 55 5,712,194.53 5.08
North Carolina.......................................... 94 8,103,499.75 7.20
Ohio.................................................... 121 9,911,547.66 8.81
Oklahoma................................................ 12 973,144.37 0.87
Oregon.................................................. 19 2,426,084.14 2.16
Pennsylvania............................................ 52 2,995,751.20 2.66
Rhode Island............................................ 1 91,778.28 0.08
South Carolina.......................................... 25 2,136,384.06 1.90
South Dakota............................................ 1 40,581.22 0.04
Tennessee............................................... 55 5,294,756.06 4.71
Texas................................................... 79 7,117,291.95 6.33
Utah.................................................... 12 1,223,200.96 1.09
Vermont................................................. 1 65,662.00 0.06
Virginia................................................ 10 1,114,566.91 0.99
Washington.............................................. 46 5,140,595.61 4.57
West Virginia........................................... 5 271,390.41 0.24
Wisconsin............................................... 24 1,981,528.42 1.76
Wyoming................................................. 1 40,245.00 0.04
----- --------------- ------
TOTAL:.................................................. 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
--------------------------
(1) Determined by property address designated in the related mortgage.
S-33
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS (%) HOME EQUITY LOANS BALANCE BALANCE
------------------------------------------ ----------------- --------------- -----------
<S> <C> <C> <C>
Less than or equal to 20.00...................... 1 $ 33,849.26 0.03%
20.01 - 25.00.................................... 3 130,987.55 0.12
25.01 - 30.00.................................... 2 86,991.12 0.08
30.01 - 35.00.................................... 2 70,550.00 0.06
35.01 - 40.00.................................... 5 315,421.35 0.28
40.01 - 45.00.................................... 4 277,384.64 0.25
45.01 - 50.00.................................... 6 269,247.51 0.24
50.01 - 55.00.................................... 14 836,793.72 0.74
55.01 - 60.00.................................... 18 1,182,222.17 1.05
60.01 - 65.00.................................... 35 2,187,605.60 1.94
65.01 - 70.00.................................... 33 2,488,135.81 2.21
70.01 - 75.00.................................... 110 9,514,806.84 8.46
75.01 - 80.00.................................... 239 21,400,265.80 19.03
80.01 - 85.00.................................... 260 24,670,639.30 21.93
85.01 - 90.00.................................... 358 41,093,905.53 36.53
90.01 - 95.00.................................... 76 6,310,843.46 5.61
95.01 - 100.00................................... 20 1,608,733.31 1.43
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
S-34
<PAGE>
CURRENT COUPON RATES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF CURRENT COUPON RATES (%) HOME EQUITY LOANS BALANCE BALANCE
--------------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
7.001 - 7.500.................................... 2 $ 191,975.27 0.17%
7.501 - 8.000.................................... 1 44,444.80 0.04
8.001 - 8.500.................................... 2 269,350.66 0.24
8.501 - 9.000.................................... 8 1,481,973.58 1.32
9.001 - 9.500.................................... 27 3,053,642.24 2.71
9.501 - 10.000................................... 96 10,106,982.89 8.99
10.001 - 10.500.................................. 103 10,374,528.13 9.22
10.501 - 11.000.................................. 174 17,772,683.06 15.80
11.001 - 11.500.................................. 157 15,375,893.52 13.67
11.501 - 12.000.................................. 242 22,380,840.44 19.90
12.001 - 12.500.................................. 144 13,266,723.91 11.79
12.501 - 13.000.................................. 138 10,914,562.79 9.70
13.001 - 13.500.................................. 43 3,600,729.62 3.20
13.501 - 14.000.................................. 32 2,559,682.08 2.28
14.001 - 14.500.................................. 11 801,070.88 0.71
14.501 - 15.000.................................. 2 97,962.00 0.09
15.001 - 15.500.................................. 3 129,087.10 0.11
15.501 - 16.000.................................. 1 56,250.00 0.05
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
S-35
<PAGE>
GROSS MARGINS OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF GROSS MARGINS (%) HOME EQUITY LOANS BALANCE BALANCE
-------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
2.001 - 2.500.................................... 1 $ 110,661.73 0.10%
2.501 - 3.000.................................... 1 81,313.54 0.07
3.001 - 3.500.................................... 3 353,350.66 0.31
3.501 - 4.000.................................... 14 1,356,491.57 1.21
4.001 - 4.500.................................... 31 3,294,505.52 2.93
4.501 - 5.000.................................... 86 8,446,418.55 7.51
5.001 - 5.500.................................... 119 12,824,353.17 11.40
5.501 - 6.000.................................... 166 16,416,791.39 14.60
6.001 - 6.500.................................... 211 20,237,536.62 17.99
6.501 - 7.000.................................... 200 19,340,597.53 17.19
7.001 - 7.500.................................... 164 14,522,561.77 12.91
7.501 - 8.000.................................... 97 7,959,726.72 7.08
8.001 - 8.500.................................... 47 4,156,963.18 3.70
8.501 - 9.000.................................... 26 2,180,778.79 1.94
9.001 - 9.500.................................... 14 877,171.62 0.78
9.501 - 10.000................................... 4 204,986.61 0.18
10.001 - 10.500.................................. 2 114,174.00 0.10
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
S-36
<PAGE>
MAXIMUM RATES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF MAXIMUM RATES (%) HOME EQUITY LOANS BALANCE BALANCE
-------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
14.001 - 14.500.................................. 2 $ 191,975.27 0.17%
14.501 - 15.000.................................. 1 44,444.80 0.04
15.001 - 15.500.................................. 2 269,350.66 0.24
15.501 - 16.000.................................. 10 1,686,381.15 1.50
16.001 - 16.500.................................. 27 3,053,642.24 2.71
16.501 - 17.000.................................. 96 10,093,705.99 8.97
17.001 - 17.500.................................. 104 10,409,855.38 9.25
17.501 - 18.000.................................. 172 17,581,552.39 15.63
18.001 - 18.500.................................. 156 15,340,566.27 13.64
18.501 - 19.000.................................. 242 22,380,840.44 19.90
19.001 - 19.500.................................. 144 13,266,723.91 11.79
19.501 - 20.000.................................. 138 10,914,562.79 9.70
20.001 - 20.500.................................. 43 3,600,729.62 3.20
20.501 - 21.000.................................. 32 2,559,682.08 2.28
21.001 - 21.500.................................. 11 801,070.88 0.71
21.501 - 22.000.................................. 2 97,962.00 0.09
22.001 - 22.500.................................. 3 129,087.10 0.11
22.501 - 23.000.................................. 1 56,250.00 0.05
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
NEXT INTEREST ADJUSTMENT DATES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
NEXT INTEREST ADJUSTMENT DATE HOME EQUITY LOANS BALANCE BALANCE
----------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
September 2000................................... 38 $ 3,532,226.61 3.14%
October 2000..................................... 72 7,038,585.30 6.26
November 2000.................................... 37 3,900,649.62 3.47
May 2001......................................... 1 58,268.21 0.05
June 2001........................................ 1 47,880.58 0.04
August 2001...................................... 1 19,861.72 0.02
December 2001.................................... 1 87,034.89 0.08
January 2002..................................... 2 94,574.19 0.08
February 2002.................................... 1 76,532.17 0.07
March 2002....................................... 238 21,037,005.31 18.70
April 2002....................................... 451 43,109,600.64 38.33
May 2002......................................... 343 33,476,163.73 29.76
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
S-37
<PAGE>
LOAN BALANCES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
RANGE OF LOAN BALANCES ($) HOME EQUITY LOANS BALANCE BALANCE
-------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
15,000.01 - 20,000.00............................ 5 $ 94,931.33 0.08%
20,000.01 - 25,000.00............................ 13 299,633.85 0.27
25,000.01 - 30,000.00............................ 23 633,750.45 0.56
30,000.01 - 35,000.00............................ 39 1,279,199.51 1.14
35,000.01 - 40,000.00............................ 44 1,659,454.60 1.48
40,000.01 - 45,000.00............................ 46 1,968,193.57 1.75
45,000.01 - 50,000.00............................ 46 2,192,171.38 1.95
50,000.01 - 55,000.00............................ 64 3,372,582.89 3.00
55,000.01 - 60,000.00............................ 62 3,587,123.62 3.19
60,000.01 - 65,000.00............................ 63 3,932,872.19 3.50
65,000.01 - 70,000.00............................ 78 5,252,225.82 4.67
70,000.01 - 75,000.00............................ 70 5,057,951.98 4.50
75,000.01 - 80,000.00............................ 63 4,883,813.17 4.34
80,000.01 - 85,000.00............................ 51 4,206,944.71 3.74
85,000.01 - 90,000.00............................ 47 4,120,931.43 3.66
90,000.01 - 95,000.00............................ 38 3,508,364.60 3.12
95,000.01 - 100,000.00........................... 33 3,219,662.09 2.86
100,000.01 - 105,000.00.......................... 30 3,102,317.18 2.76
105,000.01 - 110,000.00.......................... 34 3,639,564.39 3.24
110,000.01 - 115,000.00.......................... 40 4,489,305.45 3.99
115,000.01 - 120,000.00.......................... 15 1,755,192.95 1.56
120,000.01 - 125,000.00.......................... 23 2,823,937.35 2.51
125,000.01 - 130,000.00.......................... 16 2,032,201.10 1.81
130,000.01 - 135,000.00.......................... 20 2,655,887.22 2.36
135,000.01 - 140,000.00.......................... 13 1,796,300.21 1.60
140,000.01 - 145,000.00.......................... 24 3,434,994.05 3.05
145,000.01 - 150,000.00.......................... 13 1,915,601.75 1.70
150,000.01 - 200,000.00.......................... 104 17,933,842.30 15.94
200,000.01 - 250,000.00.......................... 43 9,757,406.21 8.67
250,000.01 - 300,000.00.......................... 16 4,256,512.71 3.78
300,000.01 - 350,000.00.......................... 5 1,607,025.34 1.43
350,000.01 - 400,000.00.......................... 3 1,118,709.10 0.99
400,000.01 - 450,000.00.......................... 1 405,000.00 0.36
450,000.01 - 500,000.00.......................... 1 484,778.47 0.43
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
S-38
<PAGE>
TYPES OF MORTGAGED PROPERTIES OF GROUP II 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.................................... 989 $ 89,129,476.44 79.24%
PUD.............................................. 78 12,250,609.71 10.89
Two-to Four-Family............................... 54 5,235,560.87 4.65
Condominium...................................... 21 2,433,559.87 2.16
Townhouse........................................ 21 1,736,911.55 1.54
Manufactured Housing............................. 23 1,692,264.53 1.50
----- --------------- ------
TOTAL:......................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
ORIGINAL TERMS TO MATURITY OF GROUP II 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>
61 - 120......................................... 1 $ 60,631.72 0.05%
121 - 180........................................ 3 146,853.47 0.13
181 - 240........................................ 2 82,541.46 0.07
241 - 300........................................ 1 59,111.73 0.05
301 - 360........................................ 1,179 112,129,244.59 99.69
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
REMAINING TERMS TO MATURITY OF GROUP II 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> <C>
61 - 120......................................... 1 $ 60,631.72 0.05%
121 - 180........................................ 3 146,853.47 0.13
181 - 240........................................ 2 82,541.46 0.07
241 - 300........................................ 1 59,111.73 0.05
301 - 360........................................ 1,179 112,129,244.59 99.69
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
S-39
<PAGE>
SEASONING OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
SEASONING (MONTHS) HOME EQUITY LOANS BALANCE BALANCE
------------------ ----------------- --------------- -----------
<S> <C> <C> <C>
0................................................ 382 $ 37,681,325.98 33.50%
1 - 6............................................ 801 74,671,046.48 66.39
7 - 12........................................... 3 126,010.51 0.11
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
OCCUPANCY STATUS OF GROUP II 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>
Primary Home..................................... 1,135 $109,233,689.45 97.12%
Investment Property.............................. 45 2,904,596.55 2.58
Second Home...................................... 6 340,096.97 0.30
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</TABLE>
DOCUMENTATION TYPES OF GROUP II 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............................... 1,057 $ 98,778,313.81 87.82%
Stated Income.................................... 90 8,921,045.80 7.93
Limited Documentation............................ 39 4,779,023.36 4.25
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</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.
S-40
<PAGE>
CREDIT GRADES OF GROUP II HOME EQUITY LOANS
<TABLE>
<CAPTION>
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
NUMBER OF DATE LOAN DATE LOAN
CREDIT GRADE (1) HOME EQUITY LOANS BALANCE BALANCE
---------------- ----------------- --------------- -----------
<S> <C> <C> <C>
A+............................................... 11 $ 1,400,700.44 1.25%
A-1.............................................. 186 21,100,441.34 18.76
A-2.............................................. 531 52,126,075.68 46.34
B................................................ 243 20,478,573.15 18.21
C-1.............................................. 137 11,055,935.20 9.83
C-2.............................................. 77 6,221,386.41 5.53
D................................................ 1 95,270.75 0.08
----- --------------- ------
TOTAL:........................................... 1,186 $112,478,382.97 100.00%
===== =============== ======
</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.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth CHEC's delinquency experience as of the last
day of each of the months indicated with respect to securitized home equity
loans originated or acquired, and serviced, by CHEC. These loans are similar in
type to the Home Equity Loans. 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 has limited experience servicing home equity
loans of the type included in the Trust and thus 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 this servicing portfolio
which increased from approximately $966,480,950 at March 31, 1999 to
approximately $1,950,284,484 at March 31, 2000. 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-41
<PAGE>
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000 AS OF MARCH 31, 1999
-------------------------- ---------------------------
BY NUMBER BY DOLLAR BY NUMBER BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
--------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Portfolio(1)........................... 29,235 $1,950,284,484 14,304 $ 966,480,950
Delinquency Percentage
30-59 days........................... 1.48% 1.41% 1.60% 1.34%
60-89 days........................... 0.55% 0.52% 0.55% 0.52%
90 days and over..................... 2.31% 2.25% 1.17% 1.08%
------ -------------- ------ --------------
Total Delinquency Percentage (2)....... 4.34% 4.18% 3.31% 2.94%
====== ============== ====== ==============
Percentage of REO Properties........... 0.63% 0.60% 0.20% 0.21%
</TABLE>
------------------------
(1) Portfolio includes all securitized loans originated or acquired, and
serviced, by CHEC.
(2) Excludes REO properties.
The following table sets forth 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>
FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999
----------------- -----------------
DOLLAR AMOUNT ($) DOLLAR AMOUNT ($)
----------------- -----------------
<S> <C> <C>
Average Portfolio(1)........................................ 1,462,106,026 566,006,851
Gross Losses(2)............................................. 6,129,076 135,035
Recoveries(3)............................................... 0 0
Net Losses(4)............................................... 6,129,076 135,035
Net Losses as a Percentage of Average Portfolio............. 0.42% 0.02%
</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 securitized loans originated or
acquired, and serviced, by CHEC.
(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.
(3) "Recoveries" are recoveries from deficiency judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries".
S-42
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on each class of Class A Certificates, the
aggregate amount of distributions on each class of Class A Certificates and the
yield to maturity of each class of 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 on the Home Equity Loans (including for this purpose prepayments
resulting from refinancings of the loans or liquidations of the loans due to
defaults, casualties, condemnations and repurchases by CHEC) and by 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, the
purchase of all the Home Equity Loans by an affiliate of the Servicer in
connection with the termination of the Trust and the sale of the Trust assets
pursuant to the auction) 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 timing 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 38.01% of the Group I Home
Equity Loans and approximately 20.42% 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 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, 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
S-43
<PAGE>
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. 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 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.
In addition, if the clean-up call option is not exercised on the date upon
which it first could have been exercised, then on the third Distribution Date
following such date, and on each Distribution Date thereafter, the amounts that
otherwise would have been payable to the Non-Offered Certificates will be paid
to the Class A Certificates as an additional principal distribution amount. Such
additional principal distributions for a Home Equity Loan Group may result in an
accelerated rate of
S-44
<PAGE>
amortization of the related Class A Certificates and affect the weighted average
life and yield on your investment.
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, Class A-2, Class A-3, Class A-4,
Class A-5 and 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 the Class A-6
Certificates do not receive any portion of principal payments prior to the
Distribution Date occurring in July 2003, thereafter, they will receive an
increasing percentage of their pro rata share of principal payable to the Group
I Certificates based on a schedule. This percentage will, after June 2007,
exceed 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 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.
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. In general, the earlier prepayments of principal occur on the Home Equity
Loans, the greater the effect on the yields of the Class A Certificates. 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 lives 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
S-45
<PAGE>
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 set forth below. Any discrepancy may have an
effect upon the percentages of the Class Principal Balances outstanding and the
weighted average lives of the Class A Certificates set forth in the tables. In
addition, since the actual Home Equity Loans in the Trust will 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 June 15, 2000,
- distributions on the Class A Certificates are made on the 25(th) day of
each month regardless of the day on which the Distribution Date actually
occurs, commencing in July, 2000 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
commencing on June 1, 2000 (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 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 clean-up call option is not exercised (except as noted in footnote 2
in the following tables) and there is no resulting auction of the trust
assets,
- 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 0.24% per annum on any date prior
to the clean-up call date and one-month LIBOR and 0.48% per annum on any
date on and after the clean-up call date),
- the overcollateralization levels are set initially as specified in the
Agreement, and thereafter decrease in accordance with the provisions of
the Agreement,
- the coupon rate for each Group II Home Equity Loan is adjusted on its next
adjustment date and on subsequent adjustment dates which occur at 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
S-46
<PAGE>
- six-month LIBOR remains constant at 6.970% per annum and one-month LIBOR
remains constant at 6.6262% per annum.
GROUP I
<TABLE>
<CAPTION>
REMAINING ORIGINAL AMORTIZED
COUPON TERM TO TERM TO ORIGINAL
RATE MATURITY MATURITY TERM
POOL NUMBER LOAN BALANCE ($) (%) (MONTHS) (MONTHS) (MONTHS)
----------- ---------------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
1............................................ 8,744,830.78 12.535 109 110 110
2............................................ 25,736,002.06 12.171 178 180 180
3............................................ 16,796,034.75 12.043 238 239 239
4............................................ 145,464,043.75 12.177 358 359 359
5............................................ 17,259,088.67 11.963 179 180 360
</TABLE>
GROUP II
<TABLE>
<CAPTION>
NUMBER OF
MONTHS TO INITIAL
NEXT INTEREST INTEREST REMAINING
COUPON COUPON GROSS RATE RATE TERM TO
POOL LOAN BALANCE RATE CHANGE MARGIN ADJUSTMENT ADJUSTMENT MAXIMUM MINIMUM MATURITY
NUMBER ($) (%) DATE (%) CAP (%) CAP (%) RATE (%) RATE (%) (MONTHS)
------ ------------- -------- --------- -------- ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.................... 4,270,890.16 10.509 3 6.214 1.000 1.000 17.509 10.509 350
2.................... 8,510,502.87 10.938 4 6.589 1.000 1.000 17.938 10.938 355
3.................... 4,716,358.24 10.989 5 6.522 1.000 1.000 17.989 10.989 360
4.................... 25,900,775.64 11.611 21 6.478 2.000 1.000 18.593 11.611 358
5.................... 52,124,733.06 11.603 22 6.376 2.000 1.000 18.602 11.603 359
6.................... 40,476,740.04 11.463 23 6.165 2.000 1.000 18.463 11.463 360
<CAPTION>
INTEREST
ORIGINAL RATE
TERM TO CHANGE
POOL MATURITY FREQUENCY
NUMBER (MONTHS) (MONTHS)
------ -------- ---------
<S> <C> <C>
1.................... 352 6
2.................... 356 6
3.................... 360 6
4.................... 360 6
5.................... 360 6
6.................... 360 6
</TABLE>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Class Principal Balances 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:
- 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 or six-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-47
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-1
--------------------------------------------------------------------------------------------
50% 75% 100% 115% 150% 200% 250%
GROUP I % PREPAYMENT ASSUMPTION -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------------
Initial Percentage............. 100% 100% 100% 100% 100% 100% 100%
June 25, 2001.................. 69 59 50 44 31 12 0
June 25, 2002.................. 39 18 0 0 0 0 0
June 25, 2003.................. 14 0 0 0 0 0 0
June 25, 2004.................. 0 0 0 0 0 0 0
June 25, 2005.................. 0 0 0 0 0 0 0
June 25, 2006.................. 0 0 0 0 0 0 0
June 25, 2007.................. 0 0 0 0 0 0 0
June 25, 2008.................. 0 0 0 0 0 0 0
June 25, 2009.................. 0 0 0 0 0 0 0
June 25, 2010.................. 0 0 0 0 0 0 0
June 25, 2011.................. 0 0 0 0 0 0 0
June 25, 2012.................. 0 0 0 0 0 0 0
June 25, 2013.................. 0 0 0 0 0 0 0
June 25, 2014.................. 0 0 0 0 0 0 0
June 25, 2015.................. 0 0 0 0 0 0 0
June 25, 2016.................. 0 0 0 0 0 0 0
June 25, 2017.................. 0 0 0 0 0 0 0
June 25, 2018.................. 0 0 0 0 0 0 0
June 25, 2019.................. 0 0 0 0 0 0 0
June 25, 2020.................. 0 0 0 0 0 0 0
Weighted Average Life * (1).... 1.8 1.3 1.1 1.0 0.8 0.7 0.6
Weighted Average Life * (2).... 1.8 1.3 1.1 1.0 0.8 0.7 0.6
</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 Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-48
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-2
--------------------------------------------------------------------------------------------
50% 75% 100% 115% 150% 200% 250%
GROUP I % PREPAYMENT ASSUMPTION -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------------
Initial Percentage............. 100% 100% 100% 100% 100% 100% 100%
June 25, 2001.................. 100 100 100 100 100 100 55
June 25, 2002.................. 100 100 92 29 0 0 0
June 25, 2003.................. 100 16 0 0 0 0 0
June 25, 2004.................. 56 0 0 0 0 0 0
June 25, 2005.................. 0 0 0 0 0 0 0
June 25, 2006.................. 0 0 0 0 0 0 0
June 25, 2007.................. 0 0 0 0 0 0 0
June 25, 2008.................. 0 0 0 0 0 0 0
June 25, 2009.................. 0 0 0 0 0 0 0
June 25, 2010.................. 0 0 0 0 0 0 0
June 25, 2011.................. 0 0 0 0 0 0 0
June 25, 2012.................. 0 0 0 0 0 0 0
June 25, 2013.................. 0 0 0 0 0 0 0
June 25, 2014.................. 0 0 0 0 0 0 0
June 25, 2015.................. 0 0 0 0 0 0 0
June 25, 2016.................. 0 0 0 0 0 0 0
June 25, 2017.................. 0 0 0 0 0 0 0
June 25, 2018.................. 0 0 0 0 0 0 0
June 25, 2019.................. 0 0 0 0 0 0 0
June 25, 2020.................. 0 0 0 0 0 0 0
Weighted Average Life * (1).... 4.1 2.9 2.2 2.0 1.6 1.3 1.1
Weighted Average Life * (2).... 4.1 2.9 2.2 2.0 1.6 1.3 1.1
</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 Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-49
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-3
--------------------------------------------------------------------------------------------
50% 75% 100% 115% 150% 200% 250%
GROUP I % OF PREPAYMENT ASSUMPTION -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
----------------
Initial Percentage.......... 100% 100% 100% 100% 100% 100% 100%
June 25, 2001............... 100 100 100 100 100 100 100
June 25, 2002............... 100 100 100 100 68 15 0
June 25, 2003............... 100 100 63 41 0 0 0
June 25, 2004............... 100 63 20 0 0 0 0
June 25, 2005............... 86 30 0 0 0 0 0
June 25, 2006............... 60 5 0 0 0 0 0
June 25, 2007............... 39 0 0 0 0 0 0
June 25, 2008............... 27 0 0 0 0 0 0
June 25, 2009............... 14 0 0 0 0 0 0
June 25, 2010............... 1 0 0 0 0 0 0
June 25, 2011............... 0 0 0 0 0 0 0
June 25, 2012............... 0 0 0 0 0 0 0
June 25, 2013............... 0 0 0 0 0 0 0
June 25, 2014............... 0 0 0 0 0 0 0
June 25, 2015............... 0 0 0 0 0 0 0
June 25, 2016............... 0 0 0 0 0 0 0
June 25, 2017............... 0 0 0 0 0 0 0
June 25, 2018............... 0 0 0 0 0 0 0
June 25, 2019............... 0 0 0 0 0 0 0
June 25, 2020............... 0 0 0 0 0 0 0
Weighted Average Life * (1)... 6.9 4.5 3.4 3.0 2.3 1.8 1.4
Weighted Average Life * (2)... 6.9 4.5 3.4 3.0 2.3 1.8 1.4
</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 Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-50
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-4
--------------------------------------------------------------------------------------------
50% 75% 100% 115% 150% 200% 250%
GROUP I % OF PREPAYMENT ASSUMPTION -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
----------------
Initial Percentage.... 100% 100% 100% 100% 100% 100% 100%
June 25, 2001......... 100 100 100 100 100 100 100
June 25, 2002......... 100 100 100 100 100 100 42
June 25, 2003......... 100 100 100 100 95 3 0
June 25, 2004......... 100 100 100 97 21 0 0
June 25, 2005......... 100 100 77 40 0 0 0
June 25, 2006......... 100 100 36 2 0 0 0
June 25, 2007......... 100 73 6 0 0 0 0
June 25, 2008......... 100 56 0 0 0 0 0
June 25, 2009......... 100 36 0 0 0 0 0
June 25, 2010......... 100 12 0 0 0 0 0
June 25, 2011......... 80 0 0 0 0 0 0
June 25, 2012......... 59 0 0 0 0 0 0
June 25, 2013......... 39 0 0 0 0 0 0
June 25, 2014......... 15 0 0 0 0 0 0
June 25, 2015......... 0 0 0 0 0 0 0
June 25, 2016......... 0 0 0 0 0 0 0
June 25, 2017......... 0 0 0 0 0 0 0
June 25, 2018......... 0 0 0 0 0 0 0
June 25, 2019......... 0 0 0 0 0 0 0
June 25, 2020......... 0 0 0 0 0 0 0
Weighted Average Life * (1)... 12.5 8.3 5.8 4.9 3.7 2.6 2.0
Weighted Average Life * (2)... 12.1 8.1 5.8 4.9 3.7 2.6 2.0
</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 Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-51
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-5
--------------------------------------------------------------------------
50% 75% 100% 115% 150% 200% 250%
GROUP I % OF PREPAYMENT ASSUMPTION -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
--------------------------------------------------
June 25, 2001..................................... 100 100 100 100 100 100 100
June 25, 2002..................................... 100 100 100 100 100 100 100
June 25, 2003..................................... 100 100 100 100 100 100 27
June 25, 2004..................................... 100 100 100 100 100 41 0
June 25, 2005..................................... 100 100 100 100 70 5 0
June 25, 2006..................................... 100 100 100 100 39 0 0
June 25, 2007..................................... 100 100 100 70 22 0 0
June 25, 2008..................................... 100 100 91 59 16 0 0
June 25, 2009..................................... 100 100 69 38 0 0 0
June 25, 2010..................................... 100 100 46 15 0 0 0
June 25, 2011..................................... 100 87 26 0 0 0 0
June 25, 2012..................................... 100 64 2 0 0 0 0
June 25, 2013..................................... 100 43 0 0 0 0 0
June 25, 2014..................................... 100 25 0 0 0 0 0
June 25, 2015..................................... 81 0 0 0 0 0 0
June 25, 2016..................................... 63 0 0 0 0 0 0
June 25, 2017..................................... 46 0 0 0 0 0 0
June 25, 2018..................................... 30 0 0 0 0 0 0
June 25, 2019..................................... 13 0 0 0 0 0 0
June 25, 2020..................................... 0 0 0 0 0 0 0
Weighted Average Life * (1)....................... 16.9 12.8 9.9 8.4 6.1 4.0 2.8
Weighted Average Life * (2)....................... 13.0 9.1 6.9 5.8 4.5 3.3 2.5
</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 Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-52
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-6
--------------------------------------------------------------------------
50% 75% 100% 115% 150% 200% 250%
GROUP I % OF PREPAYMENT ASSUMPTION -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
---------------------------------------------------
June 25, 2001...................................... 100 100 100 100 100 100 100
June 25, 2002...................................... 100 100 100 100 100 100 100
June 25, 2003...................................... 100 100 100 100 100 100 100
June 25, 2004...................................... 94 92 90 88 85 77 42
June 25, 2005...................................... 89 85 81 78 71 56 0
June 25, 2006...................................... 80 73 66 62 48 22 0
June 25, 2007...................................... 71 61 52 43 26 0 0
June 25, 2008...................................... 48 34 19 12 2 0 0
June 25, 2009...................................... 32 19 6 2 0 0 0
June 25, 2010...................................... 21 9 2 0 0 0 0
June 25, 2011...................................... 14 4 0 0 0 0 0
June 25, 2012...................................... 9 1 0 0 0 0 0
June 25, 2013...................................... 6 0 0 0 0 0 0
June 25, 2014...................................... 3 0 0 0 0 0 0
June 25, 2015...................................... 1 0 0 0 0 0 0
June 25, 2016...................................... 0 0 0 0 0 0 0
June 25, 2017...................................... 0 0 0 0 0 0 0
June 25, 2018...................................... 0 0 0 0 0 0 0
June 25, 2019...................................... 0 0 0 0 0 0 0
June 25, 2020...................................... 0 0 0 0 0 0 0
Weighted Average Life * (1)........................ 8.2 7.3 6.7 6.4 5.8 5.1 4.0
Weighted Average Life * (2)........................ 8.2 7.1 6.1 5.4 4.4 3.3 2.5
</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 Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-53
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
<TABLE>
<CAPTION>
CLASS A-7
--------------------------------------------------------------------------
11.0% 16.5% 22.0% 28.0% 33.0% 44.0% 55.0%
GROUP II % OF CPR -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-----------------------------------------------
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
June 25, 2001.................................. 85 80 74 68 64 53 42
June 25, 2002.................................. 73 63 55 46 39 25 14
June 25, 2003.................................. 64 52 42 33 26 15 5
June 25, 2004.................................. 56 42 32 23 18 8 0
June 25, 2005.................................. 49 35 25 17 11 3 0
June 25, 2006.................................. 43 29 19 12 6 0 0
June 25, 2007.................................. 38 24 15 7 2 0 0
June 25, 2008.................................. 33 20 10 4 0 0 0
June 25, 2009.................................. 30 17 6 1 0 0 0
June 25, 2010.................................. 26 13 3 0 0 0 0
June 25, 2011.................................. 23 9 1 0 0 0 0
June 25, 2012.................................. 20 6 0 0 0 0 0
June 25, 2013.................................. 18 3 0 0 0 0 0
June 25, 2014.................................. 14 0 0 0 0 0 0
June 25, 2015.................................. 11 0 0 0 0 0 0
June 25, 2016.................................. 8 0 0 0 0 0 0
June 25, 2017.................................. 5 0 0 0 0 0 0
June 25, 2018.................................. 2 0 0 0 0 0 0
June 25, 2019.................................. 0 0 0 0 0 0 0
June 25, 2020.................................. 0 0 0 0 0 0 0
Weighted Average Life * (1).................... 6.5 4.5 3.4 2.6 2.2 1.6 1.1
Weighted Average Life * (2).................... 6.0 4.1 3.1 2.4 2.0 1.4 1.1
</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 Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off 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-54
<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 June 1, 2000 among the
Depositor, CHEC and CHEC Conduit Funding, LLC as sellers, CHEC as servicer (in
this capacity, the "Servicer") and Bank One, National Association as trustee
(the "Trustee"). On the Closing Date, the Sellers will transfer without recourse
the Home Equity Loans to the Depositor, 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, each Seller's interest in any Mortgaged Property which secures
a Home Equity Loan, all payments on each Home Equity Loan on or after the
opening of business on June 1, 2000 (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 those 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 an irrevocable and unconditional certificate guaranty insurance policy
with respect to the Class A Certificates (the "Policy") 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 holders of the Class A Certificates are insured by the Certificate
Insurer.
Prior to the Closing Date, 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.
S-55
<PAGE>
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 2000-B, Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates, Class A-6 Certificates and Class A-7
Certificates (collectively referred to as the "Class A Certificates"). The Trust
will also issue on the Closing Date the 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 aggregate
outstanding principal balance of the class of Class A Certificates 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 Policy. On any
date, the "Aggregate Class A Principal Balance" is the aggregate of the Class
Principal Balances of all Class A Certificates on that date.
Each class of Class A Certificates represents the right to receive payments
of interest at the Certificate Rate for that 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 Company ("DTC"), in the United States, or
Clearstream Banking, societe anonyme ("Clearstream, Luxembourg") or the
Euroclear System ("Euroclear"), in Europe, if the Certificateowners are
participants of the systems, or indirectly through
S-56
<PAGE>
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 DTC. Euroclear and
Clearstream, Luxembourg will hold omnibus positions on behalf of their
participants through customers' securities accounts in Euroclear's and
Clearstream, Luxembourg'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 DTC. Citibank N.A. will act as depositary
for Clearstream, Luxembourg and Morgan Guaranty Trust Company of New York will
act as depositary for Euroclear. Investors may hold beneficial interests in the
Book-Entry Certificates in minimum denominations representing principal balances
of $1,000 and in integral multiples of $1 in excess of $1,000. Except as
described in the Prospectus, 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 DTC. Certificateowners will not be
Certificateholders as that term is used in the Agreement. Certificateowners are
permitted to exercise their rights only indirectly through DTC and its
participants (including Euroclear and Clearstream, Luxembourg).
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg, was incorporated in 1970 as "Cedel S.A.", a company with
limited liability under Luxembourg law (a societe anonyme). Cedel S.A.
subsequently changed its name to Cedelbank. On January 10, 2000, Cedelbank's
parent company, Cedel International, societe anonyme ("CI") merged its clearing,
settlement and custody business with that of Deutsche Borse Clearing AG ("DBC").
The merger involved the transfer by CI of substantially all of its assets and
liabilities (including its shares in Cedelbank) to a new Luxembourg company, New
Cedel International, societe anonyme ("New CI"), which is 50% owned by CI and
50% owned by DBC's parent company Deutsche Borse AG. The shareholders of these
two entities are banks, securities dealers and financial institutions. CI
currently has 92 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than 5 percent of CI's stock.
Further to the merger, the Board of Directors of New CI decided to rename
the companies in the group in order to give them a cohesive brand name. The new
brand name that was chosen is "Clearstream". With effect from January 14, 2000
New CI has been renamed "Clearstream International, societe anonyme". On
January 18, 2000, Cedelbank was renamed "Clearstream Banking, societe anonyme",
and Cedel Global Services was renamed "Clearstream Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Borse Clearing AG".
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of certificates. Transactions may be settled by Clearstream, Luxembourg
in any of 36 currencies, including United States Dollars. Clearstream,
Luxembourg provides to its customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg also
deals with domestic securities markets in over 30 countries through established
depository and custodial relationships. Clearstream, Luxembourg is registered as
a bank in Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks.
S-57
<PAGE>
Currently, Clearstream, Luxembourg has approximately 2,000 customers located in
over 80 countries, including all major European countries, Canada, and the
United States. Indirect access to Clearstream, Luxembourg is available to other
institutions that clear through or maintain a custodial relationship with an
account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System ("MGT/EOC") in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
DISTRIBUTION DATES
On the 25(th) day of each month, or if the 25(th) 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 DTC.
"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.
"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" above 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 Policy.
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.
S-58
<PAGE>
"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 of Class A Certificates
for the immediately preceding Distribution Date exceeded (y) the amount of the
actual distribution in respect of interest 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.
"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 the 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 each 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
(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 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
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<PAGE>
(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 Distribution Date occurring in July 2031 in the case
of Group I and June 2031 in the case of Group II, 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> <C>
July 2000 through June 2003................................. 0%
July 2003 through June 2005................................. 45%
July 2005 through June 2006................................. 80%
July 2006 through June 2007................................. 100%
July 2007 and thereafter.................................... 300%
</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, as amended
("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
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, the Class A-6 Certificate Rate, the Class A-7 Certificate Rate, the Group
I Net WAC Cap and the Class A-7 Available Funds Cap, see "--Certificate Rate"
below.
"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.
S-60
<PAGE>
"MONTHLY REMITTANCE DATE" means the 18(th) day of each month, or if the
18(th) 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 (i) prior to the third
Distribution Date following the date on which the clean-up call option could
have first been exercised, 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 and (ii) on and after the third Distribution Date
following the date on which the clean-up call option could have first been
exercised, zero.
"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.
"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,
- 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 the premium on the Policy (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
S-61
<PAGE>
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 Loan
Group to the Trustee 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 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 is reduced to
zero; and sixth, to the Class A-6 Certificateholders until the
Class Principal Balance of the Class A-6 Certificates is
reduced to zero;
provided, however, during the continuance of a Certificate Insurer
Default, if the outstanding aggregate principal balance of the Group I
Certificates exceeds the outstanding aggregate principal balance of the
Group I Home Equity Loans, 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
Loan Group to the Trustee 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, allocated between principal and
interest in the amounts and the order set forth in clauses 2 and 3 above.
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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
allocation 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 allocation 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 Group I or Group II Certificates, as applicable, 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 unrelated Home Equity
Loan Group remaining after the distributions above with respect to the
unrelated Home Equity Loan Group, these amounts to be applied in the same
order of priority as the Class A Principal Distribution Amount for the
unrelated Home Equity Loan Group pursuant to clause 3 above.
9. To the Class A-7 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.
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 as to 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 8.03% per annum.
With respect to any Distribution Date and the Class A-2 Certificates, the
"Certificate Rate" will equal 7.90% per annum.
With respect to any Distribution Date and the Class A-3 Certificates, the
"Certificate Rate" will equal 8.03% per annum.
With respect to any Distribution Date and the Class A-4 Certificates, the
"Certificate Rate" will equal 8.24% per annum.
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With respect to any Distribution Date and the Class A-5 Certificates, the
"Certificate Rate" will equal the lesser of (A) 8.48% per annum 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) 7.97% 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) 0.24% per annum (or 0.48% per annum for each
Interest Period occurring after the date on which an affiliate of the Servicer
first fails to exercise its clean-up call option).
The "Class A-7 Available Funds Cap" with respect to any Interest Period and
the related Distribution Date will be the 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 July 2001 and 0.50% for Distribution
Dates which occur in July 2001 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 (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 under
"--Distributions" 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).
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The Policy 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 (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, June 13, 2000). 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 POLICY.
FOR AN EXPLANATION OF THE POLICY, WE REFER YOU TO "THE POLICY AND THE
CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT.
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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 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 delinquency
and loss performance of the Home Equity Loans according to the tests specified
in the Agreement. 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 period that the Home Equity Loans in the
Home Equity Loan Group do not 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
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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
those 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 made
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 POLICY. 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 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 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.
The 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 Policy. 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.
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CROSSCOLLATERALIZATION PROVISIONS. Certain excess cashflow 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 on which the Class
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 thirteen
months after the maturity date of the latest possible maturing Home Equity Loan
in the related loan group.
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 Policy guarantees that the Class Principal Balances of
the Class A Certificates will be paid in full by their respective Final
Scheduled Distribution Dates.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" FOR MORE DETAIL.
OPTIONAL TERMINATION BY AN AFFILIATE OF THE SERVICER; AUCTION SALE; ADDITIONAL
PRINCIPAL DISTRIBUTIONS
An affiliate of the Servicer may, at its option, terminate the Trust by
purchasing all of the Home Equity Loans on any Distribution Date on or after the
date on which the aggregate outstanding principal balance of the Group I and
Group II Home Equity Loans is less than 20% of the aggregate outstanding
principal balance of the Home Equity Loans in both groups on the Cut-Off Date.
If the affiliate of the Servicer does not exercise this clean-up call option
when it first could have been exercised, then on the next Distribution Date
after such date, the Trustee will begin an auction process to sell the Home
Equity Loans and the other trust assets. It is a condition to the sale of the
trust assets that the proceeds of the auction are at least sufficient to pay the
aggregate unpaid principal balance of the Class A Certificates, all accrued and
unpaid interest thereon (other than any Class A-7 Certificateholders' Interest
Index Carryover) and any reimbursement amounts owed to the Certificate Insurer
(the "Minimum Bid"). If the first auction of the trust property is not
successful because the highest bid received is less than the Minimum Bid, then
the Trustee will conduct an auction of the Home Equity Loans every third month
thereafter, unless and until the Minimum Bid is received for the trust property.
Affiliates of the Servicer other than the Sellers and the Depositor may bid in
the auction.
If the clean-up call option is not exercised on the date upon which it first
could have been exercised, then on the third Distribution Date following such
date, and on each Distribution Date thereafter, the amounts that otherwise would
have been payable to the Non-Offered Certificates will be paid to the Class A
Certificates as an additional principal distribution amount. The additional
principal distribution amount for the related Class A Certificates will be
applied in the same order of priority as distributions of the Class A Principal
Distribution Amount for the related Home Equity Loan Group.
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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.
INITIAL TERM OF SERVICER AND EXTENSIONS OF TERM
Following the receipt of notice by the Servicer that it has failed to
satisfy certain loss or delinquency tests relating to the Home Equity Loans,
established by the Certificate Insurer, the Servicer will continue to act as
Servicer for an initial term from the date of receipt of such notice to the end
of the calendar quarter during which such notice is received, which term will be
extendible by the Certificate Insurer for successive terms of three months
thereafter, until the termination of the Trust. Each notice of extension (a
"Servicer Extension Notice") will be delivered by the Certificate Insurer to the
Trustee and the Servicer. The Servicer will, upon its receipt of any such
Servicer Extension Notice, become bound for the duration of the term covered by
such Servicer Extension Notice to continue as Servicer in accordance with the
Agreement. If as of the 15th day prior to the last day of any term of the
Servicer, the Trustee shall not have received any Servicer Extension Notice from
the Certificate Insurer, the Trustee will, within five days thereafter, give
written notice of such non-receipt to the Certificate Insurer and the Servicer.
In addition, the Certificate Insurer will have certain rights to terminate the
Servicer for Servicer Termination Events as described in the Prospectus and in
the Agreement.
THE TRUSTEE
Bank One, National Association has been named Trustee pursuant to the
Agreement.
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 (1) 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, (2) 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 (3) the Trustee for
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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 by the Trustee in compliance with such request or
direction.
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 internet website at
www.abs.bankone.com or by calling the Trustee's customer service desk at
1-800-524-9472. Parties 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 POLICY AND THE CERTIFICATE INSURER
THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Trustee.
Simultaneously with the issuance of the Class A Certificates, the
Certificate Insurer will deliver the Policy to the Trustee for the benefit of
each Class A Certificateholder. Under the Policy, the Certificate Insurer
unconditionally and irrevocably guarantees to the Trustee for the benefit of
each Class A Certificateholder the full and complete payment of (i) Scheduled
Payments (as defined below) on the Class A Certificates and (ii) the amount of
any Scheduled Payment which subsequently is avoided in whole or in part as a
preference payment under applicable law.
"Scheduled Payments" means the sum of (i) Current Interest on each class of
Class A Certificates, plus (ii) the Collateralization Deficit with respect to
each Home Equity Loan Group, plus (iii) without duplication of clause (ii) the
outstanding Class Principal Balance of each class of Class A Certificates on
their respective Final Scheduled Distribution Dates after giving effect to
distributions thereon on such Distribution Date, determined in accordance with
the original terms of the Class A Certificates when issued and without regard to
any subsequent amendment or modification of the Class A Certificates; payments
which become due on an accelerated basis do not constitute "Scheduled Payments,"
unless the Certificate Insurer elects, in its sole discretion, to pay such
principal due upon acceleration, together with any accrued interest to the date
of acceleration.
Payment of claims on the Policy made in respect of Scheduled Payments will
be made by the Certificate Insurer following Receipt by the Certificate Insurer
of the appropriate notice for payment on the later to occur of (i) 12:00 noon,
New York City time, on the third Business Day following Receipt of such notice
for payment, and (ii) 12:00 noon, New York City time, on the date on which such
payment was due on the Class A Certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Certificate Insurer shall cause such payment to be made on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following Receipt
by the Certificate Insurer from the Trustee of (A) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the Certificateholder is required
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to return principal or interest paid on the Class A Certificates during the term
of the Policy because such payments were avoidable as preference payments under
applicable bankruptcy law, (B) a certificate of the Certificateholder that the
Order has been entered and is not subject to any stay, and (C) an assignment
duly executed and delivered by the Certificateholder, in such form as is
reasonably required by the Certificate Insurer and provided to the
Certificateholder 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 Trust or otherwise with
respect to such preference payment, or (ii) the date of Receipt by the
Certificate Insurer from the Trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four Business Days prior to such date of Receipt,
the Certificate Insurer shall have Received written notice from the Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Trustee or any Certificateholder directly (unless a Certificateholder has
previously paid such amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order, in which case such payment shall be
disbursed to the Trustee for distribution to such Certificateholder upon proof
of such payment reasonably satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Policy, shall mean
actual delivery to the Certificate Insurer and to the fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on a
day that is not a Business Day or after 12:00 noon, New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Policy by the Trustee is not in proper form or is
not properly completed, executed or delivered, it shall be deemed not to have
been Received, and the Certificate Insurer or the fiscal agent shall promptly so
advise the Trustee and the Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in New York, New York,
Dallas, Texas, or in the city in which the corporate trust office of the Trustee
is located are authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Scheduled Payments shall be discharged to the extent funds are transferred to
the Trustee as provided in the Policy whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest under the
Class A Certificates to the extent of any payment by the Certificate Insurer
under the Policy. To the fullest extent permitted by applicable law, the
Certificate Insurer agrees under the Policy not to assert, and waives, for the
benefit of each Certificateholder, all its rights (whether by counterclaim,
setoff or otherwise) and defenses (including, without limitation, the defense of
fraud), whether acquired by subrogation, assignment or otherwise, to the extent
that such rights and defenses may be available to the Certificate Insurer to
avoid payment of its obligations under the Policy in accordance with the express
provisions of the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of the Certificate Insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the Certificate Insurer for
borrowed money. Claims against the Certificate Insurer under the Policy and
claims against the Certificate Insurer under each other financial guaranty
insurance policy issued thereby constitute pari passu claims against the general
assets of the Certificate Insurer. The terms of the Policy cannot be modified or
altered by any other agreement or instrument. The Policy may not be canceled or
revoked prior to payment in full of the Class A Certificates. The Policy is not
covered by the property/casualty insurance security fund specified in
Article 76 of the New York Insurance Law. The Policy is governed by the laws of
the State of New York.
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INSURANCE AGREEMENT. The Depositor, the Seller and the Certificate Insurer
will enter into the Insurance Agreement pursuant to which the Seller will agree
to reimburse, with interest, the Certificate Insurer for amounts paid pursuant
to claims under the Policy. The Seller will further agree to pay the Certificate
Insurer all reasonable charges and expenses which the Certificate Insurer may
pay or incur relative to any amounts paid under the Policy or otherwise in
connection with the transaction and to indemnify the Certificate Insurer against
certain liabilities. Amounts owing by the Seller under the Insurance Agreement
will be secured by, and payable solely from, the Trust. An "event of default"
under the Insurance Agreement will constitute a Servicer Termination Event under
the Agreement. An "event of default" under the Insurance Agreement includes
(i) the Trust's failure to pay when due any amount payable on the Class A
Certificates, (ii) the Seller's failure to pay when due any amount owed under
the Insurance Agreement or the Agreement or certain other documents, (iii) the
occurrence of any Servicer Termination Event under the Agreement or certain
other documents, (iv) the inaccuracy or incompleteness in any material respect
of any representation or warranty of the Seller in the Insurance Agreement, the
Agreement or certain other documents, (v) the Seller's failure to perform or to
comply with any material covenant or agreement in the Insurance Agreement, the
Agreement or certain other documents (in certain cases only if such failure
remains unremedied 30 days after notice thereof), (vi) a finding or a ruling by
a governmental authority or agency that the Insurance Agreement, the Agreement
or certain other material documents are not binding on the Seller, (vii) a
denial by the Seller of any liability or obligation under the Insurance
Agreement, the Agreement or certain other material documents and (viii) the
Seller's failure to pay its debts in general or the occurrence of certain events
of insolvency or bankruptcy with respect to the Seller.
THE CERTIFICATE INSURER
The following information has been supplied by Financial Security
Assurance Inc. (the "Certificate Insurer") for inclusion in this Prospectus
Supplement. No representation is made by the Depositor or the Underwriters as to
the accuracy and completeness of such information.
GENERAL
The Certificate Insurer is a monoline insurance company incorporated in 1984
under the laws of the State of New York. The Certificate Insurer is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia, Puerto Rico and the U.S. Virgin Islands.
The Certificate Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. Financial guaranty insurance provides a
guaranty of scheduled payments on an issuer's securities, thereby enhancing the
credit rating of those securities, in consideration for the payment of a premium
to the insurer. The Certificate Insurer and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed securities
are typically supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities include general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly-issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), which is a New York Stock Exchange listed
company. Major shareholders of Holdings include White Mountain Insurance
Group, Ltd., The Tokio Marine and Fire Insurance Co., Ltd. and XL Capital Ltd.
On March 14, 2000, Holdings announced that it had entered into a merger
agreement pursuant to which Holdings would become a wholly owned subsidiary of
Dexia, S.A., a publicly held Belgian corporation, subject to receipt of
regulatory approvals and satisfaction of other closing
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conditions. Dexia, S.A., through its bank subsidiaries, is primarily engaged in
the business of public finance in France, Belgium and other European countries.
No shareholder of Holdings is obligated to pay any debt of the Certificate
Insurer or any claim under any insurance policy issued by the Certificate
Insurer or to make any additional contribution to the capital of the Certificate
Insurer.
The principal executive offices of the Certificate Insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
REINSURANCE
Under an intercompany agreement, liabilities on financial guaranty insurance
written or reinsured from third parties by the Certificate Insurer or its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Certificate Insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. This reinsurance is used by the Certificate
Insurer as a risk management device and to comply with statutory and rating
agency requirements; it does not alter or limit the Certificate Insurer's
obligations under any financial guaranty insurance policy.
RATINGS
The Certificate Insurer's insurance financial strength is rated "Aaa" by
Moody's. The Certificate Insurer's insurer financial strength is rated "AAA" by
S&P and Standard & Poor's (Australia) Pty. Ltd. The Certificate Insurer's
claims-paying ability is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and
Investment Information, Inc. These ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by those rating
agencies. See "RATINGS" herein.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate Insurer
and its subsidiaries as of March 31, 2000 on the basis of accounting principles
generally accepted in the United States:
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------
(IN THOUSANDS)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance
premiums)................................................. $ 547,872
Surplus Notes............................................... 120,000
Minority Interest........................................... 33,914
Shareholder's Equity:
Common Stock.............................................. 15,000
Additional Paid-In Capital................................ 841,036
Accumulated Other Comprehensive Loss (net of deferred
income taxes)........................................... (3,409)
Accumulated Earnings...................................... 508,095
Total Shareholder's Equity.................................. 1,360,722
Total Deferred Premium Revenue, Surplus Notes, Minority
Interest and Shareholder's Equity......................... $2,062,508
==========
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of Financial Security Assurance Inc. and
Subsidiaries, and the notes thereto, incorporated
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by reference herein. The Certificate Insurer's financial statements are included
as exhibits to the Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q that are filed with the Securities and Exchange Commission (the
"Commission") by Holdings and may be viewed at the EDGAR website maintained by
the Commission and at the Holdings website at http://www.FSA.com. Copies of the
statutory quarterly and annual financial statements filed with the State of New
York Insurance Department by the Certificate Insurer are available upon request
to the State of New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the Prospectus, the financial statements of the
Certificate Insurer included in or as exhibits to the following documents filed
by Holdings with the Commission, are hereby incorporated by reference: (a) the
Annual Report on Form 10-K for the year ended December 31, 1999 and (b) the
Quarterly Report on Form 10-Q for the period ended March 31, 2000.
All financial statements of the Certificate Insurer included in or as
exhibits to documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the filing of
this Prospectus Supplement and before the termination of the offering of the
Class A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement.
INSURANCE REGULATION
The Certificate Insurer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the Certificate Insurer and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York, the
Certificate Insurer is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of a financial guaranty insurer
to writing financial guaranty insurance and related business lines, requires
each financial guaranty insurer to maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
financial guaranty insurer, and limits the size of individual transactions and
the volume of transactions that may be underwritten by each financial guaranty
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the Certificate Insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
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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 represent ownership of "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 Class A Certificates may be subject to the original issue
discount provisions. WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE
PROSPECTUS FOR MORE DETAIL.
In addition, classes of Class A 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 115% Prepayment Assumption with respect to
the Group I Home Equity Loans and 28% CPR with respect to the Group II Home
Equity Loans. See "Prepayment and Yield Considerations" in
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this Prospectus Supplement for a description of the prepayment assumption
models. However, no representation is made as to the rate at which prepayments
actually will occur.
The Class A Certificates, other than the Class A-7 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 Excess" 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 Class A-7 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 product of (1) 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 and (2) a fraction,
the numerator of which is 30, and the denominator of which is the actual number
of days in the related Interest Period. 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
$10,000. 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) of 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.
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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;
(4) whether the investment is prudent, considering the nature of the
investment; and
(5) 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. 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 regulations (the "Regulation"), a Plan's assets may include
an interest in the underlying assets of an entity (including a trust), if the
Plan acquires an "equity interest" in the entity,
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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.
The U.S. Department of Labor has granted to Lehman Brothers Inc. an
administrative exemption (Prohibited Transaction Exemption ("PTE") 91-14, as
amended, Exemption Application No. D-7958, 56 Fed. Reg. 7413 (February 22,
1991)) (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 Lehman Brothers Inc. 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 such 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.
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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
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-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-6 Certificates will be rated in the
highest rating category of the Rating Agencies, these 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-1, Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 Certificates. The Class A-7 Certificates will constitute "mortgage
related securities". You should consult your own counsel as to whether and to
what extent the Class A Certificates constitute legal investments for you.
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 June 7, 2000 (the "Underwriting Agreement"), between the Depositor and
Lehman Brothers Inc., as representative of 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 A-1 OF CLASS A-2 OF CLASS A-3 OF CLASS A-4 OF CLASS A-5 OF CLASS A-6 OF CLASS A-7
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
--------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lehman Brothers
Inc................ $53,200,000 $ 9,800,000 $33,600,000 $18,900,000 $19,320,000 $14,980,000 $95,200,000
Banc of America
Securities LLC..... $11,400,000 $ 2,100,000 $ 7,200,000 $ 4,050,000 $ 4,140,000 $ 3,210,000 $20,400,000
Salomon Smith Barney
Inc................ $11,400,000 $ 2,100,000 $ 7,200,000 $ 4,050,000 $ 4,140,000 $ 3,210,000 $20,400,000
</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").
No Class A Certificate will have an established trading market when issued.
The Underwriters may, from time to time, act as brokers 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 Securities Act.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1999 and December 31, 1998 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 December 31, 1999,
incorporated by reference in this Prospectus Supplement have been incorporated
in this Prospectus Supplement in reliance on the report of
PricewaterhouseCoopers LLP, 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 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 Brown &
Wood LLP, Washington, D.C.
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-81
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
----- --------
<S> <C>
2/28 Adjustable Rate Loans.................................. S-32
Aggregate Class A Principal Balance......................... S-56
Agreement................................................... S-55
Appraised Values............................................ S-22
Authorized Rating Agencies.................................. S-78
Available Funds............................................. S-58
Available Funds Shortfall................................... S-59
Balloon Loans............................................... S-45
Book-Entry Certificates..................................... S-56
Business Day................................................ S-58
Cap Agreement............................................... S-77
Carry-Forward Amount........................................ S-59
Cede........................................................ S-57
Certificate Account......................................... S-58
Certificate Insurer......................................... S-72
Certificate Insurer Default................................. S-59
Certificate Rate............................................ S-61
Certificate Register........................................ S-58
Certificate Registrar....................................... S-58
Certificateholder........................................... S-56
Certificateowners........................................... S-56
Certificates................................................ S-56
CHEC........................................................ S-21
CI.......................................................... S-57
Civil Relief Act Interest Shortfalls........................ S-60
Class A Certificates........................................ S-56
Class A Distribution Amount................................. S-59
Class A Principal Distribution Amount....................... S-59
Class A-1 Certificates...................................... S-56
Class A-2 Certificates...................................... S-56
Class A-3 Certificates...................................... S-56
Class A-4 Certificates...................................... S-56
Class A-5 Certificates...................................... S-56
Class A-6 Calculation Percentage............................ S-60
Class A-6 Certificates...................................... S-56
Class A-6 Lockout Distribution Amount....................... S-60
Class A-6 Lockout Percentage................................ S-60
Class A-7 Available Funds Cap............................... S-64
Class A-7 Certificateholders' Interest Index Carryover...... S-64
Class A-7 Certificates...................................... S-56
Class A-7 Formula Rate...................................... S-64
Class A-7 Regular Interests................................. S-76
Class Principal Balance..................................... S-56
Class R Certificates........................................ S-56
Class X-IO Certificates..................................... S-56
Clearstream, Luxembourg..................................... S-56
Closing Date................................................ S-21
Code........................................................ S-75
Collateralization Deficit................................... S-67
</TABLE>
S-82
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
----- --------
<S> <C>
CPR......................................................... S-45
Current Interest............................................ S-60
Current WAC Excess.......................................... S-76
Cut-Off Date................................................ S-55
DBC......................................................... S-57
Definitive Certificate...................................... S-57
Depositor................................................... S-21
Distribution Date........................................... S-58
DTC......................................................... S-56
Due Period.................................................. S-60
ERISA....................................................... S-77
Euroclear................................................... S-56
Excluded Plan............................................... S-78
Exemption................................................... S-78
Expense Fee................................................. S-61
Extra Principal Distribution Amount......................... S-60
Final Scheduled Distribution Date........................... S-68
Fixed Rate Certificates..................................... S-56
Group I..................................................... S-21
Group I Certificates........................................ S-56
Group I Home Equity Loans................................... S-21
Group I Net WAC Cap......................................... S-64
Group II.................................................... S-21
Group II Certificates....................................... S-56
Group II Home Equity Loans.................................. S-21
Group II Net WAC Cap........................................ S-76
Holdings.................................................... S-72
Home Equity Loan Group...................................... S-21
Home Equity Loans........................................... S-21
Interest Period............................................. S-65
LIBOR Determination Date.................................... S-65
Liquidated Loan............................................. S-67
London Business Day......................................... S-65
MGT/EOC..................................................... S-58
Maximum Rates............................................... S-32
Minimum Bid................................................. S-68
Minimum Rates............................................... S-32
Minimum Spread.............................................. S-64
Monthly Remittance Date..................................... S-61
Moody's..................................................... S-65
Mortgaged Properties........................................ S-21
Net Coupon Rate............................................. S-64
Net Monthly Excess Cashflow................................. S-61
New CI...................................................... S-57
Non-Offered Certificates.................................... S-56
One-Month LIBOR............................................. S-65
Order....................................................... S-70
Original Combined Loan-to-Value Ratio....................... S-22
Original Loan-to-Value Ratio................................ S-22
Overcollateralization Amount................................ S-61
Overcollateralization Release Amount........................ S-61
Percentage Interest......................................... S-58
</TABLE>
S-83
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
----- --------
<S> <C>
Plan........................................................ S-77
Policy...................................................... S-55
Premium Amount.............................................. S-61
Prepayment Assumption....................................... S-45
PTE......................................................... S-77
Rating Agencies............................................. S-65
Realized Loss............................................... S-67
Record Date................................................. S-58
Recoveries.................................................. S-42
Reference Banks............................................. S-65
Regular Certificates........................................ S-75
Regulation.................................................. S-77
REMIC Regular Certificates.................................. S-75
REMIC Residual Certificates................................. S-75
REMICs...................................................... S-75
Residual Certificates....................................... S-75
Restricted Group............................................ S-78
S&P......................................................... S-65
Scheduled Payments.......................................... S-70
Securities Act.............................................. S-80
Sellers..................................................... S-21
Servicer.................................................... S-21
Servicer Extension Notice................................... S-69
Servicing Fee............................................... S-69
Six-Month Adjustable Rate Loans............................. S-32
Statistical Calculation Date................................ S-21
Statistical Calculation Date Loan Balance................... S-21
Structuring Assumptions..................................... S-46
Supplemental Interest Reserve Fund.......................... S-76
Supplemental Interest Reserve Fund Deposit.................. S-76
Target Deficiency........................................... S-61
Target Overcollateralization Amount......................... S-61
Telerate Page 3750.......................................... S-65
Transition Expenses......................................... S-61
Trust....................................................... S-21
Trust Estate................................................ S-55
Trustee..................................................... S-55
Trustee Fee................................................. S-69
Underwriters................................................ S-80
Underwriting Agreement...................................... S-80
Variable Rate Certificates.................................. S-56
Weighted average life....................................... S-45
</TABLE>
S-84
<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 2000-B (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of DTC, Euroclear or Clearstream, Luxembourg.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Euroclear and Clearstream, Luxembourg will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior Home Equity Loan Asset-Backed Certificates
issues.
Secondary cross-market trading between Euroclear or Clearstream, Luxembourg
and DTC participants holding Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of Euroclear
and Clearstream, Luxembourg and as DTC 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 DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Euroclear and Clearstream,
Luxembourg will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold the positions in accounts as
DTC participants.
Investors electing to hold their Global Securities through DTC 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 Euroclear or
Clearstream, Luxembourg 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 DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
TRADING BETWEEN EUROCLEAR AND/OR CLEARSTREAM, LUXEMBOURG
PARTICIPANTS. Secondary market trading between Euroclear participants or
Clearstream, Luxembourg participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds.
I-1
<PAGE>
TRADING BETWEEN DTC SELLER AND EUROCLEAR OR CLEARSTREAM, LUXEMBOURG
PURCHASER. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Euroclear participant or a Clearstream,
Luxembourg participant, the purchaser will send instructions to Euroclear or
Clearstream, Luxembourg through a Euroclear participant or Clearstream,
Luxembourg participant at least one business day prior to settlement. Euroclear
or Clearstream, Luxembourg 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
DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Euroclear participant's or Clearstream, Luxembourg
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 Euroclear or Clearstream,
Luxembourg cash debt will be valued instead as of the actual settlement date.
Euroclear participants and Clearstream, Luxembourg 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 Euroclear or Clearstream,
Luxembourg. Under this approach, they may take on credit exposure to Euroclear
or Clearstream, Luxembourg until the Global Securities are credited to their
accounts one day later.
As an alternative, if Euroclear or Clearstream, Luxembourg has extended a
line of credit to them, Euroclear participants or Clearstream, Luxembourg
participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Euroclear participants
or Clearstream, Luxembourg 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 Euroclear participant's or Clearstream,
Luxembourg participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective European depositary for the benefit of Euroclear participants or
Clearstream, Luxembourg participants. The sale proceeds will be available to the
DTC Seller on the settlement date. Thus, to the DTC participants a cross-market
transaction will settle no differently than a trade between two DTC
participants.
TRADING BETWEEN EUROCLEAR OR CLEARSTREAM, LUXEMBOURG SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Euroclear participants
and Clearstream, Luxembourg 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 DTC
participant. The seller will send instructions to Euroclear or Clearstream,
Luxembourg through a Euroclear participant or Clearstream, Luxembourg
participant at least one business day prior to settlement. In these cases
Euroclear or Clearstream, Luxembourg will instruct the respective depositary, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest
I-2
<PAGE>
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 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 Euroclear participant
or Clearstream, Luxembourg participant the following day, and receipt of the
cash proceeds in the Euroclear participant's or Clearstream, Luxembourg
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 Euroclear
participant or Clearstream, Luxembourg 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 Euroclear participant's or Clearstream, Luxembourg participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Euroclear or Clearstream, Luxembourg and that
purchase Global Securities from DTC participants for delivery to Euroclear
participants or Clearstream, Luxembourg 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 Euroclear or Clearstream, Luxembourg for one day
(until the purchase side of the day trade is reflected in their Euroclear or
Clearstream, Luxembourg accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Euroclear or
Clearstream, Luxembourg 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 DTC participant is at least
one day prior to the value date for the sale to the Euroclear participant or
Clearstream, Luxembourg participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% (or in some cases 31%) U.S.
withholding tax that generally applies to payments of interest on registered
debt issued by U.S. persons, unless (1) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between the beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (2) the beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8 BEN). 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 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN must be filed within 30 days of the
change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME
(FORM W-8ECI). 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 W-8ECI.
I-3
<PAGE>
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM W-8 BEN). Non-U.S. persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8 BEN.
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.
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Securities holder
files by submitting the appropriate form to the person through whom he holds
(e.g., the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective for
three calendar years.
U.S. PERSON. As used in this prospectus supplement the term "U.S. person"
means a beneficial owner of a Class A Certificate that is for United States
federal income tax purposes
- a citizen or resident of the United States,
- a corporation or partnership created or organized in or under the laws of
the United States or of any State thereof or the District of Columbia,
- an estate the income of which is subject to United States federal income
taxation regardless of its source, or
- a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
As used in this prospectus supplement, the term "non-U.S. person" means a
beneficial owner of a Class A Certificate that is not a U.S. person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-4
<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.
June 7, 2000
<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 FROM 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 "Available Information," "Reports to Holders" and "Incorporation
of Certain Documents 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, 2828 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement..................... 2
Reports to Holders........................ 2
Available Information..................... 3
Incorporation of Certain Documents by
Reference............................... 3
Introduction.............................. 4
The Depositor............................. 4
The Seller and the Servicer............... 4
General................................. 4
Underwriting Guidelines Applicable to
the Home Equity Loans................. 5
Underwriting Criteria of the Seller..... 8
Servicing............................... 10
Description of the Securities............. 12
General................................. 12
Book-Entry Securities................... 14
Valuation of the Home Equity Loans...... 17
Payments of Interest.................... 18
Payments of Principal................... 18
Final Scheduled Distribution Date....... 19
Special Redemption...................... 19
Weighted Average Life of the
Securities............................ 19
The Trust Funds........................... 20
General................................. 20
The Home Equity Loans................... 21
Additional Information.................. 22
Accounts.................................. 23
Certificate and Distribution Accounts... 23
Prefunding and Capitalized Interest
Accounts.............................. 24
Eligible Investments.................... 25
Revolving Period and Amortization
Period; Retained Interest............. 25
Enhancement............................... 26
The Agreements............................ 27
General................................. 27
Repurchase and Substitution of Non-
Conforming Home Equity Loans.......... 28
Assignment of Home Equity Loans......... 30
Servicing and Sub-Servicing............. 32
Deposits to Principal and Interest
Account and Certificate Account....... 32
Advances; Compensating Interest......... 33
Optional Repurchase of Defaulted Home
Equity Loans.......................... 34
Realization Upon Defaulted Home Equity
Loans................................. 35
Hazard Insurance........................ 35
General Servicing Standard.............. 35
Sub-Servicing Arrangements.............. 35
Certain Matters Regarding the
Servicer.............................. 36
Removal and Resignation of Servicer..... 36
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trustee............................. 37
Reporting Requirements.................. 37
Removal of Trustee for Cause............ 39
Governing Law........................... 40
Amendments.............................. 40
Termination of the Trust................ 40
Optional Termination.................... 41
REMIC Administrator..................... 43
Certain Legal Aspects of the Home Equity
Loans................................... 43
Home Equity Loans....................... 43
Foreclosure............................. 44
Rights of Redemption.................... 46
Junior Home Equity Loans; Rights of
Senior Home Equity Loans.............. 46
Anti-Deficiency Legislation and Other
Limitations on Lenders................ 47
Due-on-Sale Clauses in Home Equity
Loans................................. 48
Enforceability of Prepayment and Late
Payment Fees.......................... 49
Equitable Limitations on Remedies....... 49
Applicability of Usury Laws............. 50
Environmental Legislation............... 50
Soldiers' and Sailors' Civil Relief Act
of 1940............................... 50
Use of Proceeds........................... 51
Federal Income Tax Consequences........... 52
General................................. 52
Opinions................................ 52
Taxation of Debt Securities (Including
Regular Interest Securities).......... 53
Status of Regular Interest Securities... 60
REMIC Expenses; Single Class REMICs..... 60
Taxation of the REMIC................... 61
Taxation of Holders of Residual Interest
Securities............................ 62
Administrative Matters.................. 66
Tax Status as a Grantor Trust........... 66
Miscellaneous Tax Aspects............... 69
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... 71
Tax Consequences to Holders of the
Certificates Issued by a
Partnership........................... 71
State Tax Consequences.................... 76
ERISA Considerations...................... 76
Legal Investment.......................... 81
Plan of Distribution...................... 81
Legal Matters............................. 81
</TABLE>
<PAGE>
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 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--REPORTING REQUIREMENTS" FOR MORE DETAIL.
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AVAILABLE INFORMATION
The depositor has filed with the Securities and Exchange Commission (the
"SEC") 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 SEC. 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 SEC at its Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices 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 SEC maintains an internet web site that contains reports, proxy
and information statements and other information regarding the registrants that
file electronically with the SEC, including the depositor. The address of the
internet web site is (http://www.sec.gov).
Each trust fund will be required to file certain reports with the SEC
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 SEC 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 in this
prospectus).
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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.
THE DEPOSITOR
Unless otherwise specified in the prospectus supplement, CHEC Funding, LLC
will act as depositor. CHEC Funding, LLC is a limited liability company which
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, through
five 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
$1.3 billion and is primarily engaged in the
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<PAGE>
home building, financial services, contracting and construction services
industries. The seller is also affiliated with CTX Mortgage Company, a Nevada
corporation, which originates home mortgage 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 48 states plus the
District of Columbia and employs approximately 1,144 people located in 142
offices in 38 states. The seller originates home equity loans through its retail
branch network of 65 branch offices located in 30 states. In addition, the
seller originates home equity loans through a broker referral network from five
division offices with a total of 23 regions. A third production source for the
seller is referral of home equity loans from its affiliate conforming mortgage
company, CTX Mortgage Company. A fourth source of origination of home equity
loans for the seller is purchases of loans from approved wholesale sources that
fit the seller's criteria and pass its investigative process. 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. 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 2828 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 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 29 underwriters. The seller also employs
20 other underwriters in five 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 one preferred credit bureau
report or two credit 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.
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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 49 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,
both of which bear 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 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.
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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 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, 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 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
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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.
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 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
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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 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 $350,000 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
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
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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
the 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:
- 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, other than those purchased
by it from approved wholesale sources. 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 May 31, 2000,
the servicer was servicing a portfolio of approximately $2.3 billion.
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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 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.
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. The servicer uses the market value
analysis to develop its strategy for bidding, repairs, and sale of the property.
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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 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;
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- 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 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 "Accounts--Certificate and Distribution
Accounts."
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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 The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking societe anonyme ("Clearstream, Luxembourg") or the Euroclear
System ("Euroclear") 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 DTC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream,
Luxembourg'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 DTC. Citibank N.A. will act as depository
for Clearstream, Luxembourg 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 DTC. Beneficial owners are only permitted to exercise their rights
indirectly through DTC or, in Europe, Clearstream, Luxembourg 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 DTC (or of a participating firm that
acts as agent for the financial intermediary, whose interest will in turn he
recorded on the records of DTC, if the beneficial owner's financial intermediary
is not a DTC participant and on the records of Clearstream, Luxembourg or
Euroclear, as appropriate).
Beneficial owners will receive all distributions of principal of, and
interest on, the book-entry securities from the trustee through DTC and DTC
participants. While the book-entry securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make
book-entry transfers among participants on whose behalf it acts with respect to
the securities and is required to receive and transmit distributions of
principal 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 DTC 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 securities, by book-entry
transfer, through DTC for the account of the purchasers of these securities,
which must be maintained with their participants. Under the DTC rules and in
accordance with DTC's normal procedures, transfers of ownership of securities
will be executed through DTC and the accounts of the respective participants at
DTC will be debited and credited. Similarly, the 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.
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Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in securities settled during subsequent securities settlement
processing will be reported to the relevant Euroclear or Clearstream, Luxembourg
participants on that business day. Cash received in Clearstream, Luxembourg or
Euroclear as a result of sales of securities by or through a Clearstream,
Luxembourg participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg 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 DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant 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 DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Clearstream, Luxembourg participants and Euroclear
participants may not deliver instructions directly to the European depositories.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC 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 DTC and DTC participants as in effect from
time to time.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg participants through
electronic book-entry changes in accounts of Clearstream, Luxembourg
participants, thus eliminating the need for physical movement of certificates.
Transactions may be settled in Clearstream, Luxembourg in any of 28 currencies,
including United States dollars. Clearstream, Luxembourg provides to its
participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg interfaces with domestic markets
in several countries. As a professional depository, Clearstream, Luxembourg is
subject to regulation by the Luxembourg Monetary Institute. Clearstream,
Luxembourg 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
Clearstream, Luxembourg is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream, Luxembourg 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 eliminating
the need for physical movement of certificates and any risk from lack of
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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 DTC 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 DTC. DTC will be responsible for crediting the amount of
these payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC 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 Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg 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 DTC can
only act on behalf of financial intermediaries, the ability of a beneficial
owner to pledge book-entry securities to persons or entities that do not
participate in the 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 DTC, and may be made available by Cede & Co. to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting DTC, and to the financial intermediaries to
whose DTC accounts the book-entry securities of the beneficial owners are
credited.
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DTC has advised the trustee that, unless and until definitive securities are
issued, DTC 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 DTC accounts the book-entry securities
are credited, to the extent that these actions are taken on behalf of financial
intermediaries whose holdings include the book-entry securities. Clearstream,
Luxembourg 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 Clearstream, Luxembourg 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 DTC. DTC 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 DTC, only if:
- DTC or the seller advises the trustee in writing that DTC 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 DTC; 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 DTC through the financial intermediaries and the DTC
participants in writing that the continuation of a book-entry system
through DTC (or its successor) is no longer in the best interests of
beneficial owners.
WE REFER YOU TO "THE AGREEMENTS--OPTIONAL TERMINATION--; EVENT OF DEFAULT;
TERMINATION UNDER INDENTURE" 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
DTC of definitive securities. Upon surrender by DTC 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 DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg 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 DTC, 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
certificates or 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
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will be equal to the product of the asset value percentage as set forth in the
related agreement 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
certificates or notes of the series over periods equal to the interval
between payments on the certificates or notes; and
- the then principal balance of the home equity loans.
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
certificates or 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
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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 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
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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 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
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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.
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
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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
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;
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- 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.
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 value 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,
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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 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 applicable 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
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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;
- repurchase agreements on obligations specified in the subparagraph 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
- 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 instrument described above may evidence either the right to
receive (1) only interest with respect to the obligations underlying the
instrument or (2) both principal and interest payments derived from obligations
underlying the instrument 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
instrument 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
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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 of 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 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;
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- 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 of 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 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
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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 of the
seller or the servicer 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 from any of the other
parties of notice of breach of a representation or warranty made by it with
respect to a home equity loan 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 and Servicing Advance (each defined below) (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, if a REMIC election is made with
respect to the trust fund, no repurchase or substitution of any home equity loan
not in default or as to which no default is reasonably foreseeable may be made
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
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
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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 or 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 (defined below) 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 date of 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 received during the related Remittance Period with respect to
the home equity loans;
- all Compensating Interest (defined below) 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 paid by the seller or the servicer on
or prior to the Monthly Remittance Date;
- the interest portion of all Net Liquidation Proceeds (defined below)
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 on or prior to the Monthly Remittance Date;
- 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 (defined below) 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
- 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."
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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;
(ii) cause, within 60 days following the date the home equity loans
are 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
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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 (but in any event, with respect to a mortgage as to
which original recording information has been made available to the
seller, within 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 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 trustee 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, if a REMIC election is made with respect to the trust fund, 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 indicating the current
status of the exceptions previously indicated on the pool certification with
respect to the applicable agreement. After delivery of this 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.
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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 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 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
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equity loans (net of the servicing fee) 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 (including unreimbursed
Servicing Advances) 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, but net of the
following:
- 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,
and (c) the amount of any reduction of the loan balance of the related
home equity loan by a court in an insolvency proceeding;
- 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 unreimbursed Delinquency Advances and unreimbursed
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:
- on each Monthly Remittance Date, to pay itself the servicing fee to the
extent not otherwise retained;
- to withdraw net investment earnings on amounts on deposit in the Principal
and Interest Account;
- to withdraw amounts that have been deposited to the Principal and Interest
Account in error;
- to reimburse itself for unrecovered Delinquency Advances and unrecovered
Servicing Advances (in each case, solely from amounts recovered on the
related home equity loan);
- to reimburse itself for nonrecoverable Delinquency Advances to the extent
provided below; and
- 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
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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 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 any prepayment 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. The servicer
will be entitled to reimbursement for any unreimbursed payments of Compensating
Interest as provided in the related pooling and servicing agreement or sale and
servicing agreement.
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 Monthly Remittance Date.
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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
(defined below).
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.
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 mortgage 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
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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 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 officer's 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 officer's
supervision, and (2) to the best of the officer's knowledge, based on his
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
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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.
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 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, Bank One,
National Association, which has its principal corporate trust office at 1 Bank
One Plaza, Suite IL1-0126, Chicago, Illinois 60670-0126, 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);
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- 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 Target
Overcollateralization 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 Initial Target Overcollateralization Amount or Target
Overcollateralization Amount (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;
- 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 prefunding 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.
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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) represents as a percentage of the amounts
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;
- 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, the owners of the Residual Interest Securities may
appoint a successor trustee.
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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 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;
- 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 amendment will not adversely affect in any
material respect the interest of the holders (an amendment will be deemed
not to have such as effect if it will not result in a reduction of the
rating of the securities of a series without regard to any financial
guaranty insurance policy).
In no event may 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 an affiliate thereof) 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.
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OPTIONAL TERMINATION
BY SERVICER OR CREDIT ENHANCER. At its option, the servicer (or, if
specified in the related prospectus supplement, an affiliate of the servicer or
the credit enhancer, if any, if the servicer or such affiliate 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 such other percentage
as is specified in the related pooling and servicing agreement or sale and
servicing agreement) or less than the initial aggregate outstanding principal
balance of the securities or (2) on any distribution date when the aggregate
outstanding loan balance of the home equity loans is 10% (or such other
percentage as is specified in the related pooling and servicing agreement or
sale and servicing agreement) 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 (or affiliate) 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, at a purchase price which will equal an amount up
to the sum of (a) the greater of (i) 100% of the fair market value of the home
equity loans and (ii) 100% of the then outstanding principal balance of the
securities, plus (b) one month's interest on such amount at an adjusted weighted
average interest rate for the securities, plus (c) certain reimbursement
amounts. Upon such termination of the trust, the holders will be paid the
principal balance of the securities, 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, thereby effecting early retirement of the securities.
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
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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 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.
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
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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.
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.
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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.
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
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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 "--Anti-Deficiency Legislation and Other Limitations on Lenders" 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 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.
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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.
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
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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, 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
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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
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subject of legislation or 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
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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.
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.
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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 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;
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(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:
- 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 interests
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
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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 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.
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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
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 their 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 (defined below)
("Interest Weighted Securities"). The trust fund intends to take the position
that all of
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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;
- 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
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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;
- 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
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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-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
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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 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
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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.
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 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
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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 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.
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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 of the fact that interest expense deductions, as a percentage
of outstanding principal on REMIC Regular Interest Securities,
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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 other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations.
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.
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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 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.
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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:
- 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.
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify the safe harbor described above, which, if satisfied,
establishes the presumption that the transferor of a Residual Interest Security
does not have improper knowledge. Under the New Proposed Regulations, a transfer
of a noneconomic residual interest will not qualify under the safe harbor
unless, in addition to satisfying the safe harbor described above, the present
value of the anticipated tax liabilities associated with holding the Residual
Interest Security does not exceed the sum of the present values of (i) any
consideration given to the transferee to acquire the interest, (ii) the expected
future distributions on the interest, and (iii) any anticipated tax savings
associated with holding the interest as the related REMIC generates losses. For
purposes of this calculation, the present values generally are calculated using
a discount rate equal to the applicable federal rate. The New Proposed
Regulations indicate that the effective date for the modification of the safe
harbor if finalized will be February 4, 2000.
A different formulation of these transfer restriction rules 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.
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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 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
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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 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
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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 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.
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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.
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.
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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.
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.
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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.
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
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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
(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
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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 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).
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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:
- the name, address and identification number of the relevant person;
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- 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.
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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.
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
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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 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
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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, (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;
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(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
(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
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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").
(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.
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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 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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$350,000,000
(APPROXIMATE)
CENTEX HOME EQUITY LOAN TRUST 2000-B
[LOGO]
CENTEX HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES, SERIES 2000-B
CENTEX CREDIT CORPORATION
D/B/A
CENTEX HOME EQUITY CORPORATION,
AS ORIGINATOR AND SERVICER
CHEC FUNDING, LLC
AS DEPOSITOR
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
SALOMON SMITH BARNEY
June 7, 2000
